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A statement made on Thursday announced that the Swiss National Bank and the Banque De France will look into the feasibility of a cross-national arrangement of two wholesale central bank digital currencies (CBDCs) on blockchain. The SNB has enlisted a private sector consortium (including R3, UBS, and Credit Suisse) which will be led by Accenture.

The two central banks will use a delivery-versus-payment mechanism to exchange a financial instrument against a euro wholesale CBDC and a euro wholesale CBDC against a Swiss franc wholesale CBDC. The arrangement will be settled between the Banque De France and the Swiss National Bank.

The move represents an expansion of Project Helvetia, an experiment between the Swiss National Bank, the Bank of International Settlements Innovation Hub Swiss Centre, and financial market infrastructure operator SIX. The project, which concluded in December, demonstrated the potential of integrating central bank money with tokenised assets.

In this article, Mrugakshee Palwe takes a deeper look into what Blockchain is, how it works, and why it’s required to make cryptocurrencies like Bitcoin possible. 

What are the properties of a Blockchain network?

Blockchains, in general, have three properties:

Internet vs. Blockchain

The invention of the internet is a common comparison to the way Blockchain and cryptocurrency is entering the mainstream. After the internet was established, anyone from around the world had access to information. The ability to publicise your voice became possible, followed by the ability to keep current with the times. The internet essentially decentralised information, creating somewhere we can easily trade, transfer, and share information.

What the internet did to information, Blockchain is doing to money. Various Blockchains are creating the internet of money, a global financial ecosystem that allows us to trade, transfer, and share value in a decentralised way. Just like pre-internet, we relied on centralised sources for our information. We currently rely on centralised entities dubbed as banks to provide our financial infrastructure. Blockchain is changing this paradigm at a staggering rate.

No Bitcoin without Blockchain

Bitcoin was invented on 31st October 2008 and launched on 3rd January 2009. The attempt to figure out how to securely link together transactions goes back as far as 1997 with foundations rooted in “HashCash”, a pre-Bitcoin phenomenon. Without the founders of Bitcoin figuring out how to create a tamper-proof chain of transactions, Bitcoin would not be possible.

So how does it all work?

The Bitcoin Blockchain is a series of individual blocks that contain transactions taking place on the network. Computers around the world maintain the same copy of each individual block. These computers form the Bitcoin Network and maintain the security and authenticity of the Blockchain.

The transactions that take place on the network are put into blocks and linked together cryptographically, and thus the Blockchain has been an obvious choice of words to describe the underlying technology to Bitcoin and other cryptocurrencies.

Blockchain cuts out the middleman

In the original whitepaper where Satoshi Nakamoto introduced Bitcoin, he detailed a “peer-to-peer electronic cash system”. Peer-to-peer means that there is no need for a third party to authenticate transactions on the network.

Cash transactions are a peer-to-peer payment system. There is no third party required to facilitate the transaction between you and a merchant for a purchase or transfer when using cash. The property of cutting out the middleman in online transactions has the potential to disrupt many industries. For example, from making supply chains more efficient to making global financial transactions faster and cheaper.

The difference between Blockchain, cryptocurrency

Cryptocurrency is an application of Blockchain. Just like the internet serves many applications (like websites), there is a wide range of cryptocurrencies, each with their own unique purpose serving as applications on their own Blockchain. Blockchain is the underlying infrastructure that makes cryptocurrency possible.

Another point worth noting is that not all Blockchains have an associated cryptocurrency. While cryptocurrency is the first application of Blockchain, industry professionals have found ways to apply the technology in a variety of ways that don’t require a cryptocurrency to be tied to the Blockchain.

The many uses of Blockchain

A new industry is emerging in the technical corners of the planet. In finance, Blockchain has many use cases including tokenisation, cross-border transactions, and censorship-resistant payments.

In other industries, Blockchain can be used to form agreements in business relationships to reduce disputes and ambiguity between partners. Smart contracts, which are self-executing coded contracts, have enabled new forms of digital agreements. This becomes very useful as it digitises the contract and automates its execution.

Applications that are built on top of Blockchains are called decentralised applications, or dApps for short. dApps are applications that exist on decentralised networks such as Ethereum. Ethereum can be thought of as an application or token platform, with the capability of hosting dApps. Your dApplication can leverage aspects of Blockchain such as the durability of decentralised networks, or the censorship resistance of cryptocurrency, simply by deploying your idea on top of an existing Blockchain. You don’t need to worry about the underlying computer infrastructure, as this is provided to you by willing participants all over the world.

Can Blockchain fail?

Blockchains are just software built by humans, and humans can make mistakes. That being said, the Bitcoin Blockchain has been active for more than a decade, without a single successful hack performed on the network. The developers of Bitcoin have decided to make trade-offs with the software, opting for more security and trust, instead of an efficient network that can process a global load of transactions.

Many hacks have taken place on Blockchain networks in the last decade. Hackers either exploit the code directly or gain control of the network through the governance mechanisms. For example, in order to hack the Bitcoin network through governance, you would need to control 51% of the network. This task has been deemed impossible, as the Bitcoin network is so widely distributed that it is nearly impossible to amass that much computational power. However, other Blockchain networks are smaller, and thus, much more vulnerable to a 51% attack.

The difference between public and private Blockchains?

Blockchains can be examined in a number of ways. One of those ways is by looking at who has access to the network. The Bitcoin network, for example, is completely open to anyone and everyone to use, without bias. The Bitcoin network applies no preferential treatment to you based on social status, or geographic location. It is for these reasons that Bitcoin is considered a public network.

A private network is more suited for use cases that require permission for accessing and utilising the network. A private network is better suited for enterprise purposes, such as supply chains, and closed financial systems.

The sophistication and level of security surrounding Blockchain and Bitcoin is remarkable, providing everyday people more power, control and convenience when it comes to managing their money.

What are the downsides of Blockchain technology

The downsides of Blockchain need to be talked about in the context of what that particular Blockchain is trying to solve. If the Blockchain is aiming to be a global payments system, that Blockchain needs to be primed to scale to meet demand, while maintaining security for its users. This is a hotly debated topic, but it all boils down to how Blockchains are implemented and governed.

If we look at Bitcoin, for example, the Blockchain uses more electricity than the country of Ireland in a single year to process no more than seven transactions per second. Contrast this to VISA, which processes 65k transactions per second, and Bitcoin doesn’t quite meet the standards. What’s worse is that adding more computers to the Bitcoin network doesn’t solve the scalability problem. As more computers are added to the network, the network gets stronger security but remains to process only seven transactions per second.

Since the inception of Bitcoin, developers have created new Blockchains that are more scalable but are arguably less secure than the security that the Bitcoin network provides.

Why Blockchain and Bitcoin are such a big deal

In today’s digital age, efficiency and privacy are more important than ever before. The sophistication and level of security surrounding Blockchain and Bitcoin is remarkable, providing everyday people more power, control and convenience when it comes to managing their money.  Whether digital money takes over our traditional paper money that is stored in physical banks is yet to be seen, but one thing is for certain: the complex world of Bitcoin and Blockchain is on the rise, with absolutely no signs of slowing down.

Shane Neagle explores what DeFi is and what it means for the future of the financial services sector.

Throughout humanity's long history, there were not that many thresholds after which nothing remained the same. The first major threshold represented a shift from hunter-gathering to agriculture, which led to the formation of cities, inevitably leading to metallurgy and the industrial revolution. In turn, after each threshold has been crossed, we have seen greater acceleration of innovation and economic growth.

Our modern era has been marked by the most important threshold of them all – digitisation – transforming real word assets into fungible and infinitely replicable bits. As a result, a book can be almost instantaneously downloaded at the speed of light to whoever needs it, effectively for free. This alone represents a far cry from the revolutionary Gutenberg printing press.

However, the world of finance has been missing the key ingredient to fully undergo digitization. Having electronic payment systems to move around representations of money is one thing, but having natively digital money is altogether another problem. One that many believe has been solved by the pseudonymous Satoshi Nakamoto, who ushered in blockchain technology manifested through the world’s first cryptocurrency – Bitcoin (BTC).

Blockchain Tech as a Digital Recreation of Money

Before blockchain came along in 2009, what would it have meant to digitise money? How could it retain value without being attached to some externality? We measure value with money because it is fungible, but how would we make money digital, fungible, and incorruptible? Otherwise, a string of numbers as a digital code would fail to render any meaning, or value.

Blockchain provides those boundaries that wall off potential corruptibility by relying on a decentralized digital record. Spread across a network of computers, blocks represent records of transaction, cryptographically (SHA-256 encryption) linked into chains. Therefore, when a single block is added – transaction conducted - it has to be verified across a majority of the network of thousands of computers holding the complete blockchain ledger.

In turn, every transaction is traceable. Most importantly, with constant verification of the entire network by Bitcoin miners, it is virtually impossible to be hacked. If someone generates a fake transaction, it would fail to generate a solvable hash, which would reveal it to miners. Although this has the effect of consuming electricity comparable to Argentina, it simultaneously made it so that Bitcoin grew to over $1 trillion in market capitalisation, as a leaderless, decentralised, unassailable and deflationary digital money, aka “digital gold”.

Bitcoin (BTC) price over one year, March 2020 - March 2021. (Source: TradingView)

Decentralised Finance as the Final Piece of the Digital Money Puzzle

Bitcoin, as a native digital currency, turned into a massively successful proof of concept. It continues to onboard institutional investors, from MicroStrategy to Tesla, both as a hedge against inflation and as a payment method. However, Bitcoin still exists squeezed within a centralised financial system, dependent on the on/off ramp of fiat currency.

What if the entire financial infrastructure, from banks to clearinghouses and exchanges, can also be digitised in a decentralised manner? Although blockchain technology made digital money possible, not all blockchains are created equal. Bitcoin’s blockchain was designed as secure and conservative, while others are more flexible.

Ethereum is one of them, launched in 2015 by Vitalik Buterin. While Ethereum’s native cryptocurrency (token) – ETH – doesn’t have a hard cap supply like Bitcoin, its value proposition is in utility. Thanks to its programmable blockchain, Ethereum hosts almost the entirety of dApps – smart contracts that are executed when conditions are triggered. This makes it possible to create blockchain games, NFT marketplaces, decentralized exchanges (DEX), and most importantly – DeFi – Decentralised Finance.

Total locked value (TLV) in DeFi, as of March 22, is $43.35 billion. (Source: DeFipulse.com)

Digital Recreation of Financial Products and Services

The scandal involving Citadel hedge fund and Robinhood trading app demonstrated in no uncertain terms the foibles of a financial system dependent on intermediaries.

Whether you want to trade with large market cap blue-chip stocks or dubious stocks like GME, such a system doesn’t inspire confidence if its underlying mechanisms can be upended with a pulling of hidden levers. Thanks to smart contracts - dApps - decentralised finance eliminates such risks. This means that you can engage in:

Alongside smart contracts, the underlying constructs powering DeFi are:

Moreover, DeFi no longer presents an isolated system reserved for altcoins. The defining trait of DeFi is constant innovation, befitting such advanced digital technology. Just last month, the Synthetix platform made it possible to connect traditional assets like stocks and equities to the DeFi ecosystem. In the coming months, you will start to hear more about such assets - synths or synthetic stocks.

The growth of Bitcoin (BTC) is accompanied by many utility altcoins serving DeFi. (Source: TradingView)

Such bridging assets means that one could start trading with stocks on a DeFi protocol, and even engage in shorting. This was made possible by Chainlink (LINK) – a decentralised oracle protocol that feeds smart contracts with off-blockchain data, including those from the banking infrastructure and stock markets.

DeFi Shortcomings and Outlook

Given that DeFi exploded in value since last summer, it would be more accurate to frame DeFi’s current flaws as birthing pains. As you would guess, much of it stems from security issues – hackings and exploits. CipherTrace estimated that the DeFi market lost $2.7 billion last year due security breaches.

This largely originates from Ethereum’s flexibility as a programmable blockchain. Like smart contracts, it is entirely open-source, which is good for the growth of the space as it allows viable alternatives to emerge, Polkadot being one of the more rapidly growing ones. Although all major smart contracts are regularly audited by professional security companies, they too can miss exploits, as we saw with Yearn.Finance.

However, that doesn’t mean that insurance too cannot be decentralised. Indeed, such solutions are already in full swing: Nsure.Network, CDx, Cook Protocol, Etherisc, and the most popular one so far – Nexus Mutual.

Outside of these technical issues, DeFi has all it takes to fully tokenize and decentralize the world’s financial system if it is allowed to evolve. This may collide with governmental interests, but if we take into account 1.7 billion unbanked adults, and the growing threat of deplatforming in the developed world, this should serve as a strong force to drive DeFi across the new threshold.

So why did blockchain adoption take so long compared to other new technologies such as cloud and AI? The slow adoption in highly regulated, complex markets such as the financial services industry shouldn’t come as a surprise. Blockchain is suited for complex, collaborative, multi-party, and critical application use-cases. This is another big reason why blockchain adoption has taken much longer than some predicted, as Rob Coole, VP of Cloud Technologies at IPC, explains below.

Next-generation blockchain

Next-generation blockchain organisations are leading the way showing how the technology can be used intelligently for the world we live in today. For example, R3, an enterprise software company, is working with an ecosystem of over 200 financial institutions, regulators, trade associations, professional services and technology companies to develop Corda, a Blockchain platform designed specifically for businesses to deliver two interoperable and fully compatible distributions of the platform that addresses issues such as transactional certainty, data privacy, and scalability limitations.

Gartner predicts that blockchain will be fully scalable by 2023. IPC’s sense of the future of blockchain, particularly in the enterprise space, is just as positive. We are seeing customers truly learning about the practical reasons to deploy, leading to more investment in time and money in blockchain.

Importance of complementary partnerships

Both application service providers and subscribers should partner with service and product providers at an operational level integration to be ahead in the blockchain curve.  Real value is provided with the integration and support from the hyper-scale platform community such as Microsoft Azure and AWS together with open industry platforms, such as IPC’s Connexus Hub, that creates end-to-end solutions that solve business problems. The importance here is APIs. We believe in a API partner integration approach which gives institutions the ability to easily access data, provide insights and inspire innovation for the market need.

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Service providers, like IPC, can play a critical role here by supporting operationalisation in the systems-oriented context. Such providers are a natural connector embedding connectivity to key market participants. IPC, for example, enables access to all asset classes with over 2,000 sell-side firms, 4,000 buy-side firm and 75+ exchanges in its vast, diverse ecosystem.

What’s next?

COVID-19 has provided a ‘new normal’ that is impacting every aspect of our lives. Though this pandemic is devastating from a health, societal and economic perspective, blockchain may help the global economy rebound. The World Economic Forum believes technology such as blockchain “will benefit all countries currently impacted by COVID-19”, as it provides an efficient approach to reduce trade cost on a global scale.

Digital initiatives such as blockchain is non-partisan and open to all which allows users to act quickly at low cost with low barriers for innovation - all valuable factors in supporting the economy in an economic downturn. So, although blockchain adoption was slow in its early stage, 2020 seems to be the year blockchain comes of age.

Andrew Raymond, CEO of Bolero International, shares his advice with Finance Monthly.

Reliance on paper documentation and manual processes means banks are struggling to meet the needs of exporters and importers as we emerge from the COVID-19 crisis.

The demand for fast digital services with minimal human involvement is gathering pace as global trade prepares itself for the big task of recovery. The WTO (World Trade Organisation) estimates trade could plummet by anything between 13% and 32% this year alone.

The critical role of paperless trade systems in fostering recovery is recognised in the ten-point plan issued by UNCTAD (The United Nations Conference on Trade and Development), which makes their introduction a key priority.

Apart from sheer speed of transfer, electronic versions of essential trade documents have the distinct advantage of not being held up at borders or lost during movement restrictions. This has become a vital attribute. Bills of lading, for example, are crucial trade documents that serve many purposes. Created by carriers, they can be used by exporters to draw under letters of credit from the buyer’s bank payable at sight, or to obtain finance in case of deferred payment. As “documents of title”, they confer ownership of a shipment and are forwarded to the buyer’s bank in exchange for payment against the letter of credit. The buyer will also use the bill to claim the consignment, once delivered.

The demand for fast digital services with minimal human involvement is gathering pace as global trade prepares itself for the big task of recovery.

Clearly, severe consequences ensue if documents such as bills of lading go missing or are held up. Fees and penalties mount as cargoes sit in port longer than necessary. This is where the advantages of digitisation are most obvious. Exchanged on a secure, purpose-built trade digitisation platform, trade finance instruments, electronic bills of lading (eBLs) and other digitised trade documentation, take hours to process instead of days or weeks for paper equivalents.

This is why banks are more likely to invest in paperless systems in the aftermath of the coronavirus pandemic. Yet digital trade finance solutions vary hugely and corporates must take care they do not sign up to services that are poorly designed, lack connectivity or have little acceptance in the wider trade sphere.

Here, then, are five points for corporates to ask a bank when it comes to trade digitisation.

1. Can you manage everything end-to-end from a single interface?

Any digital solution in trade finance must be comprehensive in every sense. From a single interface it should be possible to manage all the documentation required to support a transaction.

A single interface should provide simple access to multiple banks for fast comparison of credit lines, rates, fees and offers. This is the primary means by which corporate treasuries will improve their cash flow and use of working capital. Fast access to a wide choice of credit lines also reduces the need for expensive bank instruments.

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2. Does the solution bring everyone together?

Buyers, sellers and carriers – they all need to be on one platform. There needs to be a good, secure flow of information between all parties. Your bank’s digitisation solution should connect seamlessly with your back-office and your own eco-system, giving access to alternative funders and third-party providers such as logistics companies, carriers, insurers and counterparties. This is connectivity that should be easy and open to increase efficiency and provide customisation.

3. Does the bank and its proposed solution have the necessary expertise in-built?

It’s vital to ask if a bank and its solution-providers have the necessary understanding of trade flows and how your business fits in. Does the proposed solution have a proven network of users among banks and significant corporates, and is it sanctioned by national authorities and recognised within the trade community? Many platforms focus on their integration with emerging blockchain solutions. This is important but still requires a current network of users and documents based on real working practices in global trade.

4. Is the platform secure, compliant and fit for trade after COVID-19?

A critical electronic document such as an eBL must be underpinned by a respected body of law, such as English common law, to give both yourself and customers greater confidence. A platform must also conduct compliance checking in line with international trade rules such as those prescribed by the International Chamber of Commerce eUCP which govern letters of credit.  For many corporates, the immediate post-COVID era will be one in which they cannot be certain of the solvency of their trading counterparties. Know Your Customer protocols need to part of the solution but not so laborious they become a barrier.

A critical electronic document such as an eBL must be underpinned by a respected body of law, such as English common law, to give both yourself and customers greater confidence.

5. Does the solution offer visibility of bills of lading as well as letters of credit from multiple banks?

A digital platform must give corporates access to electronic bills of lading (eBLs) as well as letters of credit and other trade finance options.  As we have seen, bills of lading are critical documents, but often subject to change, which requires visibility and vigilance.

Ideally, a bank’s trade finance digitisation platform should offer you the ability to use critical trade documents such as eBL under any transaction. With so much competition in some of the toughest conditions ever experienced, open account trading is set to continue its dominance in cross-border transactions, so having access to eBLs is an important requirement.

These are just five points but they cover the main areas that corporates need to explore. It is important to weigh up the options quickly, but also to take the right decisions on trade document digitisation in order to maximise revenues as the world recovers from the pandemic and new rules apply.

Subscription models now extend into everything from the automotive to the supermarket industry and include everything from pet food to virtual spin classes. Alongside online advertising, subscriptions are a business model that has exploded in popularity, because monthly digital payments provide more long-term recurring revenue streams than one-off sales and generate long-term online customer relationships. 10 million people signed up for Disney+ within 24 hours of its November debut, and Salesforce.com is valued at around $140 billion, giving some illustration of the commercial success of the subscription model. 

However, the model is now in danger of becoming a victim of its own success, with industries heading hard and fast towards a ‘peak subscription’ cliff edge. There is simply a finite limit to the number of services people and businesses are willing and able to subscribe to. Customer recruitment and retention is extremely difficult because subscriptions can be an expensive, long-term commitment; half of subscribers to e-commerce services cancel within six months. At the same time predatory practices such as those in smartphone apps make consumers increasingly wary about “subscription traps.” Finally, the subscription economy is excluding billions of people who cannot afford expensive long-term contributions. For the newspaper industry, this means not only shrinking the potential market but denying all but the relatively privileged access to the independent information that is vital for democracy to operate. It also means denying industries the ability to offer ‘low-hanging fruit’ of smaller, cheaper transactions for more limited services and thus denying them access to a far bigger customer base. Professor Aggelos Kiayias, Chief Scientist at IOHK, suggests how new technology could provide an alternative model.

There is evidence that ‘micro-transactions’, where people have the option of paying tiny sums, as little as a fraction of a penny, for individual services such as songs or articles, can cumulatively offer a rich revenue stream. Free-to-play mobile games generated $88 billion through other services such as ‘micro-transactions’ in one year alone. Mini-transactions also form a potential ‘gateway’ to a bigger subscription market by offering initial ‘taster’ services to a wider audience.

A key barrier to this has been that slow transaction speeds and high transaction fees make ‘micro-transactions’ unviable as a lucrative revenue model across all industries. Even the fastest, VISA, can only process some 24,000 transactions a second. The blockchain space has also hitherto offered little in the way of a solution because of the so-called ‘scalability problem’ which seems intrinsic in the protocol design of systems like Bitcoin. This makes transactions slower and fees higher, the more users are added to the network.

Free-to-play mobile games generated $88 billion through other services such as ‘micro-transactions’ in one year alone.

A New Model

A recently announced system based on a “proof-of-stake” blockchain discipline, dubbed Ouroboros Hydra, is set to challenge the subscription economy and enable a new payment model which has potential to revolutionise the financial services industry. The third-generation “layer-2” protocol will allow parallel processing of transactions to take place at the physical limits of the network without compromising security or relying on energy expensive “proof-of-work.” This could allow the blockchain to scale to process millions of minor to major transactions on cell phones, outpacing conventional payment systems used by current subscription services. Unlike conventional “layer-1” blockchains, its overall transaction processing throughput can get faster as the number of nodes in the network increases.

With revenue models based on digital advertising and subscriptions nearing a cliff-edge, such high-speed third-generation blockchains could allow new industries to emulate the mobile gaming industry’s ‘freemium’ model, allowing users to pay for extras to their basic service. Customers will be able to pay in cryptocurrency rather than fiat currency. A set of simulations conducted as part of the research announced, show the system demonstrates sufficient transaction speeds to minimise transaction fees, facilitating ‘micropayments’. This opens up the possibility of an alternative to the subscription economy.

Access for All

A genuinely decentralised and scalable blockchain protocol could create an economy based on millions of ‘micro-transactions’. On an individual level, online newspaper readers could pay per article rather than paying a set amount per month, or gamers could buy virtual items within a game for fractions of a penny. Companies can also engage in more fine-grained business-to-business exchanges. This new protocol can therefore open up online services for people who may otherwise be unable to afford them, opening up a bigger mass market to industries, or systems for which so far it was uneconomical to do so. ‘Micro-transactions’ provide a way to ‘on-board’ people as longer-term customers as well as providing an alternative revenue stream to subscription.

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Limitless Potential

Importantly, Ouroboros Hydra is not just a transaction processing system. It is capable of offering smart contracts as well which means it would be possible to encode and enforce various policies related to the ‘micro-transactions’ processed by the system. The result is a flexible design that can also accommodate any elements of the subscription model for those participants, users and businesses alike, who prefer it. Furthermore, taking advantage of suitably crafted smart contracts, novel business models can be developed hybridising between the two approaches and thus allowing innovative and highly tailored and personalised engagement between businesses and customers.

What Next?

This is only the start. Decentralised and scalable blockchain protocols could enable millions in the developing world to enjoy access to previously inaccessible financial services, such as remotely paying for vital services like utilities and healthcare. In this way, we can pave the way towards a more inclusive, truly decentralised, people-centric banking system, which can form the future backbone of financial services.

Security has long been the number one priority for organisations when building and maintaining an IT infrastructure, as they seek to ensure data privacy is protected in ever more challenging circumstances. In any given week or month, we now expect to see a headline reporting the latest cyber-attack or data breach, and it’s evident that a number of companies are yet to find a way to responsibly manage the growing cyber threat landscape. The financial services sector is particularly prone to such attacks given the vast amounts of sensitive information it handles. A global report from Accenture and Ponemon revealed that the average annualised cost of cybercrime for finserv companies is - at $18.5 million - over 40 per cent higher than the average cost per firm across all industries. As such, it is imperative that firms within the industry are  adopting the right technologies to protect themselves. Stephan Fabel, Director of Product at Canonical, explores the security benefits of financial services taking on new technology.

One of the most well-known security solutions used in banking and fintech today is encryption. The challenge, however, lies in bringing this level of security to the wider industry. Finserv customers expect robust security measures while still being able to benefit from  ease of deployment, flexibility, and agility - the combination of which can be a challenge for IT teams to achieve. Yet there are solutions to this issue. IBM has demonstrated one example, working alongside Canonical to provide fintech customers with the technology to optimise data protection and privacy across both containers and multi-cloud infrastructures.

The Arrival of Containerisation

The “secure service container”, developed specifically for container-based applications on IBM’s LinuxONE, offers developers a combination of hardware and software, thereby allowing them to derive the same quality of security that they would on Linux, and in any data centre - whether on-premise or in the cloud.

Finserv infrastructures of today and tomorrow are being built around Linux, precisely because it offers easy deployment alongside providing a highly functional and easily automated stack. Such capabilities have already drawn leading industry players such as Barclays to  build whole data centre infrastructures around Linux. In addition to  giving IT teams easy access to innovations and software frameworks, open source software also increases trust, which is essential for security compliance in the long term.

Finserv infrastructures of today and tomorrow are being built around Linux, precisely because it offers easy deployment alongside providing a highly functional and easily automated stack.

Equally, a further benefit of open source is the strength of its community of developers, which is very quick to identify and fix bugs or errors. This isn’t the case with close-sourced software, where access to the back-end is limited, making it difficult to assess the reasons behind any problems.

Above all else, containerisation enables finserv companies to unlock new levels of security, cost savings and developer efficiency. The majority of developers are not security experts, and are prioritising cost efficiencies when deploying new systems and applications. Containers allow them to move things to the cloud at the push of a button, and it will run as a virtual machine. Developers have not always  had the opportunity to take advantage of the advanced hardware security offered by such technology, which restricts entry to cyber criminals, even if they have physical access to computers.

As a result, it’s not surprising that banks and fintechs are turning to this technology to provide more robust protection against increasingly common attack factors, including malware, ransomware and memory scraping. A report last year from 451 Research highlighted this, with containers (29%) ranked alongside AI and machine learning (36%) as the financial industry’s top IT priorities.

Cryptography and Blockchain

We’ll also see additional threats come to fruition within the next decade or so, as the power of quantum computers becomes sufficiently capable to break all current cryptography keys. It’s essential that the finance sector remains ahead of the game and is prepared for this development in advance. Certain technology vendors have already populated their systems with such algorithms, moving from firmware into hardware. When quantum computers advance to the required level of power, businesses will need to decrypt all of their data, and re-encrypt it using innovative and ultra-secure methods such as quantum cryptography.

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Blockchain technology is also set to become one of the principal security algorithms within the banking and financial sectors. Ultimately, the goal is to enable organisations to operate, test and run analytics without data. The sector also benefits from the vast number of innovative new players coming to market and operating within the space - all of whom build their IT infrastructures on non-monolithic systems, thereby freeing themselves of the shackles of legacy systems.

Fintech is one of the most recognisable terms in the financial services industry but sits aside its lesser-known compatriots, RegTech and InsurTech. Put simply, these terms represent the evolution and revolution of financial services globally, and the UK has firmly embraced the use of such advances. Evolution relates to the giants of the UK financial services industry who have been around for over a hundred years and revolution reflects the large number of start-ups who have not had to adapt old systems to new ideas but have had a clean sheet from which to design a process and solution using the latest technology. Simon Bonney, Partner at Quantuma and member of IR Global, explains to Finance Monthly how fintech has transformed the industry.

Background to the UK Fintech Industry

The UK fintech industry is worth around £7 billion and employs over 60,0000 people. It now has banks that only communicate with their customers through an online platform and have no physical branches.

The UK thrives as a leading global fintech hub for a number of reasons. As a world leader in the financial services industry, there is an imperative to ensure that we invest in, and utilise, the latest technology to facilitate our competitiveness. As well as a deep homegrown pool, the UK attracts a wealth of entrepreneurial and tech talent because of its status (42% of workers in UK fintech were from overseas in 2018), and also its investment. Investors put more money into UK fintech than any other European country in 2018 ($3.3 billion). In addition, the UK recognises the importance of striking a balance between the promotion of entrepreneurialism and the regulation of new ideas to provide confidence to businesses and consumers the world over through the Financial Conduct Authority (FCA). The FCA’s regulatory sandbox, the framework to allow live testing of new innovations, has become a blueprint for fostering innovation around the world.

The Opportunity

The UK Government has recognised that fintech engenders a significant opportunity to create jobs and economic growth and also facilitate the birth of new start-ups in other industries which are able to utilise new technology to make their costs quicker and cheaper. In 2019, 79% of UK adults owned a smartphone and on average they spent over two hours a day on their phones. Access to financial services by smartphones, coupled with a loss of confidence in the traditional financial services industry following the Global Economic Crisis in 2008, has meant that consumers embrace the relative ease and convenience of fintech.

Technology generally has changed the way that consumers expect to engage with financial services and the UK financial services industry has recognised that it cannot operate the same way it did 10 years ago if it hopes to keep pace with the demands of customers. Fintech has changed and will continue to influence the experience and speed of transactions. It has had a significant impact on the cost of operations. For those businesses with legacy systems, there is a huge challenge in ensuring that fintech is embraced and implemented. In order to cope with this challenge, it is likely that banks will seek to further outsource their operations and hand over management of their legacy systems so they can focus on serving customers and finding new routes to market.

Potential Challenges

Growing opportunities do not come without hurdles. The sheer speed of change in fintech means that regulation is generally trying to catch up, and in a number of instances, such as cryptocurrency, regulators are required to learn about the technology and the way it encourages people to behave before being able to effectively regulate it. However, that regulation will have an impact on development, as the costs of ensuring that new products are compliant will provide a barrier to entry. In addition, fintech is inextricably linked with data and the use and regulation of data will continue to feature in the spotlight.

A Note on Fintech Bridges

It is hoped that through the use of fintech bridges, the UK’s best and brightest fintech ideas and businesses will be able to thrive internationally, with automatic recognition by the regulators in those partnering countries. Collaboration has been a feature of the success of fintech, with open source solutions being made available to enable the improvement of all aspects of the industry for the greater good with blockchain being a prominent example. Collaboration on an international level should only provide a more stable platform for that innovation. However, Brexit has raised questions regarding the future of the UK as a behemoth of the financial services industry, and the nature and mobility of fintech and the use of fintech bridges means that competition has been increased across the world.

The UK has been able to remain at the forefront of fintech due to its history in financial services and its depth of talent and investment. Importantly it recognises the importance of remaining at the forefront and will strive to ensure that innovation and regulation continue to go hand in hand.

Money is a sensitive subject when it comes to the legal world. This is why governments are having a difficult time adjusting their policies to allow the utilization of emerging technologies to enhance traditional financial services. Add to that the boundless possibilities and unexplored scenarios of the results of adopting these technologies, then you have more people opposing the idea instead of championing them.

For instance, many proponents have shown the superiority of using blockchain technology in carrying out cheaper and more secure financial transactions through cryptocurrencies. But until today, most governments still don’t know how to respond to the growing market.

The challenge now lies with traditional finance companies who can only benefit from using these technologies for more efficient systematized operations. If these organizations can adopt these tech while assuring the authorities about the consistent quality and security of the service, they can help speed up the changes in the existing guidelines and policies.

This infographic by Prototype discusses the various technologies that are disrupting the financial industry.

Interest in digital currency has grown significantly in the last few years. In this piece, we explore what digital currencies are, the current state of the cryptocurrency market and how it will impact the economy over the next few months based on current trends and events occurring in the UK.

Put simply, cryptocurrency is a digital currency managed by a network of computers.

Run through open source code, computers are used to verify each cryptocurrency transaction. Unlike traditional physical currency, they are decentralised and not managed by a central bank.

You have probably already heard of Bitcoin, which was one of the first types of cryptocurrency to come into existence. However, hundreds of other currencies have been developed since and each have different characteristics. For example, the coin Ethereum can be used to create contracts and run applications, while Litecoin and Bitcoin Cash run in a simpler way to Bitcoin, with the focus of these currencies being on processing transactions.

The technology used to manage these transactions is known as Blockchain. This technology has been around for a while and is used for many other purposes, including updating healthcare records. The UK government is even investing in blockchain to record and administer pension and benefit payments.

Cryptocurrencies have a huge amount of potential, particularly when it comes to providing accessible options for allowing people across the world to exchange money.

Currently, the use of cryptocurrency is still an emerging trend with a limited number of businesses accepting it as a payment method. These digital currencies are experiencing somewhat of an identity crisis as debates around its definition as a currency or commodity continue and authorities argue over whether it should be regulated.

Cryptocurrencies have a huge amount of potential, particularly when it comes to providing accessible options for allowing people across the world to exchange money.

However, governments and banks are reconsidering their cautious attitude towards digital currency as global businesses begin to invest in this technology. Facebook’s upcoming launch of their coin, the Libra, has caught the attention of the Bank of England. The BoE have warned Facebook that their currency would need the same level operational resilience as debit and credit card accounts, if they are to manage high volumes of transactions securely.

Libra will not be decentralised like other cryptocurrencies. Instead, it will be managed by an association of major technology and financial service companies.

Some EU governments have taken a hard-line approach, with France’s Finance Minister declaring that they will not allow the use of Libra within Europe. They state that the currency would put consumers at risk of financial fraud. Nevertheless, with the UK’s recent withdrawal from the European Union, it is likely that they will be exempt from such measures.

Brexit has also presented new opportunities for cryptocurrency processors. It is predicted that more cryptocurrency exchange offices will open in Dublin in 2020. This hotspot is ideal as it is an EU member with close proximity to the UK market.

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While cryptocurrencies are often seen as a highly volatile form of currency, the recent worldwide Coronavirus outbreak has had a damaging impact on the global economy and resulted in investors seeing digital currencies as a safe haven.

The virus is predicted to result in consumers buying less at physical stores as they avoid getting infected. As a result, the amount of online purchases being made is set to increase significantly, and with more powerful firms such as Facebook migrating over to cryptocurrency transactions, we can expect more and more of these purchases to be made with digital money.

Better distribution of fund shares

Currently, the distribution of shares in a real estate fund when it is created is fairly complex. Infrastructures exist, but do not allow real estate fund management companies to distribute their shares abroad easily. There are several distribution channels that make international distribution difficult. Blockchain - by virtue of its construction and its method of record-keeping - enables asset managers to get around these market infrastructure issues and distribute internationally more easily. By using such solutions, a real estate fund management company will be able to better manage the relationship with investors or distributors and reduce costs linked to the management of liabilities through automation.

While blockchain platforms could improve the management of the relationship between the real estate fund management company and its investors, it also guarantees more reliable access to the characteristics of the fund, as well as to the data which serves as the basis for the valuation of the assets. For example, cash flows from a building can be entered on the blockchain, which then becomes a reliable and dynamic source enabling the performance of an asset to be measured more regularly.

Creation of an over-the-counter secondary market on the blockchain

Blockchain as a solution to lower product prices and facilitate trade by providing liquidity is often put forward. However, this seems unrealistic in a short/medium horizon. Blockchain technology will allow institutional investors to exit a real estate fund more easily once their strategy on a property has come to an end without destroying its structure. Where currently - once the strategy is finalised - the property is sold and the fund loses management, with blockchain, investors will be able to exit more easily and other actors with different investment strategies will be able to replace them. In this scenario, the real estate fund retains the management of the property and the commissions associated with it by changing the range and type of investors.

While blockchain platforms could improve the management of the relationship between the real estate fund management company and its investors, it also guarantees more reliable access to the characteristics of the fund, as well as to the data which serves as the basis for the valuation of the assets.

In addition, the operation of a real estate fund is still very manual. An investor who wishes to manage or resell his or her shares will have to send transfer orders, on paper, to their real estate fund management company. Some of these orders are still being sent by fax! None of these processes is automated, and they are fairly expensive. With the blockchain, two investors can connect on a platform, finalise their exchange then notify the real estate fund management company. Once the transaction has been validated by the latter, the property register is automatically updated.

Fluid and more liquid redemption request

Real estate funds are often open funds with subscription and redemption processes. However, certain settlement-delivery schedules for these shares can be long: a redemption process can take several weeks. In the event of a massive sale of units, the funds could face a liquidity problem. The blockchain streamlines this process: in addition to facilitating the primary buyout mechanism, in the event of a market reversal, the secondary market would make it possible to exchange larger numbers of shares over-the-counter regardless of the buyout capacities of the funds. This is an attractive feature for insurance companies for example, whose portfolios often contain real estate funds, blockchain can be a real asset. In the event of significant market tension, the blockchain could facilitate the implementation of gates or “buyout capping” processes in order to spread them over time and avoid a liquidity crisis for the fund.

From the paper world to the digital world

By facilitating back and middle office management and by creating an efficient secondary market that does not yet exist, the blockchain can facilitate the creation of new business models for real estate funds. The very functioning of those funds will be transformed. In the world of real estate funds, we expect to see more transparency and fluidity with technology adoption that should result in real growth in 2020.

 

Below Zoe Wyatt, Partner at international tax specialists Andersen Tax, discusses the inevitability of blockchain, whilst exploring banks' attitudes towards the emergence of new financial technologies, and highlighting how the two can, in fact, work hand in hand.

The first industrial revolution in 1780 began with mechanisation. It was followed by electrification in 1870, automation in 1970 and globalisation in the 1980s. Today, we have digitalisation of the industrial process and tomorrow there will be ‘personalisation’ (industrial revolution 5.0): the cooperation of humans and machines through artificial intelligence (AI) whereby human intelligence works hand-in-hand with cognitive computing to personalise industrial processes.

This might involve the creation of bespoke artificial organs operated by computers talking to one another, automation of the manufacturing process, or self-executing contracts (smart contracts), and so on.

John Straw, a disruptive technology expert involved in developing the 5.0 model, recently claimed that blockchain could render the financial services industry irrelevant, thereby killing off the City of London and constricting the tax revenues that fund the NHS. Straw makes some headline grabbing comments, but do they have any substance?

Blockchain is the technology that underlies cryptocurrencies, such as Bitcoin, and whilst it has existed for approximately ten years, it remains relatively new.

In simple terms, blockchain is a digital archive of information pertaining to an asset, individual and/or organisation. But this is no ordinary digital ledger.  Its technology features:

These characteristics diminish the role of intermediaries who are traditionally used to validate data and ensure that it is kept safe. Therefore, Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.

Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.

Technical issues exist in overcoming scalability, transaction speed, and energy consumption. However, these will be resolved in the near future as companies develop ways in which the blockchain can be stored ‘off-chain’. This will ensure that it does not need to be downloaded entirely by a node to verify a transaction using AI, amongst other tech, to guarantee that the immutability of blockchain is not undermined. It also creates scalability and reduces energy to such a degree that even the idle computer in a car or mobile phone can be used to verify transactions.

Blockchain technology can be deployed by the financial services sector to:

Although blockchain technology has the power to change the entire traditional banking system, it does not represent disaster for the City of London. Although traceability of transactions and, therefore, tax evasion cannot yet be mitigated entirely,  blockchain can indeed help to resolve some critical tax evasion and avoidance issues.

HM Treasury has already developed a proof of concept for VAT using blockchain technology. This should eliminate large swathes of VAT fraud. Given the advent of digital identity, tighter anti-money laundering (AML) procedures administered on blockchain and a widely adopted digital currency, tax evaders will have nowhere to hide.

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Blockchain and smart contracts have the capacity to completely transform the audit and tax industries, including multinational corporations’ in-house CFO/finance functions. When coupled with AI technologies, this will enable the digital preparation of accounts and tax return, and the performance of audits. In turn, this facilitates absolute tax transparency, making it easier for tax authorities to raise and conclude enquiries more efficiently into, for example, transfer pricing on intra-group transactions.

Most importantly, the tax and regulatory systems need to evolve somewhat faster than we have so far seen on other new business models and supply chains.

To realise these benefits, seamless interoperability of different technologies is required, together with cooperation between multiple parties, as opposed to a single banking system. This will allow for comprehensive management of the risks that Straw prophesises.

 

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