BLOCK CHAIN IN BANKING SECTOR

Block chain is the technology which is used to decentralized transaction of any

digital currency through shared ledger or ledger sharing concept throughout this
world.

There are many different block chains—public and private—and they allow
anyone to send value anywhere in the world where the block chain file can be
accessed. Think of each chain as an online database stored in a distributed,
peer-to-peer fashion. The storage devices for the database are not all connected
to a common processor and each block—ordered records—has a timestamp and
a link to a previous block.

Cryptography ensures that users can only edit the parts of the block chain that
they “own” —by possessing the private keys necessary to write to the file. It also
ensures that everyone’s copy of the distributed block chain is kept in sync.

A recent report predicts that by 2025 10% of GDP will be stored on block chains
or block chain-related technology.

Block chain technology can potentially disrupt the financial industry that we know
and use today. Here are just a few of the top ways I believe it will transform
finance and banking:

Fraud Reduction

Even though block chain is new technology, its potential to reduce fraud in the
financial world is getting a lot of attention since 45% of financial
intermediaries such as stock exchanges and money transfer services suffer from
economic crime every year. Most banking systems around the world are built on
a centralized database that is more vulnerable to cyber attack because it has one
point of failure rather than many—once hackers breach the one system they
have full access. The block chain is essentially a distributed ledger where each
block contains a timestamp and holds batches of individual transactions with a
link to a previous block. This technology would eliminate some of the current
crimes being perpetuated online today against our financial institutions.

Know your Customer (KYC)

Financial institutions spend anywhere from $60 million up to $500 million per
year to keep up with Know your Customer (KYC) and customer due diligence
regulations. These regulations are intended to help reduce money laundering
and terrorism activities by having requirements for businesses to verify and
identify their clients. Block chain would allow the independent verification of one
client by one organization to be accessed by other organizations so the KYC
process wouldn’t have to start over again. The reduction in administrative costs
for compliance departments would be significant.

Smart Contracts

Because block chains can store any kind of digital information, including
computer code that can be executed once two or more parties enter their keys,
block chains enable us to have smart contracts. This code could be programmed
to create contracts or execute financial transactions once a certain set of criteria
has been achieved—delivery of products could signal an invoice to be paid for
example.

Decentralized Trade Finance

A trade finance solution with letter of credit, bill of lading and multi-signature
solutions based on block chain would include the following features:
• Carriers issue bill of lading on the block chain as a digital asset.
• Banks issue letter of credit as a digital asset on the block chain.
• Multi-signature contracts.
• Smart-contract-enabled, event-based fund release to ensure speed and
transparency

Payments

Block chain disruption could be highly transformative in the payments process. It

would enable higher security and lower costs for banks to process payment
between organizations and their clients and even between banks themselves. In
the current reality, there are a lot of intermediaries in the payment processing
system, but block chain would eliminate the need for a lot of them.

Trading Platforms

It’s exciting to contemplate the changes that might occur with our trading
platforms if they relied on block chain-based technology. There’s no doubt that
the risk of operational errors and fraud would be dramatically reduced. NASDAQ
and the Australian Securities Exchange are already exploring block chain
solutions to reduce costs and improve efficiencies.

HURDLES TO BLOCK CHAIN IMPLEMENTATION FOR FINANCIAL

SERVICES

The block chains that would be used by financial institutions would need to
comply with privacy laws of today and the future and need to ensure the safety of
the data. There are many questions regarding regulatory oversight for this new
technology that need to be sorted out. And, any block chain used in this sector
would need to handle an extraordinarily large data set, therefore scalability is
incredibly important.

There are some initial steps banks should consider when implementing a block
chain platform alongside existing systems.
• Identify opportunities for innovation. The key question to ask before starting a
trial is which processes to move to block chain. This can be tricky. Block chain
is essentially a shared database, and banks have commonly relied on
database management technologies to store and control access to data.
Creating a working group that explores the pros and cons of moving a process
to block chain would be an ideal place to start. Such a group would operate
like a startup and explore areas where block chain can add value, while
staying in sync with the bank’s strategic goals.
• Assess feasibility and impact on existing systems. This involves weighing the
benefits and costs of moving a process to block chain. Taking the perspective
of key stakeholders and partners impacted by the move is critical.
• Test proofs of concept. Not all ideas will have the potential to reach this
stage, but once a proof-of-concept (PoC) application is ready, it needs to be
tested against real-world simulations to identify areas of improvement. By
measuring the results against expectations, banks will be able to refine the
application and use this knowledge for future application development.
• Understand the regulatory environment and data security. External factors
such as regulations play an important role in the block chain era. The current
regulatory framework has no provisions for accommodating a technology that
could eliminate intermediaries. Storing customer data on computers in different
countries will also require banks compliance with data privacy laws that may
vary from one country to another.

Similarly, there is no framework of regulations to make smart contracts work in

the capital markets as they exist today. While regulators changes incurred by
block chain, such as storing data in multiple locations rather than one central
location, represent a radical shift in the way banks operate.

• Determine the nature of block chain implementation: open vs. permissioned.

Most banks are known to be working on closed/ permissioned block chain
platforms. Given the technology’s embryonic state, it makes sense for them to
retain control, which means assigning a central administrator to authorize block
chain participation. However, the full benefits of decentralization, such as lower
transaction costs, cannot be achieved without giving up control. This
permissioned block chain approach makes sense in the near term, but as
platforms emerge independently, industry players will be pressured to realize
the true benefits of a block chain platform.
• Calculate scalability. The Bitcoin community continues to debate 20 the best way
to increase the transaction processing capacity of block chain from the current
seven transactions per second, as real-world scenarios would require banks to
 process thousands of transactions per second. Proposed solutions 21 include
increasing the block size limit from the current 1MB per-block, direct payment
channels between two users, and centralized servers that handle off-chain
transactions.

SOLUTIONS FOR TACKLE HURDLES REGARDING IMPLEMENT BLOCK

CHAIN IN FINANCIAL SECTOR [BANK]

The Hyper ledger project, Distributed ledger and Digital Asset Holding are
creating a safe space to carry out pilot tests for block chain prototypes.

Digital Asset

A digital asset is anything that exists in a binary format and comes with the right
to use. Data that do not possess that right are not considered assets. Digital
assets include but are not exclusive to: digital documents, audible content,
motion picture, and other relevant digital data that are currently in circulation or
are, or will be stored on digital appliances such as: personal computers, laptops,
portable media players, tablets, storage devices, telecommunication devices.

Hyper ledger

The Hyper ledger project is an open source collaborative effort created to

advance cross-industry block chain technologies. It is a global collaboration
including leaders in finance, banking, IoT, supply chain, manufacturing and
technology. The project aims to bring together a number of independent efforts to
develop open protocols and standards, by providing a modular framework that
supports different components for different uses. This would include a variety of
block chains with their own consensus and storage models, and services for
identity, access control, and contracts.

Distributed Ledger

A distributed ledger is essentially an asset database that can be shared across a

network of multiple sites, geographies or institutions. All participants within a
network can have their own identical copy of the ledger. Any changes to the
ledger are reflected in all copies in minutes, or in some cases, seconds. The
assets can be financial, legal, physical or electronic. The security and accuracy
of the assets stored in the ledger are maintained cryptographically through the
use of ‘keys’ and signatures to control who can do what within the shared ledger.
Entries can also be updated by one, some or all of the participants, according to
rules agreed by the network.
Entries can also be updated by one, some or all of the participants, according to
rules agreed by the network.