From modernising payment infrastructure and enhancing security, to driving efficiencies and innovation. Whatever the question, Blockchain seems to be the answer nowadays. Announcements from the last month alone are fairly typical.
The Swiss stock exchange said it is building a Blockchain proof of concept for securities processing.
IBM and China UnionPay are putting bonus points on the Blockchain to allow customers to exchange them across different bank loyalty programmes.
Ernst & Young is investigating a Blockchain solution for gold trading with a New York start-up.
And 12 members of the R3 consortium have tested cross-border payments with Ripple’s digital asset XRP, demonstrating cost savings of up to 60 percent.
It was only eight years ago that the pseudonymous Satoshi Nakamoto published his paper Bitcoin: a peer-to-peer electronic cash system. Nakamoto’s genius was combining several pre-existing concepts to create something new — the Blockchain protocol. This included the distributed ledger, open source software, cryptography and a proof of work.
Blockchain’s appeal today is that it tackles central issues of our time. How do you know who you are dealing with? Can you trust them? How do you prevent double spend with currencies or double entry with asset registry?
Blockchain has an answer. The decentralised peer-to-peer network resolves a cryptographic problem to verify transactions between members. There is no need for trusted intermediaries. Transfers of value between participants are noted and added to a chain of previous transactions.
As long as the majority of participants are not colluding to cheat the system, they will generate the longest chain to prevent duplication and outpace attackers.
Whilst Blockchain may have an answer, it is not the answer to every question. Blockchain is not a panacea. It has its strengths and weaknesses, as any technology.
BLOCK AND CHAIN
Several use cases play to Blockchain’s strengths in the payments domain. These include correspondent banking, trade finance, strong authentication and Internet of Things applications.
“The distributed nature of the Blockchain facilitates a new range of databases, where each member of the network can access and store information. This may remove intermediaries in traditional correspondent banking to reduce costs, deadlines and risk,” says Jean-Charles Ricomini, Payments & Cards Manager, at Sopra Banking Software.
“So-called ‘smart contracts’ on the Blockchain allow participants to record changes in ownership and simultaneously trigger payment, particularly useful in trade finance. A shared register of documents meeting KYC requirements could also remove duplication, boost efficiency and cost savings,”Olivier Perrin, Cards and Payments Consulting Manager, continues.
Who is to say that only banks, merchants or consumers can initiate transactions? Blockchain could simplify integration and communication between different systems, including with the Internet of Things.
“Whether or not you think that Blockchain is the new DNA for financial transactions, it is too big to ignore. If you operate within financial services, integrating Blockchain into your organisation’s strategic thinking, and operational and technical capabilities is merely table stakes for the future,” concludes Olivier Perrin, Cards and Payments Consulting Manager.
Visit Sopra Banking Software’s payment platform here.