Blockchain : Rethinking Banking And Business


Friday, February 23, 2018 /10:30  AM / FDC 

In today’s world, disruption is the constant over-arching theme. Technology is constantly changing the way we do things. The recent rise – and fall – in crypto-currencies caught the majority of people off guard. Many still dismiss them as fool’s gold, and lacking in most of the fundamental properties of a proper currency (medium of exchange, store of value and a unit of account). Bitcoin is perhaps the most popular of the lot. It is now even traded on a futures exchange. Where many saw a bubble, others saw opportunity for a quick buck. The value of bitcoin skyrocketed by over 2000% in the space of a year to $20,000 per coin – astronomical by any standard – but has fallen to under $9,000 as at the 9th of February.

Whether bitcoin or any of the countless other crypto-currencies will be worth upwards of $50,000 per coin, as predicted by some analysts, or that it will one day replace fiat-currency, is something that is still the subject of frenzied debates. However, the real treasure is blockchain – the underlying technology on which bitcoin and the entire crypto currency universe is based.

What is blockchain ?
Purportedly the brainchild of a person or group of persons known as Satoshi Nakamoto, blockchain, also known as distributed ledger technology (DLT), is a digital platform and database that allows digital information to be distributed but not copied. Originally created to authenticate bitcoin transactions, it was designed as a way to centralize record-keeping without needing third-party authorization – like a bank or a regulator. It enables users to record, track, and validate peer-to-peer transactions. Confirmation of records is done by multiple users with access to the data. It keeps a permanent record of all transactions, keeps users information anonymous while all activity is secure and unchangeable. But beyond recording financial transactions, it can be used to record practically everything of value. 

Decentralization – the masterstroke
This single advancement in technology has the potential to revolutionize our world and the way we do business in ways so profound it would have been considered unfathomable just a few years ago. Perhaps the most crucial area where the blockchain technology comes into play is in guaranteeing the legitimacy of a transaction by documenting it on a main register as well as on a connected distributed system of registers, all connected through a secure validation mechanism. 

The database is not stored in a single location – It is hosted by millions of computers concurrently and stays accessible to anyone on the internet. This means records stay public, can be easily verified, and no centralized version of this information exists for any hacker to corrupt.

What can blockchain do for business?
At the moment, the financial industry, and banking in particular, has the biggest potential for disruption by blockchain technology. Its proponents are of the opinion that current banking processes are expensive and time-consuming and blockchain technology presents a much more secure and convenient alternative. From all kinds of payments, settlements, trade finance and even compliance, the underlying features of blockchain technology seems almost tailor-made for banking and it is garnering increasing support from major players in the glob-al financial services industry. 

According to PWC, as of 2014, over 45% of financial intermediaries worldwide suffered from some form of economic crime yearly. Blockchain’s ability to create shared digital data-bases of entries that are incorruptible would drastically eliminate the potential for cyber-attacks against many banking systems – currently built on centralized databases. The current system is highly vulnerable as a single breach of the system by hackers gives them full access.

Another big win would be in the area of remittances as it would drastically cut down the time taken to complete a transaction. Nigeria received an estimated $22bn in diaspora remittances in 2017 while spending $2bn (9%) in remittance fees. The standard transaction time is typically two business days. Blockchain technology has the ability to not only in-crease the speed and efficiency of sending and receiving money, it also drastically lowers transaction costs. An example would be Thailand, through Siam Commercial Bank, and Japan’s SBI Remit, which have mutually adopted the first blockchain-powered instant remittance service as a way to create another means of payment between the two countries. A transaction that would typically take two business days to complete is now being done in an estimated time of less than five seconds.

Another major area that DLT could give banking a significant upgrade – in terms of cost and efficiency – is in trade finance. It has the potential to fine-tune the cross-border trade finance process through the use of smart contracts. Blockchain can store any kind of digital information – including computer code which could be programmed to generate contracts or carry out transactions once a given set of conditions are met. It will allow companies to track orders and automatically activate payments on specific events – for example, delivery being recorded could be programmed to trigger an invoice notification. It would lower the costs and complexity of the current process and may also mean that a far wider range of potential users could now access trade finance services.

Other areas of increased efficiency and cost-cutting would be in meeting the standard Know Your Customer (KYC) regulations. A survey by Thomson Reuters estimated that financial institutions spend over $400mn annually on KYC requirements. Block-chain would simply allow the independent verification of one client by one organization to be accessed by others, saving time and cutting costs significantly.

Possible Implications for Nigeria
Since blockchain makes record-keeping more efficient, a blockchain of property titles would go a very long way in drastically curbing cases of fraud in the sale of properties in Nigeria. The idea is already being experimented with in a few advanced countries like Sweden and Georgia.

In this and other developing parts of the world, the use of blockchain technology could also facilitate financial inclusion: increasing the share of the population with access to financial products. Nigeria is still well short of the Central Bank of Nigeria’s (CBN) target of 80% by 2020. Two years to the deadline, only 41.6% has been achieved. The adoption of blockchain technology would enable banks bridge this gap by circumventing legacy infrastructure – and the attendant costs – especially in the rural communities. This would allow Nigeria’s informal economy go mainstream, giving them access to services like credit and insurance, allowing them expand their business and maximize potential – by so doing, stimulating the wider economy.

It is still early days yet the impact has already been profound while the possibilities appear limitless. The blockchain disruption may be the biggest yet and business may never be the same.

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