Beyond Bitcoins – Distributed Ledger and Blockchain

Cryptocurrencies mystify Blockchain and Blockchain mystifies Distributed Ledger Technology, DLT as we call it. DLT is a much wider concept in which Blockchain is one of the elements whereas cryptocurrencies are just a use case.

Any planetary transaction has three essentials – participants, underlying assets and procedural governance. It is the understanding of core concepts of distributed ledger and their interrelations would bring a new dimension in the way we transact.

The five key concepts of distributed computing are:

• The blockchain
• Decentralized consensus
• Trusted computing
• Smart contracts
• Proof of work / stake

Banking and financial unstitutes are the early adopters of DLT and Blockchain with a host of technology solution providers supporting them.  Across the globe institutions are experimenting with such use cases including healthcare industry (records and insurance payments), property records, judicial records & contracts, passport / visa issuance / identity documentation, project expense management etc.

In the payments space Blockchain can not only replace the existing system, but create a system of its own. In India, for instance, presently there is no system to facilitate peer– to– peer lending and Blockchain could improve transparency and trust in the network.

A Broad Spectrum of Use Cases

Other use cases from my domain which are just right for Blockchain and DLT include:

Cross-border Remittances

Inward and outward remittances are a key product offering for banks. Increasingly retail banking customers are demanding the ability to send international payments on demand and in real time – not only across banking networks but also emerging financial networks (e.g., mobile wallets).  Banks need to evolve and offer new service options to customers.

There are numerous challenges in cross-border remittances namely choosing the right mode, partner, profitable forex rate, availability on all channels, regulatory documentation, sanction-filtering and settlement time as per the end-user SLA.  Cross-border transactions are handled through a network of international correspondent banking relationships. Whilst the transaction messaging may occur in real-time, based on the nature of contractual agreements between banks, the settlement takes place between banks holding Nostro accounts via a complex web of intermediary relationships. These arrangements have high built-in risk of errors and settlement failure.

From a treasury perspective, such remittances necessitate maintaining prefunded Nostro and Vostro accounts for movement of actual funds. Banks using Blockchain would benefit from consolidation of Nostro accounts and significantly lower settlement risks associated with cross-border international transactions.

Blockchain along with crypto currency and artificial intelligence can make this process straight through, real-time and profitable.

Bill Payments

A large expatriate population presents a big opportunity for banks to offer instant cross-border bill pay services – such as utility bills as well as property taxes and insurance – to   build rewarding financial relationship with end-customers and billers.

Prepay Top-Up

Overseas workers could directly load or recharge prepaid cards of dependents in the home country.

Trade Finance

The letter of Credit (LC) is one of the best use cases which needs a common ledger that allows all counter-parties to have the same validated record of transaction and fulfilment of conditions. Smart Contracts can be very effective tools in the supply chain finance, bill discounting, invoice financing kind of businesses. The significance of DLT and Blockchain in such businesses will be determined by the elimination of paper, maintenance and reference to a central credit repository of participants, fund transfers, limit reinstatement and standardization of the processes across financial institutions. This may further be extended to cover acceptance of purchase requisitions, generating purchase order, preparation of Smart Contract and tracking the fulfillments online.

Escrow Management

This is a very less spoken subject in banking, however, it is still a big business when it comes to values involved. Escrows exist from IT, insurance, medical formulation custody, securities transaction to project management businesses. The crux of escrow management lies in holding and releasing the funds and assets based on achievement of milestones or fulfillment of criteria laid down while entering the escrow agreement. DLT helps in increasing the transparency and getting the acceptance of all the stakeholders for execution of each step.

Most banks are beginning to evaluate the commercial viability of making these services available. BankChain is a community of thirty banks which have come together for exploring, building and implementing blockchain solutions. FSS works across the payment spectrum and is working on many of the above-mentioned use cases. In addition, FSS has partnered with a leading blockchain provider to provide implementation and hosting services to banks.