Array ( [20231231] => 1 [20240101] => 0 [20240102] => 3 [20240103] => 0 [20240104] => 2 [20240105] => 1 [20240106] => 2 [20240107] => 2 [20240108] => 4 [20240109] => 1 [20240110] => 3 [20240111] => 2 [20240112] => 0 [20240113] => 1 [20240114] => 3 [20240115] => 1 [20240116] => 0 [20240117] => 2 [20240118] => 4 [20240119] => 1 [20240120] => 0 [20240121] => 4 [20240122] => 1 [20240123] => 0 [20240124] => 2 [20240125] => 2 [20240126] => 1 [20240127] => 0 [20240128] => 1 [20240129] => 3 [20240130] => 0 [20240131] => 1 [20240201] => 1 [20240202] => 0 [20240203] => 2 [20240204] => 2 [20240205] => 1 [20240206] => 0 [20240207] => 1 [20240208] => 1 [20240209] => 0 [20240210] => 2 [20240211] => 3 [20240212] => 2 [20240213] => 2 [20240214] => 1 [20240215] => 3 [20240216] => 2 [20240217] => 5 [20240218] => 5 [20240219] => 1 [20240220] => 3 [20240221] => 1 [20240222] => 3 [20240223] => 0 [20240224] => 2 [20240225] => 2 [20240226] => 1 [20240227] => 2 [20240228] => 1 [20240229] => 2 [20240301] => 0 [20240302] => 0 [20240303] => 2 [20240304] => 0 [20240305] => 0 [20240306] => 2 [20240307] => 5 [20240308] => 1 [20240309] => 4 [20240310] => 3 [20240311] => 3 [20240312] => 3 [20240313] => 3 [20240314] => 2 [20240315] => 2 [20240316] => 1 [20240317] => 1 [20240318] => 0 [20240319] => 0 [20240320] => 3 [20240321] => 4 [20240322] => 6 [20240323] => 0 [20240324] => 2 [20240325] => 3 [20240326] => 1 [20240327] => 1 [20240328] => 2 [20240329] => 1 )

The blockchain in practice

Feature-image
by Mark Parsley

Published: April 16th 2018

Most treasurers get the theory, and most know something about the many pilot projects and consortia working on blockchain solutions, but what products actually exist and how do they benefit corporates today? By Mark Parsley.

How corporates and their partners deal with digitalisation will determine whether or not they survive the next decade and treasurers – and their boards – realise it.

One key technology that has moved from the margins, through hype into the mainstream is distributed ledger technology (DLT), sometimes called blockchain. The differences between the two are technical and the arguments over definitions arcane. Treasurers don’t need to know them. But in short, all blockchains are distributed ledgers, but not all distributed ledgers are blockchains, and the key differences concern how much centralised control exists within the system and how widely data within the system is shared.

In financial markets, unlike cryptocurrencies, permissioned or private blockchains are required to provide centralisation, which can then compromise the immutability of transaction histories (the centre could change data without being seen) and there is a need for only the parties to a transaction to validate it, unlike a public blockchain.

But the basic idea is the same: a distributed ledger is simply a database that is replicated on many machines and in which control over the data’s evolution is shared between some or all of the entities running the machines. The ledger validates, stores, and replicates transaction data on many computers around the world (hence ‘distributed’).

Cryptography and digital signatures are used to prove identity, authenticity and enforce read/write access rights. And the system contains mechanisms to enforce immutability: making impossible the changing of historical records. In other words, a distributed ledger is like a normal SQL database plus code that can add new rows to the database, validate that these rows conform to pre-agreed rules and ensuring that all the copies of the database are the same – in real time.

The systems of most interest to banks and large corporations do not just act as distributed databases of data, they also embed smart contract technology. So do treasurers think DLT will affect them?

EuroFinance recently asked 250 treasurers whether they believe that DLT will fundamentally change the payments ecosystem. Of those asked, 62.4% said yes. “I am very interested in DLT. We are not using it yet but it is coming. I am interested in that you can get all the data of your payments in real time and it is secure; it means collaboration between banks and corps to make corporate’s life easier,” explains one treasurer. And when will we begin to see concrete products? “In the next three to five years we will see something we can use, a tool for corporates.”

It’s not just payments. One treasurer believes, “DLT will have an immediate impact on reconciliation. We know the banks are really active in this area and that they offering more services in intelligent reconciliation.” And one retailer sees DLT as an enabler for innovative loyalty schemes based on pseudo-currencies and blockchain wallets.

DLT is also still top of the banks’ priorities. In May, the R3 CEV consortium of 80 banks completed the largest fundraising to date for the emerging technology, raising more than $100 million from about half its membership as well as technology group Intel, though the funding round was scaled back twice from $200 million and then $150 million. Of the 25 or so global DLT consortia (22 of which were started in 2016), 13 are in financial services. These include groups such as B3i (insurance), the post-trade distributed ledger group (clearing and settlement) and R3, Digital Asset Holdings and Axoni (financial services).

The last of these, Axoni, raised $20 million from Citi, J.P. Morgan, Goldman Sachs, Wells Fargo, NEX Group, Thomson Reuters, F-Prime Capital and Digital Currency Group (DCG), among others, via December 2016 and May 2017 funding rounds. It is involved in trials of DLT in trade affirmations and over-the-counter (OTC) equity swaps – the latter a bank effort announced in January to overhaul the Depository Trust & Clearing Corporation (DTCC) Trade Information Warehouse (TIW) using DLT. All the major banks use the warehouse.

IBM has driven another DLT initiative, also used by a number of banks, known as the Hyperledger Project.

And both have competition. In February 30 big banks, tech giants, and other organisations – including J.P. Morgan Chase, Microsoft, and Intel launched a group, the Enterprise Ethereum Alliance, to build business-ready versions of the software behind Ethereum, an open-source, public, blockchain-based distributed computing platform featuring smart contract functionality and with its own cryptocurrency – ether (i.e. it’s in part a rival to Bitcoin).

Treasurers need not worry too much about that yet. For them and for the banks, the key interest in these technologies is cost, transparency and information richness. It is part of the hype that what the internet was to information, DLT can be to transactions – it makes them less expensive to share and record, and reduces the cost of trust in transaction systems.

R3’s CEO, David Rutter likes to cite a McKinsey study that claims banks spend around $3.6 trillion globally supporting their transactions with tens of billions in annual savings there for the taking. But what is the evidence so far that the technology can deliver improved services for corporate clients?

Trade finance

While many of the earliest applications of blockchain have been in payments (see article on SWIFT/Ripple), trade finance is where real-world corporate applications may appear first this year. Trade is not fully automated, it relies on chains of trust and transactions involve significant amounts of data and require complex tracking.

In 2016, HSBC and Bank of America Merrill Lynch piloted a scheme using Hyperledger Fabric to show that letters of credit can be executed on the blockchain. And Corda, the shared ledger platform developed by a consortium of more than 70 leading financial institutions, brought together by R3, facilitated invoice financing and letter of credit transactions in trials with more than 15 banks using its form of ledger technology and smart contracts. It’s not clear when or if this solution will be rolled out meaningfully and possible changes in the relationship between Hyperledger and R3/Corda – different ways to implement a digital trade chain (DTC) style solution – complicate the picture.

In a potentially more concrete development, seven European banks are partnering on a new blockchain-based trade finance platform for European SMEs and plan to launch in the second half of 2017. The Digital Trade Chain (DTC) initiative was driven initially by Belgium-based KBC and is based on a permissioned ledger, with authorised parties allowed to submit transactions on the platform and manage open account trade transactions for both domestic and international commerce, with visibility from initiation to settlement. The banks involved are KBC, Deutsche Bank, HSBC, Natixis, Rabobank, Société Générale and UniCredit.

SMEs looking to expand globally face the problem that letters of credit, used by larger firms, are for them complex, expensive and time consuming and the alternative, open account trading, exposes one counterparty or other to the full transaction value risk at any point in time.

Maintaining secure records on a digital, distributed ledger creates the required combination of transparency, verifiability, and immutability of agreements.

At the launch in January, KBC Group CEO Luc Gijsens explained: “SMEs are having to run their businesses differently in an increasingly digital age. Our successful DTC trial shows that blockchain technology offers a number of opportunities that we want to continue testing and developing.”

Deutsche Bank global head of disruptive technologies and solutions Roberto Mancone said: “For DTC to be successful, it needs to be available and accessible by a large number of SMEs – hence the importance of having a number of banks involved.”

A host of other proof of concept trade finance transactions have been executed including: S7 Airlines and Alfa-Bank and the first Russian blockchain LoC transaction; Barclays has completed a test on technology developed by Wave to use a blockchain letter of credit to close a transaction between Ornua and the Seychelles Trading Company; The Commonwealth Bank of Australia (CBA), Wells Fargo and trading firm Brighann Cotton successfully completed a trade finance transaction experiment in October 2016 using blockchain, smart contracts and the Internet of Things (IoT); ICICI, India’s largest private bank, and Emirates NBD, recently announced successful international transactions for both trade finance and remittances using blockchain technology; UBS and IBM have worked on a project that replicates the entire lifecycle of an international trade transaction on Hyperledger’s Fabric blockchain; and Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore (IDA) have jointly developed a prototype solution again on Hyperledger Project blockchain fabric to replicate a letter of credit (LC) transaction.

Supply chain finance

In March, Chinese online P2P lender Dianrong and FnConn, a subsidiary of Foxconn Technology Group which provides loans and financing solutions to SMEs, announced the launch of Chained Finance, claiming that it was the first blockchain platform for supply chain finance. The aim of the platform is to help supply chain financing companies potentially triple the number of small suppliers they reach.

The two companies recently completed a successful pilot and proof of concept of Chained Finance by securing funding for small and medium enterprises (SMEs) in China that were otherwise unable to secure needed capital. Chained Finance originated US$6.5 million (RMB45 million) in loans for these SME supply chain operators.

The solution is based on a permissioned blockchain and Dianrong is an active participant in Hyperledger. A ‘permissioned or closed-loop’ blockchain restricts the number of users who can validate block transactions or create smart contracts (which are used in supply chain blockchain solutions) to pre-registered and authenticated users. This differs from the fully distributed ledgers of Bitcoin.

The two firms chose the blockchain because of the control and transparency it allows over the financial history of borrowers and the security of the data within the system. They claim that Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems. The system will be rolled out throughout China first but in theory can be implemented globally.

It will have competition. In the UK, Tallysticks is building a blockchain SCF platform driven by companies need for an automated solution – the firm has filed four patented processes, including automated custodial transfer and automated transaction settlement.

A functioning blockchain-based supply chain finance/bill discounting and invoice payment solution has also been implemented in India, by Mumbai’s YES Bank. So far the project, using smart contracts built on Hyperledger and utilizing IBM’s Hybrid Cloud technology, allows consumer electrical equipment manufacturing company Bajaj Electricals to digitalise the process cycle for bill discounting at Bajaj Electricals and reduce it from four-five days to almost real time.

The details of invoices processed in Bajaj Electricals’ Oracle system are transferred to Yes Bank on blockchain, and then are discounted and funds are disbursed to Bajaj’s vendors. On the due date, the solution facilitates an automated debit from Bajaj Electricals’ account with YES Bank.

Again, the system ensures transparency for all parties through the shared public ledger, while the entire transaction history of a vendor is recorded and immutable.

Partly driven by the enthusiasm of the central bank, India is a hotbed of blockchain activity. In November 2016, for instance, the $17.8 billion multinational Mahindra Group and IBM announced that they would co-develop a cloud-based application for tracking supply chain transactions via blockchain.

However, there are certain limitations with the closed-loop blockchain implementations that Kannan highlighted by referring to the YES Bank/Bajaj Electricals case. “We define closed-loop as a private network consisting of one company, one bank, and a set of suppliers. Here, in a way, a supplier is forced to discount his bills with a single bank. He might not be banking with the bank as a supplier or getting better rates elsewhere,” said Kannan.

Both these solutions are limited by the use of the permissioned blockchain. While adding more banks and companies to the list of approved counterparties is a short-term solution, in the longer term an open system would be much more likely to be transformative.

Payments

We’ve already seen how the blockchain is affecting the fundamental plumbing of the payments system (see article on SWIFT/Ripple), but there are also initiatives that bring DLT closer to treasury.

In December 2016, BNP Paribas completed its first live cross-border B2B payments between corporate clients using blockchain technology, processing several payments for two of its longstanding corporate clients, Amcor, global leader in packaging solutions and Panini Group, international leader in collectables and trading cards.

This news follows the announcement last September that BNP Paribas is co-developing new products and services with a number of clients, aiming to design the next generation of Transaction Banking and Cash Management products with Blockchain technology. The ‘Cash Without Borders’ proof of concept was launched early 2016 after the Bank’s Corporate Trade and Treasury Solutions business embarked on a collaborative process during its first-ever ‘Blockchain Bizhackathon’.

Using Blockchain technology, BNP Paribas successfully processed and cleared for Panini Group and Amcor payments in various currencies between BNP Paribas bank accounts located in Germany, the Netherlands and the United Kingdom. The payments were fully processed and cleared in a few minutes highlighting the real potential of this innovative technology which eliminates delays, unexpected fees and processing errors, paving the way for real time cash management.

Panini Group Treasurer, Fabrizio Masinelli said: “Blockchain technology applied to cross-border payments offers an innovative way of processing in near-real-time high-value transactions between different companies. This proof of concept shows how powerful such technology can be and how it can be utilised as an effective and efficient response to the main issues that treasurers face on a daily basis. This great achievement was possible thanks to the collaboration between Panini’s Group Treasury teams and the various teams of BNP Paribas.”

Jacques Levet, Head of Transaction Banking EMEA at BNP Paribas CIB, commented: “This proof of concept demonstrates that blockchain technology offers real opportunities to considerably improve our offer for corporate treasury managers. On the payments front, this confirms our strong commitment to follow closely and further accelerate our participation in a number of market initiatives aiming at improving the corporate payments experience using blockchain technology.”

Visa’s bet on blockchain

We have also seen how re-invigorating correspondent banking networks using DLT can use the existing payment infrastructure of, for example, ACHs to provide corporate clients with a transformed service without the need to put all their trust in new FinTech startups.

A similar idea lies behind the joint venture between Visa and Chain, a San Francisco-based enterprise blockchain infrastructure startup. Again, the concept is a merger of DLT with an existing, trusted network of banks – in this case Visa’s 17,000 banking partners – to help banks improve international business-to-business payments for their corporate customers. The two companies are currently building Visa B2B Connect, a Visa-operated payments system that uses a permissioned, private blockchain architecture.

The companies claim the system will enable participating financial institutions to quickly process and settle international payments securely with near real-time verification of blockchain technologies.

“We are developing our new solution to give our financial institution partners an efficient, transparent way for payments to be made across the world,” said Jim McCarthy, Executive Vice President of innovation and strategic partnerships at Visa, in prepared remarks.

“Visa is leveraging Chain Core to create a permissioned blockchain network to enable their financial institution clients to directly exchange value on behalf of their corporate customers,” wrote Chain’s cofounder and CEO, Adam Ludwin, in a blog post. “This network allows institutions to move value with greater speed, predictability, and security than is possible today.”

Competitors like SWIFT, of course, have questioned the demand for real-time payment pointing out that corporate payers actually want to pay as late as possible. The counter argument is simple: if you want to pay on day 30, then real-time payments let you do just that, rather than having to pay on day 27 and allow three days for the money to arrive within the 30-day limit.

And it’s not just bank networks that can be used – with or without blockchain. Western Union recently participated in a funding round for Digital Currency Group (DCG), a firm that collaborates with financial institutions to develop use cases for DLT. One is to improve the core migrant remittance service, But another is to leverage the 100,000 SMEs that make payments through the service to create Western Union Edge, a B2B payments network. Right now, the service is available in a dozen countries and does not use DLT, but given the relationship with DCG and the possibilities of blockchain technology to cut costs, increase security and boost visibility – not to mention the existence of FinTech competitors using DLT in the remittance space, such as Bloom Solutions – and it seems likely that the service will utilise DLT at some point.

Foreign exchange

Some of the largest names in FX have made significant commitments to DLT, focusing on improving trading efficiency. DLT should be ideal in this kind of market, in which so many counterparties – buyer, seller, broker, clearer, and others – hold records of the same transaction. A shared ledger updated in real time and visible to all should slash transaction times and costs.

For this reason, NEX Group, formerly the interdealer broker ICAP, has invested (via its Euclid FinTech investment arm) in Axoni, a provider of distributed ledger technology for the financial services industry. NEX aims to use DLT to process thousands of foreign exchange trades and to give customers access as participants in a DLT-based system so that, initially, institutional investors can more transparently track and value deals in the spot market. NEX subsidiary, Traiana subsidiary, which acts as a messaging hub for $2tn of forex, fixed income and swaps deals, is developing a combination of smart trade contracts and a blockchain product with the eventual aim of replacing their current post-trade system.

Another FX market giant, Citi, in December 2016 made an undisclosed investment in Cobalt DL, a London startup also developing a DLT solution to simplify foreign exchange trading. Cobalt has also attracted two of the biggest traders of FX, Citadel Securities and XTX Markets, as well as 22 banks and financial firms. The firm believes it can cut the cost of FX trading by 80%. The system is to go live in the third quarter and runs on technology supplied by Setl, a UK blockchain software developer, and data from Northern Ireland-based First Derivatives.

Other key FX banks are members of Ethereum’s Enterprise Ethereum Alliance which has also executed a trial spot trade using an adaptation of Ethereum as the settlement layer. And Goldman Sachs patented a permissioned blockchain concept to achieve much the same thing and which explicitly allows regulators to access the database and provides functionality to comply with anti-money laundering (AML) regulation and know your customer (KYC) laws.

None of this is directly available to treasurers, though the very largest MNCs rival some hedge funds in their FX dealing and so may gain direct access. The real benefit for most corporations will simply be in faster, more transparent and much cheaper FX dealing. 2017 may well be the year this starts to happen.

Capital markets

DLT is even beginning to invade the capital markets. IBM and Japan’s SBI Securities revealed last year that they are working on a blockchain-based bond trading platform using the Hyperledger Fabric.

“As an innovative technology, blockchain has the potential to revolutionise ways businesses work together with their ecosystem of trading partners,” said Takeshi Fukuda, director of IBM Research Tokyo, in a statement. “The technology establishes accountability and transparency while streamlining business processes.”

But for treasurers the key development will be the ability able to issue bonds on a blockchain-based digital asset creation tool. One example is three-year-old startup BlockEx. After developing a white-label cryptocurrency brokerage platform to sit on top of existing exchanges, BlockEx has built an exchange for “the issuance of digital assets including bonds, equities and syndicated loans [that will] collapse origination issuance, asset servicing, exchange, clearing, settlement and reporting into one platform. By templating and streamlining the legal process it becomes possible to reduce the price of origination up to 75% and time to originate and issue can be reduced to days.” In theory, this could ultimately squeeze out bank syndicate functions.

The platform enables issuers to create smart contracts that specify coupons, payment dates and maturities, with the flexibility to create retail-friendly payout structures such as monthly or even daily coupons. The digital assets are sold directly to investors, cutting out bank intermediaries and potentially slashing issuance costs by more than half.

It allows a company to use the asset creation tool, pick documentation and raise money in a single day, aims to settle trades within 30 seconds and creates a secondary market that generates an indelible history of buying and selling activity using distributed ledger technology.

Perhaps the most exciting thing about the concept is that it brings the benefits of capital markets to SMEs because of the reduction in cost, time and complexity. and medium-sized enterprises eyeing US$10m-$50m issue sizes, which are largely shut out of the capital markets due to syndication costs that average US$200,000-$400,000 according to BlockEx estimates.

The first issues are, apparently, happening any day now and similar efforts are underway at other companies to apply these ideas to other forms of bank loan and to private and public equity issuance. With Goldman Sachs having announced that it already figured out how to automate half the 127 steps in an IPO, robo-issuance is on the way.

Enterprise risk management

Finally, DLT is breaching the inner sanctum of corporate MIS systems – the ERP. ERPs do not look like ready candidates for DLT. The key principle of an ERP system is the central collection of data for wide distribution, replacing standalone databases linked to multiple disconnected spreadsheets. The centrally aggregated data is then available to all business processes. This is pretty much the opposite of a distributed ledger.

However, because DLT creates a trackable, immutable record for any kind of transaction, from financial trades to shipping manifests, from supply chains to equipment maintenance schedules, a DLT enterprise solution that draws data from the ERP and is then used to create a trusted transaction and data sharing system between companies has got companies like IBM excited.

So, for example, anytime a business process requires an immutable, verifiable tracking record, a DLT solution is useful So, a new blockchain system from IBM and Maersk aims to manage and track the paper trail of tens of millions of shipping containers by digitising the supply chain. DLT can be used for audit logging to satisfy regulators or for tracking which users are using which computer systems. Walmart has run a pilot to demonstrate that DLT can be used to track produce through the supply chain. And Sweden-based enterprise software provider IFS, has created a new proof of concept to demonstrate how blockchain can be integrated with organisations’ ERP systems in the aviation industry to track maintenance and parts.

In addition, in May, Hyperledger Project member SAP announced SAP Cloud Platform Blockchain, its blockchain-as-a-service solution. It’s very early days, but it seems designed for companies that are already using its ERP solutions, as they look to implementing distributed ledger solutions for data storage, management, and other applications. If SAP thinks the blockchain works well with ERPs, we can safely assume that it does.

DLT is coming fast

So what does this blizzard of jargon, startups, joint ventures and pilots actually mean for the treasurer? The first conclusion is that DLT/blockchain is happening many times faster even than was predicted a year ago. The objections to the use of public blockchains in finance and commercial transactions have been easily overcome by the development of private blockchains. The technology has been applied to an extremely wide variety of markets and transaction types and in most cases several competing organisations have successfully completed pilots and proofs of concept.

Can treasurers benefit right now from easy-to-access DLT solutions that immediately reduce the costs of their core processes? Not quite. Will they be able to this year? Possibly. Next year, definitely. Do they need to understand the underlying technology? It’s better that they do, so that they understand the security implications if nothing else.

But, like all new technology, within a very short time, we will all simply be using interfaces that work better, faster and more cheaply than the legacy systems and we will neither need to know how they work nor will we care.