A major new blockchain-based platform for seven of Europe’s largest banking organisations is under construction at technology firm IBM. According to
Reuters’ Jemima Kelly, the Digital Trade Chain Consortium, which includes KBC, Société Générale, Natixis, Rabobank and Unicredit, will use the platform to streamline trade finance transactions for small and medium-sized companies (SMEs).
Europe is home to around 20 million SMEs, which provide 85% of jobs, Keith Bear, vice president for financial markets and head of blockchain at IBM, tells Kelly. “So anything that can facilitate growth in the SME community is going to help a lot.”
Currently, trade finance transactions involve a “complicated paper trail” that relies on international courier services, according to Kelly, making the process lengthy and susceptible to document fraud. Blockchain technology’s electronic record-keeping and transaction-processing capabilities are set to drastically improve this process.
General manager for trade finance at KBC, Hubert Bdenoot, is also quoted in the article: “What we will have is a platform to bring buyers and sellers together and to make trade transactions transparent from ... the moment that a purchase order is issued up until payment.” The new services offered by the platform will include financing and risk coverage, as well as a track-and-trade system for buyers and sellers. However it may be a while before the technology has a revolutionary impact on the sector. “I think this is something that has to grow, but which will create a halo effect in the market,” adds Bdenoot.
Reuters article
Technology trials
In Asia, IBM’s Japanese branch is developing a similar platform for AEON Financial Service (AFS) to improve settlements and transactions for consumers and enterprises, writes consultant Charles Brett for
Enterprise Times. The technology, to be rolled out across Japan and throughout Asia, will also “offer virtual currency payments between individuals and businesses, loyalty points allocation and redemption, as well as transaction data management”.
Using the Hyperledger Fabric blockchain framework – part of the
Hyperledger project, a global collaboration hosted by The Linux Framework – the platform will trial a secure encryption technology that “validates transactions at the infrastructure layer”, allowing “enterprises to form blockchain networks within a specific industry and organisation”, writes Brett. Sharable models can also be built to develop production networks.
Blockchain has raised concerns surrounding data privacy across different countries, as well as the identification of asset locations
The initial trial will assess the effectiveness of blockchain across a number of areas, and measure its scalability. However, according to Brett, concerns have been raised about the extent to which blockchain can scale “to support large numbers of transactions”. Furthermore, the use of smart contracts – for firms’ internal legal departments, and to support consumer buying and selling activity – could prove complex. “There is little real understanding of how smart contracts work or are created,” writes Brett. “This will have to be overcome as part of the project, and that includes an interface that allows a smart contract to be automatically encoded and validated.”
Enterprise Times article
A potential risk
Questions surrounding smart contracts have also been raised by a new
report from the Financial Stability Board (FSB). A global team of regulators and government officials found that despite there being no current financial stability risks from emerging fintech innovations, there are a number of “potential issues that regulators should focus on”, writes
CoinDesk’s Stan Higgins.
According to the report, issues of “legal uncertainty” are connected to fintech innovations such as smart contracts in a number of jurisdictions, which could be “even more prevalent when considering cross-border activities”. Blockchain has raised concerns surrounding data privacy across different countries, as well as the identification of asset locations when “no one bank or entity is the custodian of the record”.
The compatibility of national legal frameworks across jurisdictions may not be advanced enough to keep up with innovations in “cross-border lending, trading and payment transactions”, the report notes. Furthermore, attention must be paid to the “legal validity and enforceability of smart contracts and other applications of distributed ledger technology (DLT)”, which are currently inconsistent.
Despite this, the positive contributions blockchain could offer in relation to financial stability – namely improved access to technological financial services – are also considered. “Innovations such as digital identity and DLT-based applications could support improved quality and accessibility of, or financial services for, end users,” the report says.
While blockchain is providing banks and consumers with new opportunities for growth and prosperity, regulators will play a key role in mitigating risk and ensuring close co-operation between countries in the future.
CoinDesk article
Read our article ‘Blockchain enters the premier league’ by Keith Bear, vice president, global financial markets at IBM, and Graham Biggart, regulatory and compliance solutions lead at IBM, in the Q3 edition of the Review of Financial Markets, the academic section of The Review, due out mid-August.