WEF Report Addresses How Blockchain Can Reshape Financial Servicesby Fintechnews Switzerland September 9, 2016
Blockchain technology, also known as distributed ledger technology, has attracted the interest of the financial services ecosystem – and their money.
Over the past three years, the World Economic Forum (WEF) estimates that some US$1.4 billion have been invested into blockchain technology with companies having filled over 2,500 patents during that same period of time.
Over 90 corporations have joined blockchain consortia and 80% of banks say they would initiate blockchain projects by 2017.
As blockchain has become a buzzword in the financial services industry, WEF has conducted a 12-month research to better understand the implication and potential of blockchain technology in the sector.
In a new report titled “The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services,” WEF details its six key findings:
Blockchain technology has great potential to drive simplicity and efficiency through entirely new financial services infrastructure and processes.
For instance, it can reduce and even eliminate manual efforts required to perform reconciliation and resolve disputes. It can also enable real-time monitoring of financial activity between regulators and regulated entities, reduce counterparty risk, enable asset provenance and full transaction history, and disintermediate third parties that support transaction verification and validation thus accelerating settlement.
Distributed ledger technology should be viewed as one of the many technologies that will transform the foundation of next-generation financial services infrastructure. It should be seen as “part of a toolbox” that includes biometrics, cloud computing, cognitive computing, among other emerging technologies.
Blockchain technology can be used in many different areas with each use case leveraging the technology in different ways.
For instance, in trade finance, blockchain enables real-time multi-party tracking and management of letters of credit, as well as faster automated settlement. For global payments, it allows for near real-time point-to-point transfer of funds between financial institutions, removing friction and accelerating settlement. For automated compliance, blockchain technology provides faster and more accurate reporting.
Blockchain technology can be used for digital identity, “a critical enabler to broaden applications to new verticals,” as well as digital fiat currencies.
A fully digital system for storing and transferring identity attributes, when directly integrated into a distributed financial infrastructure, can provide faster and accurate anti-money laundering (AML) and know-your-client (KYC) processes, as well as seamless customer onboarding.
Distributed fiat currencies issued by central banks, when employed within a distributed financial infrastructure, can eliminate the need for an inefficient bridge between cash and a new financial infrastructure.
The most impactful blockchain applications will require collaboration between all key stakeholders in the financial services ecosystem, including incumbents, innovators and regulators. This will require balancing competing interests, significant time and investment to replace existing financial infrastructure, as well as changing existing regulations, standards of practices and creating new legal and liability frameworks.
New financial services infrastructure built on blockchain technology will redraw processes and “call into question orthodoxies that are foundational to today’s business models.” This includes question the need for individual books of record through immutable and distributed record-keeping, challenge existing competitive advantage models that leverage information asymmetry, allowing for on-demand and immediate monitoring and reducing the need to trust and rely on counterparties.
That said, there are still a number of questions that need to be answered in order to move forward. These include assessing blockchain’s feasibility, quantify benefits and analyzing implementation details.
“Cost-benefit analyses need to be conducted to determine the financial viability of distributed ledger technology,” the report says. “Roadmaps need to be developed to achieve market participant collaboration and establish standards; governance models, backed by societal-level discussions, need to be envisioned to support technology accountability; and regulatory, legal and jurisdictional-specific tax frameworks need to be established and well-understood.”