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1、The role of blockchain in banking Future prospects for cross-border payments 3 Preface Section 1: The blockchain solution 4 What is blockchain 5 The industry approach 16 Regulation Section 2: Outlook 21 Future trends for blockchain in banking 24 Technology considerations for future implementation 25
2、 Regulatory and governance challenges remain 27 Conclusion 29 Appendix Contents Preface I n this consultation paper, OMFIF and CCBU investigate the effects of blockchain and distributed ledger technology on financial institutions business models. The study focuses on the motivations underpinning fin
3、ancial institutions decision to adopt blockchain, their participation in consortia groups of companies collaborating to develop common objectives and standards for blockchain and DLT and the critical practices and lessons they have learned so far. It is based on in-depth interviews with representati
4、ves of major global banks and financial technology companies. The people we spoke to are innovation officers and managers responsible for deploying practical blockchain and DLT use cases in areas like cross-border payments, trade finance and foreign exchange settlement. OMFIF and CCBU engaged with e
5、xperts representing other diverse perspectives and sectors, including fintech and technology providers from the blockchain and DLT industry. Analysis of financial technology regulation and public policy papers complements our research. Contributors insights are reflected throughout this paper and su
6、mmarised faithfully to give an overview of blockchain and DLT in the financial industry, as well as the opportunities and risks that major global banks face by innovating in this field. 3OMFIF.ORG 4BLOCKCHAIN BANKING Distributed ledger technologies collectively known as blockchains or blockchain-bas
7、ed platforms have moved from the margins of public interest to being touted as paradigm-changing technologies. At their core, blockchain and DLT are novel systems to digitally manage data in a decentralised manner, transforming how individuals, companies and institutions can transact and trade with
8、each other. Mainstream interest in blockchain arose after the 2008 financial crisis in tandem with the development of the worlds first peer-to-peer cryptocurrencies. Its best-known application is bitcoin, the cryptocurrency developed by Satoshi Nakamoto in 2008. Bitcoin employs blockchain technology
9、 to allow, in principle, any anonymous individual or entity to perform transactions without a trusted third party. Other subsequent public blockchains such as ethereum are based on similar principles. However, bitcoins lack of wider integration with technological infrastructures and its uncertain po
10、sition in existing regulatory frameworks have hampered mass adoption of blockchain. Large businesses and governments are increasingly interested in exploring the potential merits of blockchain and DLT. In contrast to bitcoins open architecture, the development of enterprise- grade blockchains in the
11、 financial industry and other economic sectors has focused on permissioned systems. Federated blockchain models offer the most promise as potential enterprise-grade systems within financial services and other industries. Smaller settings require fewer nodes to generate consensus, and therefore do no
12、t need nearly as much computational capacity to secure the network, allowing for greater scalability. Unlike public blockchains, there is no need to incentivise validators those responsible for verifying transactions within a blockchain to compete with hashing power for cryptocurrency rewards, as ma
13、intaining network security is a shared interest. In effect, the financial sector is prioritising blockchain models that can offer security and scalability rather than decentralisation, see Fig. 1.1. Blockchain: functions and limitations Major banks and financial institutions are realising that block
14、chain technology could vastly improve the efficiency of their processes particularly in cross-border payments and reduce costs. Many have joined forces to research new applications, though regulatory barriers remain. Section 1: The blockchain solution 5OMFIF.ORG After the initial hype, industry prop
15、onents have adopted a more pragmatic approach: Focus on pain points in existing businesses, from the perspective of efficiency and cost-savings. This is a departure from blockchains early days, when it was touted as a generator of digital transformation and a new revenue driver. Contrasting technolo
16、gy and fintech start-ups. Form or participate in a technology consortium. With blockchain technology still in its nascent phase, being part of a consortium is a more cost- effective way to share information, learn about the underlying technology, grow the community to garner network effects, and nur
17、ture an internal innovation culture. Maximising benefits, limiting risks The properties of blockchain are especially suited to maximising mutual benefits and limiting business risks from collaboration and co-investment. Blockchain enables banks to work together on a common solution using a decentral
18、ised database. For one major bank, Many advantages of blockchain, such as immutability, are useful but really the core tenet is the idea of decentralised data that allows many countries and competitors to work and co-invest on a common platform. Everyone keeps their own data and only permission cert
19、ain data to each other when they want to interact and trade. While novel use cases (or business cases) for blockchain are still emerging, some of the common areas it has been applied to in the financial industry include know-your-customer procedures, trade finance and primary security issuance. The
20、technology suits various core banking functions and back-office scenarios such as payments, clearing and settlement, see Fig 1.3. The industry has identified five main pain points that DLT could address: security, speed, transparency and traceability, risk and cost management. The centralised nature
21、 of legacy financial The industry approach Public blockchainConsortium blockchainPrivate blockchain Managing entity All participants (decentralisation)Participants in the consortium One central institution holds all the authority Governance It is very difficult to change the rule that has been made
22、Rules can be changed easily through the agreement among consortium members Rules could be changed easily according to the decision made by the central institution Transaction speed Difficult to expand the network, and transaction speed is slow Easy to expand the network and transaction speed is fast
23、 Very easy to expand the network and transaction speed is fast Data accessEveryone can access it Only authorised users can access it Only authorised users may access it Identifiability Pseudo-anonymousIdentifiable Identifiable Transaction Proof Proof of transaction is decided by algorithms such as P
24、oW and PoS, and cannot be known in advance Proof of transaction is known through authentication, and transaction verification and block generation are made according to the rules agreed in advance Proof of transaction is made by central institution ExamplesBitcoin R3, Hyperledger Fabric, Quorum, Eth
25、ereum Linq, a stock exchange platform for Nasdaq unlisted companies Fig. 1.1 Financial sector favours permission-based consortium model Three types of blockchain systems Source: Financial Services Commission (2016) 6BLOCKCHAIN BANKING systems makes them vulnerable to single points of failure. For ex
26、ample, a single-point attack on an intermediary responsible for payments, clearing or settlement could suspend services to the entire system, leading to widespread outages among payments services. By creating a distributed network, a DLT-based system could eliminate these single points. Speed remain
27、s an issue in legacy systems. Authentication, verification and data-sharing are usually manually undertaken by different intermediaries. For example, in trade finance, a shipment of goods could be delayed due to multiple checks by intermediaries and numerous communication points. Multiple platforms
28、and different data recording methods could cause fraud or audit issues if there are multiple versions of the truth, or errors in the way information is stored. At its core, blockchain is a ledger offering visibility into the entire lifespan of a transaction or value exchange within a banks operation
29、s. It can reduce the need for expensive and time-consuming third-party verifications along a payment process or funds transfer. Documents can be linked and accessible through blockchain and reviewed and approved in real time, reducing the time it takes to initiate the shipment of a good or delivery
30、of an asset. Current banking models require a trusted third-party intermediary to remove the credit risk between two parties in a transaction. Credit risk is present when one leg of the transaction is made first, such as the delivery of goods or an asset or cash payment, meaning there is no guarante
31、e that the second leg of the transaction will occur. DLT platforms allow the recording of transactions of any arbitrary asset money, equities, bonds, over- the-counter derivatives as well as cash, allowing multiple, simultaneous changes to the ledger. This would mean that the concept of delivery v.
32、payment where one asset changes hands only if the other asset does as well can be achieved simultaneously, with no ambiguity as to which leg occurred first. This extends to invoices and payments two parties can know the status of an invoice at any time, and the payment can settle at the exact moment
33、 the invoice is marked as paid, with both parties having visibility of this change of status. This could mean that transactions recorded on DLT could on aggregate be cheaper than transactions recorded across multiple siloed accounts, and remove the credit risk. Greatest return Respondents say the gr
34、eatest return from blockchain was its use for cross-border payments. Banks identify several pain points causing inefficiencies, costs and risk to daily operations. Most of those surveyed expect faster payments, especially across borders, to be the most important use case. One respondent notes that b
35、lockchain could help solve some of the most cumbersome issues in payments systems. Cross-border payments, as well as extending the opening hours of central bank payments systems by decentralising infrastructure, were identified as key objectives early on. Industry focused on cross-border payments Th
36、e banks surveyed are largely concerned about pain points in cross-border payments, particularly high costs and inefficient processes. Respondents feel that DLT would provide the tools to surmount these issues. A 2019 Institutional Deposits Corporation study on blockchain spending found that cross-bo
37、rder payments was the use case receiving the most annual investment at $453m, equivalent to 16% of market share, see Fig 1.2. Proponents of blockchain maintain that DLT offers several advantages over current payments technology. These include facilitating near-frictionless settlement at any time, gl
38、obal interoperability, high security, and ultimately, quicker and lower-cost transactions. To understand the rationale and use cases for blockchain technologies in cross-border payments, the next section examines the incumbent methods for international transactions and their principal limitations an
39、d disadvantages. The cross-border payments system relies heavily on correspondent banking networks facilitated by financial intermediaries at multiple levels. A correspondent bank will have either a nostro or vostro account with a counterpart bank in another 48 16 10 10 9 7 Fig 1.2 Cross- border pay
40、ments dominates use cases Blockchain use cases, 2019 market share, % Others Cross-border payments and settlements Trade finance and post-trade or transaction settlements Lot lineage or provencance Assets or goods management Regulatory compliance Source: Institutional Deposits Corporation 2019 From i
41、dentifying these inefficiencies and pain points, the industry has developed a number of blockchain use cases. One prominent use case is trade finance. Facilitating the movement of physical goods and commodities is burdensome, with paper processes such as issuing letters of credit, bills of lading an
42、d invoices used to reduce payment and delivery risks. DLT can speed up transaction settlement time (which currently takes days), increase transparency between all parties of a trade and free up capital that would otherwise be used to pre-fund trade finance transactions. For example, China Constructi
43、on Bank launched BCTrade, a blockchain trading platform, of which 60 financial institutions are members. So far, 3,000 users from banks, manufacturers and import and export trading firms, have used the platform to transact more than Rmb440bn in forfeiting, domestic letters of credit, international f
44、actoring and re-factoring and logistics finance. Spotlight: BCTrade 7OMFIF.ORG Typical financial actors Blockchain and DLT use cases Strategic innovation motives General regulatory attitude Back-office (settlement, reconciliation, messaging etc.) Banks and fintech firms, incumbent service providers
45、e.g. Swift JP Morgan Interbank Information Network Settlement Clearing Systems e.g. Citi-Nasdaq Blockchain Intra-bank foreign exchange settlement e.g. HSBC FX Everywhere Network Digital transformation in strategic but methodical manner Insulate incumbent positions from future disruption Optimise ope
46、rations and lower costs on existing payment rails Streamlining inter and intra-bank workflows Partner with existing market leaders to quickly deploy new technologies at scale Regulatory concerns over legality and contractual enforceability of transactions and settlement finality Driving base-layer i
47、nteroperability and common technical standards Compliance procedures (KYC, AML, CFT etc.), documentation, information-sharing Banks and fintech firms, incumbent service providers e.g. Swift Streamlining trade finance processes such as letters of credit, bills of lading, invoicing e.g. We.Trade Custo
48、mer compliance, KYC and collateral management e.g. CLS-IBM LedgerConnect All of the above Potential for market disruption to a limited extent as interoperability/ standardisation can expand opportunities for service providers Regulatory concerns over security and privacy related to digital identitie
49、s and data storage Entry of new intermediary actors involved in compliance Need to enhance regulatory capacity to engage and integrate new technologies into supervisory/audit processes Means of payment (account v. token- based) Typically fintech firms, now big tech and some banks on limited basis. Retail remittances, B2B payment solutions e.g. Ripples XRP, Facebooks Libra, Visa B2B, Santander One Pay FX Challenge/ complement mainstream financial system infrastructures Broaden financial inclusion among peripheral markets and in