Blockchain to make big impact in OTC derivatives, syndicated loans and VCPE

Bahrain Central Bank creates Sandbox for cryptocurrency research

During UNLOCK Blockchain Forum which took place on January 14^th-15^th 2018 in Dubai, the transformative role of Blockchain within the banking sector was tackled, and more specifically the state of the banking Scene in the Aftermath of the Blockchain Tsunami.

For example the Central Bank of Bahrain has tackled Blockchain very positively. As Yasmeen Sharaf, Superintendent Fintech Unit, Central Bank of Bahrain stated “the Central Bank has a very positive view on the Blockchain technology, as it is a game changer that removes intermediaries, enhances the efficiency, the speed and the security of financial transactions while lowering the costs. We still do not recognize crypto currencies as official currencies. However, we are open to learn more about them and that is why we approved a number of applications from fintech startups and companies to test their business models revolving around crypto in our regulatory sandbox.”

Despite the positive reviews on Blockchain there are still many challenges facing its adoption.  Dr. Veronica Lange da Conceição, Head of Innovation, UBS stated “We’ve looked and incubated dozens of use cases with various partners, we joined a number of consortia on Blockchain in the financial industry and have built up a good portfolio with about 6 cases that are ready to go into production in the coming 12 months.” A recurring challenge observed after UBS’s first Proof of Concept was digital identity.  Dr. Veronica said “Unless we have digital identities in place, it is very hard to go into production. We have seen the gaps, and we are making progress in terms of the legal framework and the regulatory assessments of such solution.”

Sam Chadwick, Director of Strategy in Innovation and Blockchain, Financial & Risk, Thomson Reuters distinguished between two types of obstacles that his customers face when it comes to Blockchain: Technology issues and Business issues. As he explained, “Technology issues entail interoperability, scalability and encryption amongst other issues while governance constitutes the biggest challenge, as it is extremely difficult to bring banks to work together and to share their data.”

Julio Faura, Head of R&D, Santander Innovation Division, explained that decentralization increases efficiency and interactivity, however, bank systems are not designed to be interoperable but rather really secure.  He said “In the past year, we have been working to try to interconnect better these things using Blockchain protocol, which is quite valuable. We’re still not there yet, however we have achieved new advancements.”

As for the future of Blockchain in the banking industry there are many use cases that can be applied. According to Dr. Lange, “one of our best examples is our trade finance project. UBS wanted to look beyond digitizing an existing trade finance process, as the generation of a letter of credit to go with a shipment requires up to 7 days for the preparation of the documentation.” In order to digitize that but also add value to it via Blockchain, they came up with one solution running on the Hyperledger platform that combines shipment, logistics and financing information amongst others. According to Dr. Veronica, “Feedback from clients from the concept design phase to piloting was very positive.”

Mohammed Alsehli, Founder and CEO, ArabianChain Technology believes that the future is in digitization of assets on the Blockchain. He states, “We with our partners, the Jibrel Network aim to tokenize (meaning digitizing the assets and moving them on the Blockchain) assets and move all the consumer banking onto the Blockchain. This allows banks to adopt the technology without having to deal with the infrastructure, which opens a new market for them.”

Sam Chadwick believes that high value and low volume transactions are perfect for Blockchain, as instantaneous settlement is not needed. This means that OTC derivatives, syndicated loans and venture capital private equity (VCPE) are going to be the use cases where we see traction in the near term, beyond tokenization.