Revolutionising the financial industry through blockchain

Blockchain, also known as decentralised and distributed ledger technology, has become one of the most important technologies around the world and is being considered as a key driver of economic development. 

The technology guarantees faster, efficient, reliable, transparent, immutable and cost-effective transactions. In Bangladesh, blockchain has a huge potential in many sectors, especially for the financial industry. 

It is said that the blockchain will fundamentally change the operations of the banking sector – just like the internet did to media. There are many areas in banking where blockchain can play a significant role. 

Firstly, in the correspondent and intermediary banking system, data privacy is a big concern for banks. For example, for credit scoring and cross-border money transfer, banks are required to share customer information with intermediaries, which open up the customer to cyber-attacks or data breaches. 

PricewaterhouseCoopers (PwC) reports that 45 percent of the financial intermediaries face economic crimes every year. Blockchain provides more secured financial transactions compared to a traditional system. It does so by using advanced public-key cryptography to secure its data, which relies on users having two cryptographically matched keys. 

When someone wants to send a file to a user, he sends the file to a user's public key. The file can then only be opened by the user's correlating private key. There is a relatively low risk of data tampering or data being intercepted compared to traditional methods of transfer and storage. 

Moreover, for cross-border money transfer, banks charge an additional cost for every transfer. As of now, the cost of remittance is between 5-20 percent. However, according to Deloitte's survey, 2019, blockchain could cut down the costs to 2-3 percent of the total amount. 

It usually takes two-three business days to complete cross-border transactions, which discourages expatriate Bangladeshis from sending remittance through banking channels. Delay in receiving money is one of the reasons for increasing remittance inflows through Hundi. A report by the Bangladesh Institute of Bank Management found that Hundi traders transfer remittance much faster to relatives of expatriate Bangladeshis through mobile services, which has resulted in a fall in the amount of money sent through banking channels. Blockchain can resolve the problem by providing real-time transactions across borders. 

In case of cross border transactions, banks require intermediaries. For example, if someone has to transfer money from Singapore to Bangladesh, the transfer process has to go through one or more financial institutions before it reaches the receiver. Blockchain allows banks to send and receive money without involving intermediaries. 

Furthermore, according to a Thomson Reuters survey, the average cost for financial firms to meet their obligations are $60 million, with some spending up to $500 million on compliance with Know your Customer (KYC) and customer due diligence (CDD). 

Blockchain would reduce the cost of KYC management, CDD and other infrastructural costs. It is estimated that blockchain could reduce infrastructural costs for bank by $15-20 billion a year by 2022, as claimed by Santander InnoVentures.

A study conducted by Accenture, looking at eight of the world's 10 largest investment banks found that blockchain could reduce the costs of infrastructure to support their operations by as much as 30 percent. 

Additionally, while we have witnessed a bad incident of hacking a Bangladesh Bank account, it is high time to take the necessary steps in implementing blockchain technology in our country. Blockchain could be the possible solution to reduce transaction costs, overcome inefficiencies, eliminate intermediaries, and reduce economic crimes in the global financial system.

A PwC survey found that 82 percent of reported blockchain use cases were in financial services in 2017, but that portion dropped to 46 percent in 2018. However, PwC forecasts financial services to be the current and near-term future leader of blockchain. 

According to a PwC Survey in 2018, 84 percent of organisations have at least some involvement with blockchain. Many countries like Australia, England, the United States, China, Singapore and India are taking leading roles in implementing blockchain in various sectors. 

But there are some barriers. According to PwC, the top barriers to blockchain adoption are regulatory uncertainty, lack of trust, consensus and intellectual property concerns. In the international stage, while some nations have sought to foster the growth of blockchain usage, others have sought to eliminate it from their jurisdictions. This uncertainty has contributed to a lack of commercially deployed blockchain solutions.

In order to meet the standard of the 21st-century global economy and to take advantage of such technology, the government and the central bank should provide a legal and regulatory framework for adoption of blockchain. Enterprises should ready themselves to embrace the opportunity. 

Policymakers have to try to balance their desire to foster the development of the technology in our country, while protecting its citizens from fraud or other harm. Though the central bank has been closely monitoring the development of blockchain in Bangladesh, it should move beyond its traditional regulatory role by providing clear guidance regarding its implementation in financial industries. 

The Bangladesh Bank may take the initiative of exploring the applicability of blockchain to the financial industry by conducting a workshop involving all stakeholders. The real value of this solution will come only through collaborative adoption. Most importantly, financial institutions should identify use cases judiciously rather than getting influenced by the hype. 

Choosing the blockchain model is also important. For example, permissionless blockchain, such as the bitcoin – where anyone with an internet connection can view and edit information on the chain – would not be a good fit for many enterprises. 

Blockchain projects need to be supported by suitable strategies. The key is for organisations to understand the risks inherent in the system and to ensure that these are adequately managed and mitigated where necessary.

Mazharul Islam, a corporate legal practitioner.