NEW PRINCIPLES TO EXPLORE

BANKING BLOCKCHAIN USE

CASES EFFECTIVELY

Summary
A new breed of blockchains are being
developed to become identifiable,
controllable and asset-agnostic. This
evolving architecture demands new
rules to explore use cases in the financial
industry. Here we outline three use-
case principles for bank CIOs that can
potentially guide their blockchain
investments in 2017.
Bitcoin, since its inception in 2009, has
seized the imagination and attention of
the world. However, 2014 onwards, the
underlying protocol enabling Bitcoins,
blockchain technology, is capturing the
center stage. Governments and industries
alike are looking to exploit the blockchain
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to lower costs and bring in operational
efficiencies while at the same time
increasing security. Blockchain has the
potential to fundamentally change the
business and process governance. The
power of the technology cannot be denied
and hence, the world is willing to re-
engineer age old processes to implement
blockchain.
Blockchain is fast coming of age in the
banking and financial services industry
and its potential can be fully leveraged by
selecting the right use. This sentiment is
echoed across industries, with many large
banks looking to exploit it for multiple
use cases. However, blockchain in its true
avatar may not be entirely suitable for
highly regulated financial institutions.
Hence, a new breed of blockchains is
cropping up to meet financial institutions
requirements.
The New Era of Blockchain
- Innovation made Usable
Financial institution’s (FIs) priority has
moved from understanding blockchain’s
potential to what further needs to be
done for a blockchain to work within the
regulatory boundaries of the industry.
Their aim now is to meet the key aspects
that a financial institution requires in order
to use it effectively. Three broad areas
are emerging in the ‘New Era’ blockchain
architecture.
Identifiable
• The pseudo-anonymity of the blockchain
does not work for FIs, where ‘identifiability’
is key
• To meet regulations like KYC/AML and
FATCA, FIs need to be able to identify and
pinpoint the identity of the nodes
• This is addressed by including the ‘real
world’ identity to the blockchain address
based identity
• ‘Auditability’ was always a strong point
of traditional blockchains, but with
‘identifiability’, it gets stronger
• FIs can take this further and build a
fool proof repository of identities on the
blockchain
Controllable
• A public blockchain gives very little
control to its participants and is truly
democratic in nature. This does work
in many cases as FIs need to be able
to exercise control on several aspects,
especially in the financial regulation space.
Therefore, the need and the proliferation of
private networks (or consortiums)
• Such networks allow control to a group
or an individual organization to decide
who can participate, how consensus on
viewing rights, membership and frequency
of validations can be arrived at
• Such a permissioned environment
brings in certainty, predictability, and
accountability into the blockchain based
system
Asset Agnostic
• The concept of creating value on the
blockchain has been a point of controversy
from the time of its inception. Regulators
have mostly taken a negative stance on
the ‘value’ aspect while being open to the
blockchain itself
• Thus, a blockchain which is not tied to
one asset (that is created on the chain or
otherwise) is an ideal way forward
• Such chains allow FIs to transfer legal
tender/instruments/documents or any
other asset which can be digitized
These adaptations of the blockchain make
it extremely attractive to the financial
industry. The FIs can now focus on the
use cases that interest them most, rather
than worry about the suitability of the
underlying technology. Key considerations
for FIs to look at for developing use cases
would be regulatory constraints, the
readiness of the ecosystem and of course
the nature of the process/area that is under
consideration.
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 Three Principles to Explore
Use Cases
FIs are cautious by nature. Blockchain
technology has the potential to
revolutionize financial transactions but
several challenges have to be overcome –
one of the fundamental question from FIs
is where to start for ‘proofs of concept’ of
blockchain use cases.
In 2016, Moody’s published a whitepaper
that identified 25 important use cases
from over 100 use case candidates, most
of which are still valid in 2017 – but a
collection of 25 use cases is still far more
than sufficient to give a clear view of
exactly which use case fits most to a bank’s
business. The new blockchain architecture
– identifiable, controllable, and asset-
agnostic – demands FIs to explore further
what are the right use cases. In this
chapter, we introduce three fundamental
principles to help identify best-fit
blockchain use cases, so that FIs can move
forward to operationalize the technology
and integrate it into current processes and
systems.
Principle 1: Non-Monetary
In an era of cybercrime and stringent
regulatory requirements, blockchain
regulation is a gray area in the financial
industry, creating some uncertainty
around its implementation. Regulators are
keeping an eye on blockchain technology,
especially in the area of:
• The basic tenets of a KYC/AML
compliance program (for instance FINRA
3310) require the customer identifies (who,
where, and which organization) must be
traced by blockchain payment system
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• The general ledger integrity must be
assured - all distributed ledgers that reflect
account changes must be reconciled to
bank’s enterprise GL
In such a context a blockchain, when tied
to fiat or virtual currency, creates extra
complications with compliance and legacy
integration. Instead, documents, records,
financial instruments and even private
equities carried by blockchain could be an
ideal way forward to avoid the compliance
hurdles and regulation uncertainties.
However, central banks are catching up
quickly. In countries where regulation
supports blockchain innovation – for
instance, the Monetary Authority of
Singapore is testing blockchain for a new
payment transfer project – FIs could adopt
an aggressive approach to try blockchain
payments in sandbox environments.
Principle 2: Contained
R3 CEV, as one of the largest blockchain
consortium, stated early on, that the
initiative will, ‘seek to establish consistent
standards and protocols for this emerging
technology across the financial industry’.
However, the question for financial firms
is whether they should work together
on a standardized consensus model that
everyone agrees on or work independently
on different versions and let the market
decide. The other side of the coin is it
takes time for a consortium to reach an
agreement, and extra efforts to implement
– any initiative of this scope to harness
a standard in a fast pace environment is
definitely not easy, and sometimes a road
block not a catalyst to innovation. What
happened to R3 in recent year has shown
the difficulties of building an ambitious
consensus among a large group of key
stakeholders.
Therefore, FIs could first look at use cases
that could be implemented inside the
organization, or within a much smaller
scale of consortium – it enables them to
test the technology in a time-to-market
manner, and start small with niche-market
use cases. Most FIs are interested in
blockchain but have not participated in
major consortiums – for instance, regional
and small-medium-size banks. Such FIs can
go ahead with this light-weight approach,
and even global multinational banks
could run a bi-model strategy to try both
contained and consortium relevant use
cases.
Having said that, a bank should consider
all these factors in a local context to
determine the best-fit approach. There
are exceptions where agreement can still
be efficiently made among a group of
banks. It could be achieved by a powerful
centralized organization, for instance, a
financial holding company that includes
a family of banks, or a strong state-owned
banking association that represents a
group of local credit unions.
Principle 3: Distributed
It is essential to understand that from a
business perspective, blockchain doesn’t
fundamentally change how payment or
money market works. However, blockchain
as a technology platform can be adapted
to a business context – and potentially
transform the whole process and
operations.
The dispute of the pros and cons between
a centralized database and decentralized
database has been continued for decades.
Centralized system has approved its
efficiency in many business scenarios
to handle mass volume transactions, for
instance, core banking. On the other hand,
although no formal benchmark released
to indicate any serious capacity issues for
blockchain, efficiency (for instance network
scaling problems) is a general concern to
not just blockchain but many other types
of distributed databases - where significant
overhead or replication associated with
these protocols exists.
However, blockchain, by its nature as a
distributed record-keeping database,
could demonstrate its true value, especially
in a collaborative, distributed business
environment. Typical scenarios include
trade finance, international remittance,
and syndicated loan. For these use cases,
and with careful planning, FIs should
have the confidence to deploy a scalable
blockchain solution not only in a sandbox
environment but also in a production
environment.
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 The Segmentation Model
Though there is no ‘one-size-fits-all’ rule,
these three non-exclusive principles form
a segmentation model. It is designed to
help FIs further filter and identify suitable
blockchain use cases. See figure 1.
Segment 1:
Ready Classic
It is a segment where the use cases can
fulfil all three principals. These use cases,
though with a limited number, can
leverage the full advantage of distributed
ledger, and be easily integrated into a
legacy environment without a compliance
breach. Example use cases include trade
finance document transfer, digitizing
paperwork for both inter and intra
organizations.
Segment 2:
Innovation Showcase
A distributed platform like blockchain
could potentially lead to cost optimization
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and operational efficacy. Although this
business value is yet to be justified in a real
production environment, FIs that have a
strategy to appeal tech-savvy consumers
can explore the use cases to replace a
centralized legacy system to deliver a clear
marketing message in innovation and
digitalization. Example use cases include
digital vaults and collateral management.
Segment 3:
Monopolistic Collaboration
Due to the complexity of building
a standardized protocol within a
consortium, a monopolistic power in
collaboration - implying a holding group,
a monopoly banking association or a
mega-bank leading trade finance partners
– is a prerequisite to applying a business
scenario within a group of different
business entities quickly. By implementing
blockchain, it should be able to improve
Innovation
Showcase
Non- Monetary
Figure 1: Segmentation model to identify suitable blockchain use cases
time-to-market and gain competitive
advantage. Example use cases include
syndicated loan, and multi-bank KYC – if
regulator as a catalyst to push for national
KYC standard.
Segment 4:
Open Regulation
Uncertain regulations keep bankers away
from using blockchain for payments in
a format of digital money – including
fiat currency and loyalty points – in a
real world. However, an open regulation
framework or sandbox approach (in both
advanced markets such as Australia,
Singapore and emerging region such as
Eastern Africa) opens up new opportunities
to re-design payment ecosystems using
blockchain. Example use cases include
same-bank international remittance.
Contained
Open
Regulation
Ready
Classic
Monopolistic Distributed
Collaboration
Conclusion
Many FIs select blockchain use cases due
to the hype surrounding this technology
and not based on the local business and
regulatory context. The three principles
and the segmentation model is designed
to help these organizations to review its
blockchain investments and pipelines.
FIs are suggested to look into a multi-
tier approach – adopting multiple
segmentation approaches – to participate
blockchain development with a list of
prioritized use cases.
Several ‘proofs of concept’ of blockchain
use cases have been put forward by
financial institutions. The battle for Authors:
distributed-ledger pilots and business
Ethan Wang,
cases will define success for many
Product Manager, Infosys Finacle
innovation players in the financial services
and payment sectors. However a clear Shweta Shivaraja
understanding of where next generation Product Manager, Infosys Finacle
blockchain is moving and how to explore
most suitable blockchain use cases will be
key to deliver successful outcomes in this
space – In spite of the challenges facing
the blockchain, as technology becomes
more robust, blockchain will eventually
demonstrate its true value to reinvent
banking and payment processes.
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About Infosys Finacle
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