The disruptive potential of blockchain in financial services
Blog: Capgemini CTO Blog
Blockchain is at the tail end of a major hype cycle and has tremendous potential to change the way we think about trust in business. It is showing early signs of enabling new business models and delivering new value propositions while solving longstanding challenges with transparency and security in transactions that involve multiple parties and large amounts of data. This is revolutionizing businesses and transforming entire industries, especially financial services. How is blockchain doing this? Let’s first understand the technology and examine some of its potential use cases.
What is blockchain?
Blockchain technology is a decentralized ledger, which allows a shared set of computing systems to agree that a transaction between multiple parties is authentic. These outcomes are permanently recorded and consistently reconciled and updated in a cryptographically secure way. Because the ledger is distributed among all transaction participants, it exists simultaneously in multiple places, making it extremely difficult to manipulate entries or tamper with the data without the other parties noticing. Thus, what makes blockchain so important is its ability to automate trust and transparency among all parties using it.
Smart contracts are among the most important innovations in the blockchain space. Contracts have existed for decades but are now being reimagined to operate and automate business processes in a fully decentralized fashion, enabling shared rules of engagement, conduct, and business processes to be automated and enforced ecosystem-wide. The development of smart contract languages, such as Ethereum’s Solidity and Digital Asset’s DAML, have enabled blockchain’s value in the enterprise.
Types of blockchain
There are two types of blockchain – permissionless and permissioned. Bitcoin is the most well-known example of a permission-less, public blockchain network in which anyone can participate. Cryptocurrencies, such as bitcoin, use this type of blockchain technology because it allows all parties to track, verify, and agree upon transactions, even when the individual participants remain anonymous. Another type of blockchain model is a private, permissioned blockchain that is being used by large enterprises, such as JPMorgan. These are networks in which only known entities (partners, suppliers or customers) may participate. With private blockchain, a company uses protocols to achieve consensus and verify and assemble blocks in blockchain. This set up can deliver thousands of transactions per second and provide granular management and control over who sees and accesses the transactions.
Transparency is a core tenet of blockchain – all parties have transparency into the transactions recorded in the blockchain ledger and each block is tied to the block before it. This transparency and visibility into a single source of truth makes blockchain extremely difficult, if not impossible to manipulate at scale. However, there is still much work to be done to ensure that these networks are secure end to end. This starts with ensuring data and transactions entered in the blockchain ecosystem are adequately protected from manipulation. The infrastructure these networks reside on must also have the necessary protections in place. In blockchain, you are only as strong as your weakest link. If integration points are compromised, the entire blockchain ecosystem could be at risk.
Some blockchain use cases for the finance industry
In the financial services industry, the following use cases have emerged and are actively being addressed:
- Speeding up and simplifying cross-border payments: The transfer of value across borders (whether goods or payments) has always been an expensive and slow process. Blockchain is able to speed up, simplify, and reduce these costs significantly. For example, if a person wants to transfer money from France to their family in Singapore who have an account with a local bank, it takes a number of banks and currencies before the money can be collected. Blockchain can speed up and simplify this process, cutting out many of the traditional middlemen.
- Loyalty and rewards: Blockchain offers many benefits, including transparency and traceability of transactions. This will help banks and insurers to create a more captivating loyalty and rewards program that fits 24/7 performance management and enhances engagement.
- Clearing and settlement: Applying blockchain to clearing and settlement gives a short-term win with real cost savings. Blockchain can help central counterparty clearing systems by ensuring all counterparty balances are matched, reconciled, and resolved across the global trading system which involves thousands of investors, day traders, pensions funds, market makers, assert managers, and more. Some blockchain-based T0 settlement pilots in this space are using Digital Asset Platform, Hyperledger, and Overstock’s T0, along with many other key and emerging players such as Epiphyte, Clearmatics and SETL. Eventually, there will be a new clearing system created out of the blockchain.
Blockchain is not all that new, however it is now starting to prove itself beyond just cryptocurrency. It is likely to disrupt financial services first by making existing processes more efficient, secure, transparent, and inexpensive. It will also enable banks to introduce new products and services quicker and in a cost-effective manner. The application of blockchain technology in financial services will help organizations provide a seamless customer experience, transparency, and security. Learn more about Capgemini’s blockchain solutions for Financial Services.