Is 2018 the year blockchain moves into the financial mainstream? Ivan Gowan, CEO at fintech company Capital.com, discusses the future of blockchain in the financial sector.
The blockchain is the buzzword of the moment in the finance industry, but unlike so many other buzzwords we have seen come and go, it offers the potential to genuinely revolutionise how the financial industry operates in a vast range of applications. From significantly accelerating the security, transparency and speed of a wide variety of transactions, to enabling “unbanked” sectors of society to access financial services, over the next five to 10 years, blockchain may change finance as we know it.
However, in 2018 the impact of blockchain is likely to be more limited. A technology that could so fundamentally alter the way financial operations work will take longer to become truly integrated into such a complicated ecosystem as international finance. In 2018, blockchain will continue its existing role in supporting cryptocurrencies such as Bitcoin and Ethereum, but the primary developments may come in regulation and the underlying platform, which will undoubtedly help to accelerate blockchain’s transition into a mainstream technology.
Blockchain still suffers from a “Wild West” reputational issue. Its use to support Bitcoin and other cryptocurrencies have perhaps tarnished it with the same “dodgy dealings on the dark web” brush, but it seems likely that 2018 will see this reputation improve, and increased transparency and safety come to the blockchain. Blockchain browsers are increasingly providing an understanding of the source of cryptocurrencies and their transaction history, which will help financial institutions comply with tough anti-money laundering legislation. As blockchain technology continues to become more transparent we may see a more open-minded approach from the world’s regulators, which may then encourage financial institutions to adopt the technology.
Currently, many banks seem keen to investigate uses for blockchain around payment services and back-office administration but are stymied over a lack of clarity around the compliance issues of integrating distributed ledger technology into their operations. A clear directive from regulators, giving banks and other financial services the space they need to innovate and adopt the technology as they see fit, would go a long way to accelerating blockchain’s transition into a mainstream technology. 2018 will see the first steps taken towards a more supportive, progressive regulatory environment that encourages innovation and adoption.
As the optimism around blockchain’s potential in the finance sector continues to grow, a number of trends have emerged that look likely to make good use of the technology. The payments sector is one of the most obvious targets for blockchain innovators. The mechanisms by which financial institutions transfer trillions of dollars are highly regulated and yet suffer from multiple inefficiencies, often taking days to transfer assets. Blockchain could offer a much faster, more transparent platform through which payments are processed, its distributed ledger offering a completely verifiable, auditable and secure payment platform.
There are a number of businesses making initial moves into offering blockchain-based payment systems. Santander recently launched a trial cross-border payment service running on Ripple’s blockchain-based platform, while in 2017 Mastercard unveiled a business-to-business payment platform that uses blockchain technology. While financial services businesses are clearly dipping their toes in the blockchain waters, the technology still has some way to go before it reaches full adoption. As a muddied regulatory landscape appears to be one of the restraints on blockchain innovation by major financial institutions, 2018 brings hope that clearer regulation around blockchain will enable the sector to truly unleash the technology, to revolutionise global payments infrastructure.
Trade finance is another outdated process that is ripe for disruption at the hands of blockchain. Letters of Credit (LoC) and bills of lading are still used in paper format, sent by fax or post around the world. Blockchain holds particular value in this area of the finance sector because often multiple people in different countries need access to the same financial data when shipping goods around the world, and blockchain can offer an independent, verified and securely shared record of this data. Blockchain may hold the key to drastically improving the efficiency of managing international trade finance, but it is unlikely that 2018 will see this change fully come to fruition. For trade finance to truly gain the benefits of blockchain, the entire trade ecosystem needs to be digitised, and that may be some years away.
Recently, HSBC announced that it had completed the first commercially viable, trade finance transaction using a single distributed ledger platform when a shipment of soybeans was transported from Argentina to Malaysia. Trade between importers and exporters is typically financed through LoCs, which currently guarantee around $2 trillion of transactions, but this process is increasingly outdated and susceptible to fraud, as well as typically taking five to 10 days to process. Using a single digital platform, HSBC cut the processing time for this trade to just 24 hours, in perhaps the clearest example yet of blockchain changing the trade finance game. While the full digitisation of international trade is some years away, 2018 may bring more and more examples of institutions showing how blockchain can be deployed to solve some of the issues facing the finance industry.
As regulators around the world implement increasingly strict anti-money laundering rules, knowing who their customers are is more and more important for financial institutions. Blockchain, with its cryptographic protections and ability to share a constantly updated record with multiple parties, could significantly increase the capability of institutions to verify their customers’ identity, and extend financial services to those without formally recognised documentation. Not only would this make compliance with anti-money laundering rules more straightforward, it would also massively reduce the cost and complexity of managing this identity verification process.
We are at the beginning of the blockchain technology cycle. The technology presents multiple exciting opportunities for the finance sector, but these developments are unlikely to be transformative within 2018. Instead, 2018 is likely to hold more progressive regulation, enabling financial institutions to take the first really concrete steps towards integrating blockchain in their operations. We are also likely to see multiple advancements in the technology itself, such as improved transparency, less energy consumption and increased scalability, all of which will help to encourage adoption by the financial sector.
is a Fintech start-up that harnesses the latest advancements in machine learning and AI to provide the ultimate trading experience. With an investment of 25 million US dollars, and growing base of customers, Capital.com currently has 17,000 daily active users. Capital.com has offices in Limassol, Cyprus, London, UK, Gibraltar and Minsk, Belarus. The company develops software solutions in the trading environment, including the Capital.com app of the same name and the supplementary Investmate trading education app.
The company is licensed by CySEC, license 319/17. Trading is risky and you may lose all of your invested capital.
Further information can be found at https://capital.com/