Banks and corporate finance institutions are increasingly adopting blockchain, but grapple with a technology in rapid transition and with multiple adoption and regulatory challenges.
The promise of blockchain is already part of corporate-finance folklore. For instance, Swedish bank SEB used the technology to fund a US dollar account in New York for a corporate client in just nine seconds.
Others, like Bank of America, are furiously experimenting as well. Earlier this year the bank completed a proof of concept, working with Microsoft for a blockchain-based standby letter of credit. The project is now moving to a pilot stage, and further trade finance instruments and other applications may follow.
Blockchain, based on a shared- or distributed-ledger system that allows any participant in a network to see all records since inception, is set to have a transformative impact on a number of industries, especially global financial services. “In any instance where there are multiple relationships interacting to coordinate a particular activity on behalf of a single party, the blockchain could bring a streamlined, cost-effective solution,” says Thomas Hunt, director of treasury services at the Association for Financial Professionals (AFP), a US organization for corporate treasurers.
IBM has already run an internal treasury project on the Hyperledger blockchain platform. The project looked to record and retrieve data for fast dispute resolution and reconciliation. IBM’s vice president of blockchain markets, James Wallis, speaking at last year’s Sibos conference, mentioned that the project initially covered $100 million every day and released $50 million via improved working capital optimization, a key benefit of the technology. These figures have since risen, the company says.
Not only did IBM work on its own project, but it took the experiment global, partnering with firms such as India’s Mahindra Group. The joint Cloud-based blockchain supply-chain finance solution created a shared ledger to reduce errors, improve monitoring and boost efficiency. Initially used by Mahindra Finance, the Group’s loan subsidiary, the technology is now available to everyone and anyone seeking to enhance traceability, certainty, speed and transparency. IBM is separately involved in another Indian blockchain project, with Bajaj Electricals, to pay its suppliers more easily and quickly—and to negotiate discounts.
A former treasurer, AFP’s Hunt cites loan syndications, accounts receivable securitizations and trade settlements on foreign-exchange hedging and capital markets as possible end uses. He also points to bank fee analysis, trade finance applications that could impact existing import/export letters of credit, stock repurchases, fixed income securities and so on. “Blockchain has the potential to disrupt the treasury-technology landscape,” he says.
Ultimately, the benefits of the technology will be available to many. “We expect that blockchain generally will move closer to commercialization in the near term,” says Dean Henry, head of innovation in the global transaction services unit at Bank of America.
Blockchain is best described as a distributed electronic ledger that provides a record of events for all participants in that network. This ledger can be open source and public—similar to the Internet and the original bitcoin cryptocurrency ledger—or it can be a private, “permissioned” chain that enforces standards and vets and manages invited participants. While permission-based chains lessen the beneficial effects of broad access and enhanced transparency, they provide greater control. The end use, whether it is for a cryptocurrency like bitcoin, a payment transaction or something else altogether doesn’t matter. The digital ledger operates globally, across borders.
Many distributed-ledger technology (DLT) ecosystems of varying speeds and flavors are now available. Ethereum offers “smart contract” capabilities for the supply chain, while the Linux-hosted Hyperledger project is of interest to banks and manufacturers. SAP now offers a Cloud-based “Blockchain-as-a-Service” solution using Hyperledger standards and protocols in its Leonardo product line.
With the underlying technology in rapid transition, it’s unclear which platforms will emerge as most practical. The R3 consortium is a prominent name in the space, along with companies like Digital Asset Holdings, Axoni, Ripple and collectives like Swift and others. These organizations often partner with banks and other financial technology firms that want to incorporate DLT into their packaged solutions. R3, for example, attracted $107 million in May from over 40 financial institutions, tech giants like Intel and others—although prominent early members such as Goldman Sachs and JPMorgan Chase dropped out. Banks, finance institutions and corporate entities are looking to hedge their technological bets.
Competition is heating up, as illustrated by the tussle between Swift and Ripple. Ripple hopes to displace Swift as the platform of choice for global cross-border payments, and has more than 100 banks—including Tier 1 names like UniCredit and Santander—signed up as partners. Swift, of course, is fighting back, with a DLT proof-of-concept planned for stage three of its present global payments innovation (gpi) technology overhaul.
DLT could be the simple solution that global commercial companies seek. “The complicated technology stack that presently manages global commerce collapses and can eventually be simplified with DLT connectivity,” says Marcus Treacher, global head of strategic accounts at Ripple. “Data is freed, and cash need not get stuck anymore.” He believes this is blockchain technology’s key benefit, along with the internal efficiencies it offers corporate finance institutions.
“DLT could also allow major corporations to become financiers themselves,” he adds, “unlocking some of the huge pools of liquidity that are currently locked away around the globe.”
This obviously has consequences for banks; conventional cash-pooling and zero-balancing treasury techniques may become redundant if the technology develops as hoped. Of course, banks and incumbents like Swift could harness it for their own use, negating any displacement threat.
As is usual with new technology, not everyone is convinced. Royston Da Costa, who oversees treasury systems at UK-based Ferguson Group Services, says he views DLT as an interesting technology, worth monitoring. Still, his firm, like many of its peers, has adopted a wait-and-see approach.
“The possibilities are endless, but remember, treasurers are not rapid technology adopters,” cautions former treasurer Hunt, of AFP. Hunt refers to treasury, but the hurdles are similar across finance industry verticals.
Stephen Phillips, head of IT for Europe, the Middle East and Africa at Bain & Company, notes that the drivers of new tech development impact its ultimate forms. “How DLT is adopted in financial services is the trickiest question,” he says. “Will it be consensus-driven or competitive?”
In other words, will DLT advance via industrywide collaboration or in rival ecosystems, with processing times and usefulness deciding which platforms win out in what areas. If it is competitive, says Enrico Camerinelli, senior analyst at Aite Group, “interoperability between blockchains must be ensured” to guarantee uptake and true frictionless commerce.
Another word of caution comes from Bank of America’s Henry: “There is no shortage of regulatory topics or issues that need to be addressed,” he cautions, “since almost no country’s regulatory framework for banking and payments anticipated this type of technology.”
But Henry, like many others, hasn’t let the challenges cloud his optimism. “Potentially, DLT could have dramatic, positive implications for corporate treasurers and banks,” he says. If so, blockchain will be in the corporate sector to stay. But it may take a little bit longer to become widespread.