Four ways banks are using Blockchain.

Powering innovation in the industry

One of the most discussed topics in the financial services industry today is blockchain technology.

Barely a day goes by without a fresh announcement about how banks are seeking to use blockchain technology to transform sizeable chunks of their business.

We are beginning to understand what blockchain technology is, but how can we best use blockchain technology within our business? I will describe 4 blockchain technology use cases that can be used by banks and financial institutions.

1. Clearing and Settlement

It is not the sexiest area of banking, but the tangled web that records loans and securities costs investment banks billions of dollars to run.

Accenture has estimated that the biggest investment banks could save $10bn by using blockchain technology to improve the efficiency of clearing and settlement.

One of the best-known examples of this restructuring is the Australian Securities Exchange, which aims to shift much of its post-trade clearing and settlement on to a blockchain system. The project is being implemented by Digital Asset Holdings.

In the US, DTCC is working with IBM, R3 and Axoni to shift post-trade clearing of single-name credit default swaps on to a blockchain system by the end of next year. If this goes well, the plan is to do the same with other derivatives processed by the giant US clearing house.

2. Payments

Central banks across the world are exploring the potential for shifting parts of their payments systems on to blockchain technology or even using it to launch digital currencies. This is partly a response to the challenge that standalone cryptocurrencies such as bitcoin could pose to their control of monetary policy. It also underlines how central bankers are waking up to the potential benefits of the technology for the payments system.

Commercial banks, meanwhile, are growing tired of waiting for central bankers to take the lead and are pressing on with their own projects. Switzerland's UBS has come up with the " utility settlement coin", which aims to create a digital currency for use in financial markets by issuing tokens convertible into cash on deposit at central banks.

In the field of cross-border payments there is an increasingly bitter tussle under way. On one side is Swift, the bank-owned messaging system used to send trillions of dollars worth of payments, and on the other a growing number of firms aiming to use blockchain technology to cut costs and time, led by Ripple in San Francisco.

3. Trade finance

Trade finance is still mostly based on paper, such as bills of lading or letters of credit, being sent by fax or post around the world, and seems to many bankers to be crying out for modernisation. Many believe that blockchain is the obvious solution especially as numerous parties need access to the same information.

There are several start-ups working to digitise the bill of lading process, such as Wave of Israel, EssDocs of Malta and Bolero of the UK. I predict that it will take five years to digitise entire trade ecosystems, such as sugar or energy, but blockchain technology has the potential to be genuinely game changing.

4. Identity

Verification of customers and counterparties is a vital for banking. Without it, lenders would quickly lose their roles as trusted guardians of people's money. Regulators hold banks responsible for checking that customers are not criminals or illicit actors, and fine them if they get it wrong.

Banks have been trying for years to set up a shared digital utility to record customers' identities and keep them updated. They have failed to find the right formula, undone by conflicting demands and the problem of deciding liability. Some believe that blockchain could offer a solution because of its cryptographic protection and its ability to share a constantly updated record with many parties.

Dozens of start-ups are working on building blockchain systems for customer identification, including Cambridge Blockchain, Tradle, Credits and Blockstack.

Identity is also a central part of R3’s efforts to build Corda, its blockchain-based operating system for banks.

I hope they will enhance your understanding of the opportunities and challenges of blockchain technology, and I'm welcome your feedback and further discussion.