In the past few years, there has been hardly any industry that has undergone so many changes internally as banks and financial service providers. However, surprisingly little has been achieved for consumers – perhaps with the exception of switching accounts or multiple account dashbooard. Blockchain is a possibly disruptive technology with far-reaching implications for the financial sector. The CHAINSTEP industry spotlight shows which areas of the financial sector could benefit particularly from this.

Payment systems

While Bitcoin still dominates the headlines as a means of payment, speculation and investment, Ripple established itself at the end of April this year as an exciting alternative for the international interbanking settlement, at the latest by taking on ten additional banks and financial services providers. The company, with offices in the US, UK, Luxembourg and Australia, reduces the costs of global payments through the use of blockchain technology and works on the vision to put the exchange of values in the Internet of Value (IoV) on the same level as real-time communication (like Twitter)

CHAINSTEP assessment: The hype about Ripple on the markets is growing steadily. The company is increasingly becoming an important service provider for banks. The IoV is, however, still in the far distance and rather for the B2B area interesting.

 

At the beginning of 2017, Deutsche Börse presented its first concept for the risk-free transfer of commercial bank money through a blockchain infrastructure with “CollCo”. P2P payments with the CollCo token are accompanied at the same time by collateral between the respective Eurex Clearing Members. On the one hand, the Frankfurt intends to tap existing and new applications and realize cost savings. InAs early as 2016 the stock exchange had already worked with the Bundesbank on a blockchain based project.

CHAINSTEP assessment: With “CollCo”, Deutsche Börse is actively working on the future and wants to convert data into investment tools. So Exchange 4.0 can become a reality soon.

 

Business models

While some are still optimizing their business model (see above), technology providers such as Abra are already working to offer banking services without acting as a traditional bank (eg with deposit protection and other regulatory requirements). Using a smartphone wallet app, fiatpaper money (dollars, euros) can simply be sent likeas an e-mail and exchanged back into the local currency by Abra-authorized exchange offices / traders via smartphones. In the background, the bitcoin blockchain ensures the processing. Through hedging, the typical volatility of cryptic growth is excluded here. In terms of speed and transaction fees, “stags” like Western Union are quickly falling behind.

CHAINSTEP assessment: Banks have to adapt to new market players from other sectors. If they do not have blockchain skills or can not join a consortium, they run the risk of becoming quickly obsolete.

 

R3 is exactly such a consortium and unified 70 of the world’s largest banks and financial institutions by the end of 2016. Based on the blockchain technology, the company wants to become a kind of Microsoft for the financial world and simplify and accelerate payments between regulated participants. In addition, the development of the blockchain as well as solutions for operational processes are developed in a “laboratory”.

CHAINSTEP assessment: With the demission of important banks at the beginning of the year, R3 was a little bit off the mark. R3 might still believe to have time to develop commercial products. This may soon turn out to be deceptive.

 

Smart Contracts

The nearly 90 companies and start-ups in the fields of technology, consulting and finance, which are united in the Enterprise Ethereum Alliance (EEA), want to take a step further and establish a completely new business logic with the so-called “Smart Contracts”. These self-running and non-stopable programs form the backbone of Ethereum and enable the digitization of many of our daily practices and business processes. The greatest challenge is the interplay of sufficient transparency and the trust necessary to carry out transactions.

CHAINSTEP assessment: The project of the EEA is ambitious and the members already have a long wish list. If Ethereum carries out its planned development steps in the summer / autumn, first services could soon be available.

 

Æternity thinks the smart contracts much further. By taking on oracles (external data or verifications), blockchains can become relevant to many other industries and applications. In the version of Æternity, a decentralized oracle provides the constant inflow of current (real-world) data, which can then be used to interact with smart contracts. Data protection is particularly ensured by the possibility of keeping both the contracts and important business data outside the blockchain.

CHAINSTEP: The combination of the public ethereum blockchain with smart oracles seems to be the best way to get hands-on experience with smart contracts after many whitepapers and Proof of Concepts.

 

Note: On 29th June the “Innovationsforum Blockchain” discusses the relevance of blockchain for banks and the financial sector during a meetup im Hamburg, Germany, from 6 pm onwards. Moderated by Frank Bolten (CHAINSTEP), the speakers will be: Prof. Dr. Philipp Sandner (Frankfurt School of Finance) on payment systems, Moritz Gerdes (comdirect Bank AG) on business model innovations and Dr. Jörn Heckmann (law firm CMS) on smart contracts. RSVP here – and follow for more event details (re-live stream on YT etc.)