Blockchain Will Revolutionize Payment Speed and Compliance

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By reordering and automating complex, labor-intensive processes, blockchain technology can enable organizations of all sizes to operate faster and more efficiently. As a result, blockchain is opening entirely new possibilities for product and service innovation.

Interest in blockchain, the technology behind Bitcoin, exploded last year. Numerous financial institutions, including many of the world's major banks, launched initiatives to explore its potential. Not surprisingly, investment in blockchain has risen rapidly, particularly given the many applications that have been identified. These include the use of blockchain to transfer any digital asset; record the ownership of physical and intellectual property; improve financial product and service delivery systems and security features; and other applications of significant importantance to banks and other financial institutions.

While there are numerous significant developments and opportunities, the following are notable areas of interest to both companies and regulators, including benefits for faster payments, supply chain management, payment terms, compliance and risk management:

Settlement time. Blockchain will also drastically reduce funds settlement time, which in turn will reduce the amount of cash and collateral that financial institutions will need to hold to mitigate settlement risks. This will be particularly significant for international transactions, which currently take several days to complete but will eventually be able to settle almost instantaneously using blockchain technology.

Supply chain management. By enabling meticulous tracking of the movement of goods, blockchain will be able to provide a highly secure supply chain management system that is resistant to fraud. Everledger, a London-based startup, is focusing on registering and tracking individual diamonds to document their provenance, track their ownership and combat insurance fraud.

Smart contracts for payments. The use of digital technology to embed business rules into a contract, including automated execution of contract terms and payments, will simplify complex procurement, negotiation and verification processes, allow for contracts to be automatically customized on a contract-by-contract basis, and significantly streamline transactions by cutting out counterparties and intermediaries. IBM is investing in a proprietary blockchain to facilitate digital contracts, but it also plans to release an open-source version that can be used by anyone.

Algorithmic regulation. Blockchain technology will also make it possible to track the progressive history of every transaction on a bank’s systems to ensure that the origin, ultimate destination and use of funds are clear and traceable. This will improve the ability of banks and regulators to identify suspicious customers and networks. Government agencies will also be able to implement blockchain in systems such as Fedwire to enable bank supervisors to identify systemic payment risks.

There are also impacts for payments tied to investments and real estate transactions, including:

Trade execution and settlement. Blockchain will enable faster settlement at lower costs while simultaneously reducing the risk of fraud. A number of companies are developing unique and powerful trade and settlement offerings. For example, Nasdaq’s private Linq blockchain network enables private companies that have not yet been subjected to the recordkeeping demands of public listing to keep track of changes in the ownership of shares issued to founders, early investors and employees.

Asset exchange. Blockchain will also enable the development of new exchanges to facilitate the trading of a wide variety of assets beyond financial instruments. Current thinking is that this will involve the exchange of virtual tokens that represent underlying assets, including physical or intellectual property. In early 2016, the technology company R3 CEV conducted a test to exchange tokens that represented theoretical assets through a private blockchain application. Banks participating in the test included Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo.

Physical asset registration. Blockchain will streamline the process of registering assets, including real property. Many anticipate that blockchain will substantially alter or eliminate the way we use title insurance in real estate transactions to confirm the accuracy of a local government’s property registry. Blockchain is also expected to facilitate instantaneous price comparison models and enable the tracking of escrow payments on contracts. Several startups, including Ubitquity, LLC and Factom, are building platforms designed to track property ownership.

For financial institutions exploring blockchain opportunities, 2016 will be a year of continued innovation and experimentation. However, it is reasonable to expect that improvements and innovation will continue to accelerate as the use of blockchain becomes more widespread and accepted, and its benefits spur competitors to further accelerate adoption of new applications.

Kevin Petrasic is a partner and Matthew Bornfreund is an associate at White & Case.


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