UniCredit Releases Blockchain Paper, Launches US$200M Fintech Fund

Italian banking and financial services company UniCredit has released a new paper exploring the possible applications of blockchain technology in banking.

Entitled ‘Blockchain Technology and Applications from a Financial Perspective,’ the paper aims at presenting potential financial industry blockchain applications. It explores how banks can leverage distributed ledger technology to make these processes more efficient.

“Wide adoption of blockchain has the potential of reshaping the current financial services technical infrastructure,” the bank claims.

“The change is expected to bring with it benefits to the existing business processes through removal of intermediaries, flat data structures that will reduce the lags of reconciliations among different local ledgers, compressed confirmation times and near real-time settlement of transactions.”

Beyond Bitcoin, which was the first application of blockchain technology, banks can create their own private, permissioned blockchains. Unlike fully public and uncontrolled blockchain networks, permissioned blockchain networks allow the network to appoint a group of participants in the network who are given the express authority to provide the validation of blocks of transactions, or to participate in the consensus mechanism.

This makes particular sense for banks who can be both participants and validators in the networks. Banks can either use these platforms to interact in a decentralized way, or they can offer their customers access as a service, UniCredit says.

The bank details possible applications in the following areas:

Payments

In the payments areas, banks can use blockchain technology to perform interbank payments. In this case, the technology can streamline the process by allowing payments to be settled between banks without using an intermediary, eliminating fees involved.

Know Your Customer process

KYC is a time-consuming and expensive process required by banks and financial institutions in order to verify clients’ identity. Blockchain technology can eliminate most of the hassles by acting as an identity registry where each client would have a single cryptographic identity. Customers’ data would be securely recorded on the blockchain and available to all group’s banks.

Trade finance

Trade finance, which consists in the process of financing domestic and international trades, is complex and requires a considerable amount of manual and time-consuming steps. A letter of credit is required to solve the trust issue between counterparties and usually requires days to settle.

Application of a permissioned blockchain solution involving banks, companies and carriers using smart contracts can speed up and automate this process.

Letter of credit rules can be embedded in smart contracts created by the bank. Participants can interact with smart contract credit letter for a request of the contract terms, for carrier confirmation, bank confirmation and check confirmation.

All interactions would be cryptographically signed and recorded on the blockchain.

Post-trade lifecycle

Securities trading is a process involving a number of steps and actors and currently takes about three days between trade execution and settlement.

One possibility to simplify existing process is to represent securities and perform post-trade lifecycle on a blockchain. The entire process, as well as information and rules representing securities would be encoded in smart contracts. The blockchain could act as both a clearing and settlement platform, eliminating the need for reconciliation among different actors.

All in all, blockchain technology has the potential to streamline a big chuck of the processes in the banking and financial services industry, whether it is in the area of payments, KYC, or post-trade, bringing more efficiency and reducing costs.

“A large participation into blockchain applications will maximize financial industry advantages,” UniCredit says. “Furthermore, a relationship with fintech environment based not only on competition but also on collaboration will bring great advantages to both financial institutions and fintech startups.”

UniCredit says it is investing in blockchain technology throughout internal research, experimentation and participation to the Distributed Ledger Group, a banking consortium led by New York City-based fintech firm R3 CEV.

UniCredit launches US$200 million fintech fund

Earlier this week UniCredit announced a partnership with London VC Anthemis Group to launch a US$200 million fintech fund.

The fund, dubbed UniCredit EVO, will be focused on mid-stage startups and follow-on investments in more mature and established fintech businesses.

The bank said it was eyeing European and North American fintech companies.

Paolo Fiorentino, UniCredit’s COO and deputy general manager, said that the new partnership will allow the bank to ramp up its digital transformation, build a new business model, and maximize the combined strengths of traditional market players and newcomers.

“As a bank, we have the resources, financial expertise and large customers base that can complement startup innovation,” Fiorentino said. “This will in turn boost out digitalization, enabling us to better adapt to the ever-evolving needs of our customers.”

Featured image credit: UniCredit bank