Blockchain Distributed Ledger Technology For Trade Applications
The Blockchain technology is undeniably growing as one of the biggest ground-breaking technologies for a lot of industries. As discussed in the previous write-ups, this makes a continuity of the efforts in stressing the potential of blockchain as it is expected to transform the way various industries work to an incredible extent. Carefully and securely keeping and agreeing on the datasets of financial ownership and commitments makes the fundamental basis of market operations.
Historically, the most common methods of trade are major point of failure for businesses. That's because the slow old processes involved interrupt businesses and make liquidity difficult to manage.
The complexity of the existing systems, as well as inefficient distributed computing architectures that most times, cause incompatibility of standards, lead to the need of expensive heavy-duty infrastructure and also consume much time in their operations. According the data released by tradefinanceglobal.com, the global trade finance sector is worth an estimate of $10 trillion per year.
Considering the prime importance of this industry, since majority of the digital transactions around the globe are coined around this industry with both risks and returns involved, we look through how blockchain applications are disrupting the world trade.
Decentralized applications are established on the brook of innovations in organizing and distributing data in an immutable form. The main goal is to develop a single universally accepted trustless version, used by all the parties or participants of the system, containing a much-enhanced dataset than the likes of the centralized systems that exist in any of the systems available today.
The blockchain with its capabilities, becomes unarguably the most efficient solution at this present time. It is believed that, this innovation is going to enable new industry processes to be created based on the use of transparent data exchange and real time settlement of transactions with the help of smart contracts having programmed business logic in the ledger.
To clearly understand how effectively the blockchain technology works with this industry, it is important to highlight some of the benefits unleashed by the technology for various phases of trades:
Know Your Customer (KYC)
KYC is a global effort that aims at preventing money laundering, and attributes of financial terrorisms. It is a procedure that require financial institutions to validate and verify primary documents of customers, as part of the due industry protocol. At present, the market is flooded with KYC utilities that help manage these documents and share them with necessary entities.
In most cases, the task of due diligence and investigation is handled by the client onboarding teams at these financial institutions, given the business and reputational risks involved. One of the major problems with the KYC process is that, it often delays business, as it takes months (in some cases, up 50 days or more) to be completed at a reasonable extent.
In this 21st century, it was estimated that around $2 trillion is laundered every year. Also, according to United nations’ office on drug and crime, around 2 to 5 percent of worldwide GDP ($800 billion-$2 trillion) is laundered globally every year, making it a huge overhead for financial institutions to overcome.
Globally, the cost of managing a successful KYC is expensive for financial institutions. According to WealthInsight, banks worldwide spend around $8 billion on anti-money laundering (AML) compliance annually. Also, in 2014 alone, it was estimated that global spending on anti-money Laundering (AML) compliance alone summed to a total of $10 billion.
According to the VP of sales at Mitek, Joe Bloemendaal
“For financial institutions and payment companies, knowing who your customers are (KYC) is growing in importance. Furthermore, the study estimates that the single biggest cost burden on financial organizations is complying with new Anti-Money Laundering (AML) requirements. Financial institutions are always under pressure from investors and analysts to reduce cost, however, rather than reducing the cost, many expect the compliance budgets to even increase in the coming years.”
The problems involved in KYC is not limited to cost reduction, institutions are also being penalized through regulatory fines for failing to follow KYC guidelines. To overcome these challenges, financial institutions are now rapidly exploring the use of blockchain as a possible solution to their KYC challenges. The question is how does the blockchain overcome the KYC challenges?
The blockchain being an immutable distributed ledger shared in the public domain works based on shared global infrastructure that can move values around and represent the ownership of properties basically gives different parties involved the ability to hold and make transactions without any worry for trust in a crystal-clear structure. The technology works based on the use of two cryptographic keys (public and private keys).
Amazingly, the blockchain erases the concept of mediator(s) between parties involved in transactions, since it is devoid of any single central authority making it economically fit, considering the time and cost of transactions. An element of the blockchain technology called “Smart contracts” unleashed this unique capability. World-wide, financial institutions are taking keen interest in its applications to solve the problems created by the present approach to the KYC process. The process involved are as highlighted below:
- The bank verifies presence of the document uploaded to the blockchain by the customer using the public address provided by the customer.
- Once checked for veracity, confirmed the public address to have matched the customer’s private key, the bank uploads this copy of data onto its blockchain.
- In case there is any need for appending the data in the document, the ledger could enable encrypted updates to the ledger.
- Using the public address, these updates can also be accessed by other entities instantaneously as at when required.
- The digital signature (using the encrypted private key) of the on-boarded customer can then be used as a trust signature for future transactions
One of the major success in using Proof-of-concept for KYC is how IBM successfully demonstrated how the Blockchain-based Shared KYC platform provides a secure, decentralized and efficient mechanism for banks to collect, validate, store, share, and refresh trusted KYC information of corporate customers. In her partnership with the Deutsche Bank, HSBC, IBM demonstrated that blockchain-based registry could remove the duplication of effort in carrying out KYC checks.
The IBM’s KYC solution demonstrated the capabilities of the technology to provide a historical record of all documents shared, and compliance activities undertaken for each cooperate customer which is believed to form the evidence to be provided to the regulators.
Why Use Blockchain For KYC?
The following summarizes the advantages of the blockchain for KYC:
The tamper-proof property of the blockchain supports the ability to get a full, transparent audit trail of all transactions, since all the records are arranged in blocks in a chronological order.
Satisfactory Customer Experience:
Customers do not need to submit their documents over and over, neither do they have to always go through the stress of maintaining the security of their documents, only verification using the private keys is needed.
Reduced Operational Costs For Financial Institutions:
Through not having to KYC-check every customer, few or none operational staff will be needed for handling false positives, smart contracts could handle it all!
The foremost goal of the Blockchain technology is to significantly reduce the time and cost associated with documentation and bureaucracy during transactions. Using the blockchain approach, a consistent workflow allows for all relevant documentations to be shared when appropriate, to the appropriate individuals, to notify participants as the workflow progresses, and share communications in near real-time reducing administrative costs and time.
The use of smart contracts ensures transparency in verification and validations of asset ownerships. Using the Smart contract helps in releasing payments for a transaction as it progresses along the trade workflow, making the technology a trusted way of securing transactions.
The partnership between IBM and the payment company KlickEx, opened a broad way for trust to introduce blockchain technology to global trade. The solution centralizes the trade process into a digital ledger that is accessible to buyers, seller and all other relevant actors.
Blockchain technology permits faster novation and efficient post-trade processing, as well as mutually interchangeable use of assets on blockchains as collateral with the automatic execution of smart contracts. Conventionally, this procedure involves multiple systems within each organization, self-determining calculations, and several settlements either directly between each party involved or against a third-party intermediary.
When a trade between two parties has been matched on a trading platform, a ticket is passed to both sides, allowing them to carry out post-trade activities. Both parties receive a depiction of the commercial contract into which they have entered, and as time passes, market conditions trigger the defined revisions. Then, each party involved needs to decide on what action should be and settle the contract.