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Implementing Blockchain in Financial Services

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Alexander Safonov
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Blockchain is designed for financial transactions, so it's no surprise that the financial industry is the sector using blockchain technology most intensively. From cross-border transfers and insurance to clearing and identity management, blockchain is making financial services cheaper, easier, transparent, secure, and more accessible. Here we have compiled five of the brightest blockchain implementation cases in financial services.

Cross-border transactions

Issue. Cross-border payments totaled $150 trillion in 2021. Although experts predict the sector will grow to $250 trillion by 2027, everyone in the industry notes that payment processing tends to be clunky, opaque and heavily mediated. This leads to unnecessary bureaucracy, long processing times and excessive costs for such transactions. In some cases, the situation has become so absurd that the fee exceeds the transfer amount by a factor of two. In practice, this means that for a transfer of $50 from Senegal to the UK, a bank can demand $100. Often the sender doesn't receive even confirmation of the transaction's completion.

Other problems with cross-border payments also include:

  • High financial costs. To settle quickly, banks must provide funding in advance, often in multiple currencies, or have access to foreign currency markets. This creates risks for banks that they must "freeze" capital to cover, which quite often results in overfunding positions, which increases costs.
  • Long transaction value chains. It is expensive for banks to maintain relationships in every jurisdiction, so they use the correspondent banking network (CBN) model. This solves compliance issues, but leads to longer transaction chains and therefore increased cost and time of cross-border transactions.
  • Comprehensive processing of compliance checks. Because there is no single industry standard and regulatory systems are unevenly updated, checks result in the same monetary transaction being checked multiple times on each side. This makes such checks more costly to develop, makes automation more difficult and causes cross-border payments to be delayed or rejected.
  • Data fragmentation and corruption. Cross-border payments are made by messages sent between financial institutions to update the accounts of the sender and recipient of the transfer. The problem here is that if such institutions are not part of the same company or bank, their standards and data formats differ significantly depending on the jurisdiction, system and data exchange network. This makes it difficult to implement automated processing, resulting in processing delays or increased technology and personnel costs.
  • Very high fraud risks. Although the financial industry is becoming more automated and processes are getting increasingly streamlined, cross-border transactions are still quite complex and cumbersome. Fraud in these types of transactions is 2.5 times higher than in domestic financial transactions, resulting in $6 billion in losses and $8.6 billion in false denials. Because of the high fraud rate, merchants are adding additional layers of fraud protection, making the process harder and longer for consumers.
  • Outdated settlement technology. Most cross-border payment settlements are based on outdated practices and technologies created when paper payment processes were first migrated to electronic systems. These outdated technologies have fundamental limitations: batch processing, lack of real-time monitoring and relatively low processing performance.
All of these problems can be applied to other financial services sectors as well.

Blockchain solution. Blockchain technology can fully or partially solve all these problemsl, which has already been proven in practice: cryptocurrencies transfer money from one account to another in seconds, the cost of such a transfer is an order of magnitude lower than the cost of bank transactions (the average commission in Bitcoin is $0.775), such payment systems are transparent (this is OSS) and virtually impossible to hack.

That is why it is extremely difficult to find a large bank or financial company nowadays which would not be engaged in cross-border transfers and announced the use of the blockchain. SWIFT, Visa, Mastercard, NASDAQ, the London Stock Exchange, the Australian Stock Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, JPMorgan Chase and the Royal Bank of Canada are prime examples.

However, the adoption of blockchain technology in cross-border payments is not limited to the private sector. Many countries have also announced the creation of national cryptocurrencies (Central Bank Digital Currency, or CBDC) to make domestic and international transfers faster and cheaper.

Progress map of CBDC projects across countries

Progress map of CBDC projects across countries. Source

Cybersecurity and fraud

Issue. According to Mandiant’s M-Trends 2022 report, the financial sector is the top target for cyberattacks worldwide (14% of all attacks). Meanwhile, the number of successful hacks and the damage caused by them is growing steadily, with the cost of data breaches rising from $3.5 million in 2014 to $4.35 million to 2022. And what's even more remarkable, the 2022 study showed for the first time that 83% of victims experienced more than one data breach and only 17% said it was their first data breach. This is a very disturbing trend because it shows a global problem for companies in the security industry - if they used to get hacked, they " patched holes," compensated everyone and worked as usual, now they are simply unable to "patch up all the holes."

The average cost of a data breach worldwide from 2014 to 2022

The average cost of a data breach worldwide from 2014 to 2022. Source

Centralization is the core of this problem. Financial data is mostly stored in centralized databases and has to go through many intermediaries, each making the connection less secure. There is no transparency in such a system and data security depends on the strength of the weakest "link" in the chain of Internet connections, such as the protection of a company CFO's cell phone, which is easily hacked by a hacker.

Another consequence of centralization is the cascading effect. According to a report by the Federal Reserve Bank of New York, when a large financial company experiences a digital breach, there is a cascading negative impact. This means that a major bank hack typically results in direct costs to that bank and secondary effects on counterparties in the financial sector and in the real economy (customers, contractors, partners, etc.)

Thus, we can say that for the financial sector, security is more than protection from a single failure. It is about preventing a negative domino effect that can be triggered by a single failure.

Blockchain solution. Integrating blockchain into financial services can provide transparency and security at the same time. In doing so, blockchain can be used to create a single, neutral, open platform for storing and transmitting financial data that has the following benefits:

  • Immutability. Because blockchain data cannot be altered or deleted, it ensures that all financial information is accurate, authentic and protected from tampering or trivial destruction.
  • Privacy. Transaction data (date, amount, parties) in blockchain networks is usually public, allowing you to check the account balance and make sure it has not interacted with the accounts of malicious or sanctioned people. However, no one can find out who owns a particular cryptocurrency account because blockchain simply does not request or store such information.
  • Zero-disclosure proof. Blockchains are capable of supporting zero-disclosure technology. This allows financial data to be verified without disclosure, which increases the security of financial transactions. According to IBM research, companies that have implemented zero-trust technology in their calculations incur an average of $1 million less in hacking costs (i.e., $3.35 million instead of $4.35 million).
The Interbank Information Network (IIN) is a good example of such platform. It is an analog of SWIFT based on the Quorum blockchain, launched in 2017 by the JPMorgan Chase consortium to ensure transparency and security of banking transactions. IIN now includes more than 25 of the world's leading banks (including Deutsche Bank) and more than 400 major financial institutions and consortia in 38 countries.

Another example of using blockchain for financial services cybersecurity is the Shinhan Bank project. In 2019, the largest South Korean bank, together with blockchain startup Ground X (a subsidiary of South Korean Internet giant Kakao) and blockchain developer Hexlant, began building a public key management system for Shinhan Bank's banking services.

Almost all other blockchain integrations in the banking and financial sector are also aimed at security in one way or another.

User authentication

Issue. We trust banks and financial institutions to protect our identity data (phone and social security numbers, passport information, biometric data, bank accounts, addresses), expecting them to keep it private and protect it from hackers. But, alas, our wishes are often unfulfilled. For example, in 2021 alone,more than 2.8 million users reported fraud incidents, including credit and banking information theft, resulting in $5.8 billion in losses.

The main problems here: centralization and multiple duplicate identities. Centralization creates risks, because storing sensitive data in one system allows hackers to get that data by hacking into just one program or server. Whereas hacking a blockchain network requires access to 51% of all nodes on the network.

Multiple identity duplication is when you sign up for multiple services (Twitter, Netflix, Spotify, online banking), each of which requests your identity and stores it on their servers. This creates security risks for two reasons. First, the more places where data is stored, the greater the risk of data leakage. Secondly, a leak in one place may create an opportunity to hack other services, for example you can hack a user's email and through it get access to his Facebook account, then you can get access to the phone and then to the bank account.

What are the problems affecting the identity of users in different age groups on the Internet

What are the problems affecting the identity of users in different age groups on the Internet Source

Blockchain solution. The most significant confirmation regarding the promise of blockchain technology in the financial sector came at the 2018 World Economic Forum in Davos. In particular, the conference showed that the financial sphere can launch a new era of digital identity, by using decentralized blockchain mechanisms to protect critical data.

An excellent example of such a project is  ION (Identity Overlay Network). It is a Bitcoin blockchain-based service that was launched by Microsoft in June 2020. Its goal is to provide a simple decentralized identification (DID) of a user's identity using something like a fingerprint or Face-ID.

The ION platform works as follows:

  1. The user creates a profile in ION with personal data (passport data, driver's license, insurance policy number, address, etc.) and then links them to biometric parameters (fingerprint, face, voice password, retina or even a DNA sequence).
  2. The ION platform assigns this user profile a unique identification number that can be used to verify identity online, such as registering with a bank or Facebook.
  3. When some external service needs to confirm a user's identity, it uses its identifier in ION.
The peculiarity of such approach is that users need to create an identification profile only once in the ION network and then they can use it for authentication at all other services. And without security risks and disclosure of confidential data. Confidential data will be stored only in the ION network, while identification in other services will be linked to the identification number of the ION network.

In addition to ION, blockchain identity is also offered by IBM, Blockchains, Cambridge Blockchain, Tradle, ID2020, Civic and hundreds of other companies.

Syndicated loans

Issue. We are talking about loans that are granted to borrowers by at least two lenders (syndicators). Due to the fact that there are more than three parties involved (usually 10 or more), the granting of such loans usually takes quite a long time, as syndicators have to study the borrower's data and then make a general decision on whether or not to grant funds, in what amount and under what conditions (term, interest rate, etc.).

Blockchain solution. The introduction of blockchain into the lending industry could change it dramatically. An immutable, publicly available distributed database would give historical financial data on the borrower and help generate a new, open and as reliable credit rating as possible for each participant. Whereas smart contracts would automate the processes involved in processing the application, compiling the scores (based on statistical data), collecting funds from syndicators, disbursing them to the borrower and then accepting loan payments and distributing them automatically to participating syndicators.

The first such blockchain loan was issued back in November 2018. Then Spain's BBVA (Banco Bilbao Vizcaya Argentaria), Japan's MUFG (Mitsubishi UFJ Financial Group) and France's BNP Paribas lent $150 million to Spanish company Red Electrica. According to the parties, the entire process took 40 hours.

Now syndicated loans using blockchain technology are issued all the time besides banks and large financial structures. Typically, users also come together to lend loans to other users through blockchain startups such as MakerDAO, Aave, Euler, Compound, etc.

Comparison of conditions for syndicators in DeFi protocols

Process Automation

Issue. There are a lot of typical processes in the financial industry that are handled manually, from filling out various applications to screening unwanted counterparties, such as sanctioned and/or on terrorist sponsor lists. According to the RiskScreen survey, despite the rise of automation, 8 out of 10 employees at financial firms as well as banks still spend a tremendous amount of time on manual processes.

"Manual processes not only waste precious employee time and exacerbate negative customer experiences, but they also significantly reduce the time to generate revenue from new and existing business. They also exacerbate the risks of human error and can lead to regulatory fines and huge reputational damage",  said Stephen Platt, CEO of RiskScreen and co-founder of the International Compliance Association.

Blockchain Solution. Smart contracts can eliminate the daunting task of maintaining records, filling out various forms, billing, financial payments and even settling claims. Their nature allows these kinds of processes to be reduced to automated, self-executing algorithms that will run on the Ethereum, Binance Smart Chain, Solana or Polkadot blockchain network.

The simplest example is decentralized cryptocurrency exchanges based on Automated Market Maker (AMM), such as Uniswap, PancakeSwap, Curve and Balancer. These exchanges can automatically process cross-currency transactions of hundreds of thousands of users - securely, confidentially and at almost instant speed.

Another example is Uulala. This startup uses smart contracts to automate bill payments, microcredit and microloan agreements in the Americas. In addition to Uulala, Black, Lemonade, Teambrella and RiskBazaar are also startups that use smart contracts and neural networks to automate insurance services.

Closing Words

If you still have questions about this topic or are planning to launch your own blockchain project in finance, contact us at +1-206-785-16-88 or via email at sales@merehead.com. Our consultants will answer all your questions and tell you where to start.


Implementing Blockchain in Financial Services key takeaways:
  1. Cross-border transactions
  2. Cybersecurity and fraud
  3. User authentication
  4. Syndicated loans
  5. Process Automation
  6. Closing Words
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