Professional Documents
Culture Documents
Introduction 4
Key findings 5
Payment transactions. 10
Cost and complexity reduced. 10
Promising examples on their way. 12
What’s next? 12
Trade finance. 13
No trade-offs – speed and security combined. 14
Possible use cases in trade finance. 15
Current projects: collaboration is key. 16
What’s next? 17
For several years, the hype surrounding the dis- on the potentials and limitations of the blockchain
tributed ledger approach and blockchain technol- technology. To that end, both promising and non-
ogy has grown steadily, fostering discussions and promising areas of application are highlighted and
research activities on potential areas of application discussed.
throughout the financial services industry. Current
After an introduction of the technology, three main
research and several use cases reflect the first fea-
fields of application have been investigated here:
sible implementations of the technology, bringing
Payment transactions, trade finance and the over-
major changes for segments and processes within
the-counter market. The paper gives an analysis of
the industry. An increasing number of banks are re-
the status quo in each of these fields and shows
alizing the urgency of the topic and are exploring
where and how blockchain technology could be
ways of using blockchain technology. A differenti-
used or is already deployed. The authors show what
ated approach is necessary to elaborate on the po-
is currently done to introduce the blockchain and
tential impacts on industry segments and financial
what the next steps should be.
institutions, as blockchain technology is character-
ized by complexity and several limitations.
Drawing from a broad range of statements from
experts from both Infosys Consulting and institu-
tions from various sectors of the industry, this pa-
per provides a high-level business-case viewpoint
1 2
Other promising areas for blockchain Distributed ledger and blockchain are
applications include lending business, not one-size-fits-all solutions.
insurance, real estate and factoring.
3 4
Blockchain technology is currently not Collaboration between FinTechs and
sufficiently regulated and future suc- banks is key for broad implementation.
cess will depend on clarifying legal
aspects.
5 6
External Document © 2018 Infosys Limited
Distributed ledger tech- Centralized ledger
nology in the financial
services industry. Trusted third party
1 2 3
Transaction recorded Block validation Add block to
in new block through network existing chain
Figure 3: The process of a distributed ledger transaction; source: Own illustration based on Santander (2015) and Goldman Sachs (2014)
(5) Rules set out a protocol for interac- Two Basic Protocols
tions between participants. Two of the
most influential protocols are seen on the Bitcoin protocol Ripple protocol
bitcoin and Ripple networks (see Figure 5).
· Currency with built-in payment system · Payment system for arbitrary currencies
Whereas bitcoin is a cryptocurrency with
· Proof-of-work consensus process · Iterative consensus process
a built-in payment system, Ripple is a pay-
ment system for arbitrary assets. The two · Mining of new tokens by network nodes · Ripple Labs issues new tokens
protocols differ in their consensus mecha- · Only bitcoins can be tracked · Any kind of asset can be tracked
nism, transaction fee policy, creation of · Transactions are basically free · Transactions have an XRP cost
new tokens and other aspects. Hence,
rules strongly influence the character of
distributed ledger systems and determine
Figure 5: Bitcoin protocol vs. Ripple protocol; source: Own illustration based on Accenture (2015),
the way the system can be applied. Bitcoin (2015) and ECB (2015)
POTENTIALS OBSTACLES
The current distributed ledger technology is not always an appropriate solution, since it can
only develop its full potential if a large network and low transaction volumes are given.
Figure 6: Potentials and obstacles for applications; source: Own illustration based on expert interviews (2015) and analysis results
of the participants, and the technological private blockchain solution, allowing each payment systems is not possible to
aspects, which have to be guaranteed at member to send funds and transaction- estimate because of the unknown
any time. relevant information directly to other implementation costs for financial
members. institutions. Also unknown is how
Legal requirements: Legal arrangements certain banks might delay the process
should be defined for the insolvency of Making use of the technology in such
of implementation by resisting changes
a blockchain participant, liability for en- a way could change the course of the
owing to the fear of losses in chargeable
prevailing correspondent banking system.
forcing anti-money-laundering standards transaction fees.
International payment transactions could
(AML), and managing over-lapping juris-
be executed by omitting the use of third
dictions. Furthermore, legitimation as-
parties like clearinghouses and to a large Ripple Labs,4 a San Francisco-based
pects and procedures must be considered,
extent the branched chain and cross- venture-backed start-up, is currently
such as the identification of beneficiary
transfer of information and funds (see doing research in exactly this field.
parties and politically exposed persons
Figure 9). This principle of implementation The self-developed Ripple transaction
(PEP’s). Legal ambiguity constitutes a ma-
could theoretically be beneficial for protocol (RTXP) can serve as a central
jor hurdle for implementing the block-
national payments as well. Blockchain script, which aims at allowing members
chain in international payment systems, as
technology could therefore serve as a of such a network to conduct cross-
many aspects remain to be clarified.
perfect means for account settlements currency transactions within 3 to 10
Technological requirements: Certain within book transfers. seconds.1) Through RTXP, every member
technological properties are vital for broad can take advantage of the lowest prevail-
The key benefits would clearly be cost
use. The screening of beneficiary parties ing exchange rates, as an open-market
reductions owing to the elimination
needs to be adjusted and extended to IP principle creates a competitive set-up
of transactions, and data processing
addresses and block-chain accounts – a re- for liquidity providers and guarantees
could be shaped much more efficiently.
quirement that should be put into practice the lowest exchange rate fees for
International and domestic money
without any major problems. transactions. The cryptocurrency Ripple
transfers and cross-currency transfers
XRP constitutes an optional bridging
would become much faster, and a time
The most promising fields of application currency between all tradable currencies
and cost reduction due to 24/7/365 real-
within payment systems seem to be in- and can be used by each member of the
time settlement availability, simplified
dividual transactions and cross-border network. Although the Ripple network is
transactions and automated accounting
payments of different volumes, which can constantly growing and developing, the
adjustments would potentially be possible
be large corporate and inter-bank transac- scalability of the Ripple protocol and the
via the blockchain and thereby constitute
tions. Initial concrete approaches within usability of the bridging currency have
a major improvement.
cross-border payment processes state the not yet been tested.
potential advantage of broad peer net- At present, the detailed scope of impact
1) Principle can also be beneficial for national
works consisting of verified partners, such and cost-saving potential in the case of payments and the blockchain can serve as a perfect
as banks. These networks could employ a such well-functioning global blockchain mean for account settlements within book transfers.
BOLERO PLATFORM
B/L
Figure 10: Bolero platform; source: Own illustration based on Bolero (2015) and expert interviews (2015)
Figure 11: BPO framework; source: Own illustration based on SWIFT (2015), ICC (2014), Wolf (2013)
Blockchain
Solutions?
L/C
Insurance on
open account
[ HIGH ]
Figure 12: Trade finance products; source: Illustration slightly adapted from ‘BPO - a corporate prospect on supply chain finance’ by M. Diaz / SWIFT (2012)
Possible use cases in trade asset tracking with other technologies predefined measure, like the transfer of
and use cases like GPS, RFID or smart money or sending of a message, is taken.
finance.
contracts may lead to an advanced, Such a signal could be the entry of a
Asset tracking is one of the use cases that automated and secure flow of goods. good’s serial number by a third party. For
can be implemented in many different example, the freight carrier taking over
ways. Having an asset with a unique serial Smart contracts are a use case that
the goods from the seller could enter this
number secured in a blockchain can is likely to become an inherent part
information into the system and thereby
guarantee authenticity and origin of a of future trade finance products. The
initiate the payment. An approach like
good. The buyer of a good can verify the idea of smart contracts pre-dates
this could replace the process of sending
serial number against the immutable data blockchain technology and is simple in
a paper B/L from one institution to
in the database and can be sure of having its core. In combination with blockchain
another.
a genuine product. Especially industries technology, it becomes valuable as an
in which counterfeits are common, such agreement between two parties and Many blockchain use cases imply
as the medical sector, could strongly can be secured in a distributed ledger. that banks or other third parties
benefit from the creation of a secure The execution and fulfilment of contract become obsolete in their function as
product history. For industries with conditions can ultimately be automated. an intermediary or trustee. While the
opaque production and transportation, Manual document scanning becomes technology is able to make processes
like coffee, cocoa or textiles, blockchain obsolete and legal conflicts can be easier and flawless, in trade finance it is
technology could assist end consumers reduced. For a smart contract, a (legal) not able to take over the role of financial
in making correct purchase decisions and condition is transferred into a query that institutions. In cases of default, banks are
in distinguishing, for instance, between automatically checks the conditions’ still needed to cover the buyer’s or seller’s
fair and unfair labor practices. Combining fulfilment. In the case of fulfilment, a investments.
Figure 13: Everledger’s diamond tracking process; source: Own illustration based on expert interviews (2015) and Everledger (2014)
Exporter
Digitization
(„Bracket“)
Sales
contract
Importer
Provision of trust Securitization of the Asset tracking and automated, signal induced triggering of payments and
for many use cases contract conditions information-flow. A price advantage of 90% is possible (company statement)
besides bitcoin („Smart contracts“)
Figure 14: Skuchain‘s Bracket 2) ; source: Own illustration based on skuchain (2015) and expert interviews (2015)
most secure distributed ledger. Therefore, technological understanding cannot During the maturing of the technology,
many FinTechs use it to secure their data be found solely in-house. In contrast, a market entry could become costlier.
with bitcoin transactions. The sidechains FinTechs are in need of the customer base Current projects will stabilize and start to
of the bitcoin blockchain or the colored and the industry knowledge of financial generate revenues, leading to an increase
coin principle are favoured for consigning institutions. in investments in start-ups, infrastructure
contract conditions or tracking assets. At the moment, many banks are exploring and know-how. In addition, major trade
institutions like the ICC and the WTO
ways to make use of the technology and
What’s next? its possibilities. Only a few presently
will approach blockchain technology
on a broader level. As a result, banks
At the current stage, it is hard to predict emphasize trade finance. Some financial
should now closely monitor current
who of the different players will be institutions have taken an observer
successful and whether it is possible to and future market developments. Each
position, waiting for the right time
establish an international blockchain institution must analyze whether and
to invest. However, the wait and see how the technology can help or how it
platform for the exchange of documents
strategy appears risky as the know-how, could interfere with existing products and
and trade finance products. Success of
which is currently building, becomes processes. A successful implementation
individual companies will strongly depend
more valuable. The entire FinTech and will require combining technological
on effective networking and openness
to collaboration. Most of the currently blockchain environment is fast-moving, expertise with industry understanding
promising projects are based in some way and according to several experts, block- and critically analyzing potential
on collaboration models, and banks will chain technology will reach mass application areas.
have to accept that expertise and deep suitability within the next 5 to 10 years.
2) Bracket = Blockchain based Release of funds that Are Conditionally Key signed and Triggered by signals
Cost savings
▶ Contracts without downtime, censorship, ▶ Elimination of the credit and market risk
fraud or third party interference by requiring prefunding prior to trading
Smart contract
Smart controls
▶ Execution is open to the internet and ▶ Computer protocols monitor the perfor-
automatic settlement mance of a contract and assess the need
for contractual clauses
Figure 16: Blockchain potential for OTC market participants; source: Own illustration based on Accenture (2015), H. Shadab (2014) and analysis results
IMPLEMENTATION
Figure 17: Conception of NASDAQ’s Linq; source: Own illustration based on Rizzo, P. / Coindesk (2015), Kaminska, I. (2015), Nasdaq (2015), Rosenfeld
(2012), expert interviews (2015) and analysis results
technology enables the implementation nological requirements. The examples be observed in the form of first-use
of smart contracts in the OTC markets as presented in the following discussion cases. One example is Nasdaq 12, which
well as already seen in trade finance. The are illustrative of the biggest current implemented the blockchain technology
requirements for a mass implementation challenges. First, the implementation Linq on its stock exchange for private
and use can be distilled into three of non-digital native assets must be stocks in the field of pre-IPOs, making
broadly defined categories: legal aspects, based on standardized terms. Since the Linq the first blockchain-based platform
technological aspects, and institution- introduction of a CCP allows a position for trading and managing private shares.
specific aspects. The legal aspects present netting of a customer, the new technology The implementation of the technology
the major hurdle for most participants. should also include the ability to operate simplifies the issuance, cataloguing and
nettings among different customers. recording of shares of privately held
Legal requirements: So far, regulators Moreover, market participants want to companies.
and other judicial institutions have make use of margin finance and trade
Nasdaq also uses a more advanced bitcoin
reacted in a reserved manner concerning assets without possession. Additionally,
protocol that enables the coloring of
the blockchain technology. Fundamental the speed of confirmation has to be
bitcoins (Figure 17). Coloring bitcoins
measures in this field include the aligned with the speed of the settlement.
turns them into tokens that represent
adjustment of the current legal framework Both processes should take place
private shares.
to the distributed ledger framework and simultaneously without one lagging
the establishment of a legal environment behind the other. The platform is based on the principle
that regulates either the transition from of plain bitcoin transactions that satisfy
Institution-specific requirements: Each
traditional contracts to smart contracts additional requirements of contract
institution faces individual challenges,
details. This case constitutes an ideal
or their coexistence. Besides the basic which require in particular a redesign of
example of how investigators currently
framework, another major hurdle is the the technological architecture. Internal
operate. Linq can only be accessed by
implementation of financial contract risk, price and capital models currently
a narrowly selected circle of investors
specifications as pre-trade agreements do not align with the conditions imposed
and therefore is classified as a private
and further individual contract conditions. by the implementation of the blockchain
blockchain. With this use case, Nasdaq
technology.
Technological requirements: Complex addresses especially customers that are
market conditions impose high tech- The technology’s advantages can already open to innovation.
The technology holds strong potential for facilitate cost savings through lean back- is to manage the transition phase from
many areas of financial services. In the field office processes. The presence of many old to new processes that incorporate
of payment transactions, it could reshape use cases in these areas substantiates blockchain solutions efficiently. One
the current correspondent banking their high potential. Segments such as way of achieving this will surely be the
processes and lead to cost savings. In trade the lending business, insurance, real cooperation with regulators in order
finance, the blockchain could induce the estate and factoring are further promising to establish the legal framework that is
urgently needed digital transformation. It areas, but research still needs to provide urgently needed.
Management
summary
Distributed ledger and blockchain benefits in practical use. Should Many market participants are ex-
are about to cause major business blockchain prevail in practice, it has ploring ways of using blockchain,
transformations in the financial the potential to disrupt traditional among them established institutions
industry. and start-ups alike.
business models and make existing
Three very promising fields of appli- players obsolete. This is especially
Banks should now closely moni-
cation are payment transactions, true for trusted third parties.
tor current and future market
trade finance and the over-the-
developments.
counter market. Besides technical challenges that
have yet to be overcome, the lack According to several experts, block-
In all of these areas, first projects
and deployments can be seen. of a legal framework for the use of chain technology will reach mass
However, all of them are in a very blockchain technology is currently a suitability within the next 5 to 10
early stage and have to prove their major obstacle. years.
Illustrations
Accenture. (2015). Distributed Consensus Ledger for Payments. Retrieved January 10, 2016, from https://www.accenture.com/t20151002T010405__w__/us-en/_acnmedia/
Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-Banking-Distributed-consensus-ledgers-payment.pdf
A.T. Kearney (2013); Winning the Growth Challenge in Payments
Austen, M., et al, (2013, April 11). Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications. Retrieved January 10, 2016, from http://www.oliverwyman.
de/content/dam/oliver-wyman/global/en/files/archive/2013/Outlook_for_Wholesale_and_Investment_Banking_2013.pdf
Bitcoin. (2015). Block hashing algorithm. Retrieved January 10, 2016, from https://en.bitcoin.it/wiki/Block_hashing_algorithm
Bolero International. (2015). About Us / Solutions / Services / Customers. Retrieved December 5, 2015, from http://www.bolero.net/
Diaz, M.-C. (2012). BPO - a corporate perspect on supply chain finance (Presentation at Eurofinance Monaco). SWIFT, Monaco.
ECB. (2015). Virtual currency schemes – a further analysis. Retrieved January 10, 2016, from https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf
European Payments Council. (2015). Ripple: an Internet Protocol for Inter-bank Payments.
Everledger. (2014). Insurance fraud is a global problem. Retrieved November 23, 2015, from http://www.everledger.io/
Goldman Sachs. (2014). All about Bitcoin. Retrieved January 10, 2016, from http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdf
ICC International Chamber of Commerce. (2014). Bank Payment Obligation (BPO) Frequently Asked Questions for Banks. Paris.
Kaminska, I. (2015). Blockchain promises back-office ledger revolution . Financial Times.
Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved January 10, 2016, from https://bitcoin.org/bitcoin.pdf
NASDAQ OMX Newsroom - Press Release. (2015, May 11). Retrieved January 4, 2016, from http://www.nasdaqomx.com/newsroom/pressreleases/pressrelease?messageId=1361706
Ripple. (2015). http://www.ripple.com/.
Rizzo, P. (2015, November 21). Inside Linq, Nasdaq’s Private Markets Blockchain Project. Retrieved January 10, 2016, from http://www.coindesk.com/hands-on-with-linq-
nasdaqs-private-markets-blockchain-project/
Rosenfeld, M. (2012, December 4). Overview of Colored Coins. Retrieved January 10, 2016, from https://bitcoil.co.il/BitcoinX.pdf
Royal Bank of Scotland, Capgemini. (2015). World Payments Report 2015.
Santander. (2015). He Fintech 2.0 Paper: Rebooting financial services. Retrieved January 10, 2016, from http://santanderinnoventures.com/wp-content/uploads/2015/06/The-
Fintech-2-0-Paper.pdf
Shadab, H. B. (2014). Regulating Bitcoin and Block Chain Derivatives. Retrieved January 10, 2016, from http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/
gmac_100914_bitcoin.pdf
skuchain. (2015). Connect to the Commerce Cloud. Retrieved November 22, 2015, from http://www.skuchain.com/
SWIFT. (2015). Market adoption of BPO. Retrieved November 28, 2015, from https://www.tradefinance.training/library/files/BPO%20Market%20Adoption%20Aug2015.pdf
US Department of Treasury (2007). Fundamentals of the funds transfer process. Washington, D.C.
VISA (2006). The Inefficiencies of Cross Boarder Payments, Retrieved December 20, http://euro.ecom.cmu.edu/resources/elibrary/epay/crossborder.pdf.
Wolf, F. O. (2013, October). Die Bank Payment Obligation (BPO) im Außenhandel. Exportmanager-Online.
Infosys Consulting is a wholly owned Graduate School of program and Executive Education.
According to the Financial Times,
subsidiary of Infosys (NYSE: INFY), a Management
global leader in technology services HHL ranks first in Germany and fifth
HHL Leipzig Graduate School of globally for its entrepreneurship
and consulting, with a team of
190,000+ innovators serving clients Management is a university-level focus within the M.Sc. and EMBA
in more than 50 countries. institution and ranks amongst the programs. HHL is accredited by
leading international business AACSB International.
Infosys Consulting forms the global
management consulting arm of schools. The goal of the oldest
www.hhl.de
Infosys. A pioneer in breaking business school in German-speaking
down the barriers between strategy Europe is to educate effective,
and execution, Infosys Consulting responsible and entrepreneurially-
delivers superior business value to its minded leaders. HHL stands out for its
clients by advising them on strategy
excellent teaching, its clear research
and process optimization as well as
focus, its effective knowledge
IT-enabled transformation.
transfer into practice as well as its
Please visit us at www.infosys.com/
outstanding student services. The
consulting to find out more about
courses of study include full and
how we go beyond the expected to
deliver the exceptional. part-time Master in Management as
© 2018 Infosys Limited, Bengaluru, India. All Rights Reserved. Infosys believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Infosys
acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this
documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the
prior permission of Infosys Limited and/ or any named intellectual property rights holders under this document.