Blockchain offers the potential to encourage enormous changes across the financial services sector. It could lower the cost of central finance reporting by at least 70% for some organizations in the industry.
That transformation is an only one-use case worth considering. This technology could provide benefits in several other sectors as well.
Trade Finance and Blockchain
Most industries have evolved in numerous ways over the past 50 years, but the trade finance segment of the industry is an outlier. The resistance to digitization makes it the perfect candidate for Blockchain because it would increase transparency and create more opportunities for revenues.
Blockchain would also lower cost bases while providing better efficiency in the average transaction.
The typical international payment system travels through multiple banks before reaching its final destination. This process can provide essential security benefits, but it also increases the cost to make payments in the first place. It can impact the speed and reliability of the service too.
How much money arrives at the other end of the transaction is uncertain until the payment finally comes. Blockchain would address these shortcomings effectively, eliminating the need for third-party interventions while eliminating the need to change one fiat currency to another to make it usable for the recipient.
Clearing and Settlement Benefits
Bilateral clearing updates the accounts of trading parties to arrange for the transfer of securities or money. Central clearing uses a third party, like a clearinghouse, to complete this process. Then the settlement function ensures that the two balances are accurate afterward.
Instead of paying fees and waiting a day or more for the process to complete, Blockchain can reduce the cost of a transaction while improving the speed simultaneously. The system is straightforward and simple to use, which is why it may make the traditional processes of clearing and settling payments become obsolete.
Stock trades are currently settled in 2-3 business days. Forex trades involving currencies outside of North America have two business days to resolve. Even government bonds or options are paid the next business day.
Blockchain could settle these items in less than an hour in most situations.
Regulations in the finance industry require institutions to know their customer and institute anti-money laundering structures to protect consumer assets. Blockchain technology provides a secure, distributed ledger of transactions, creating a trusted repository of information that guarantees all of the identifying data.
The data stored in each block can verify that financial institutions are meeting their regulatory needs because each transaction receives a time-stamp registry. It creates a transparent record of activities that reduces the risk of identity theft and loss because verification methods can receive greater automation with this technology.
The use cases for Blockchain for payments can go beyond the simple transaction. This technology can help companies spend less time clearing and settling while improving compliance with changing laws in almost every industry. These benefits provide an opportunity for the financial sector to transform into a customer-centric, low-risk solution that enhances the speed and reliability of every data transfer.
Disclaimer: The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.