Introduction to Blockchain for Finance Projects
- 1. Making Blockchain Real for Business 1
- 2. IBM Blockchain 2015 BLOCKCHAIN ESSENTIALS
- 3. Business Networks, Markets & Wealth • Businesses don’t exist in isolation – Connected to customers, suppliers, banks, partners etc. through Business Network – Networks cross geography & regulatory boundary • Wealth is sum total of value of goods & services across business network – Growth constrained if silo’d or inefficient • Flow goods & services across business network is a Market – OPEN (fruit market, outcry commodities, or – CLOSED (supply chain financing, bonds)
- 4. Transferring Assets, building Value • Anything that is capable of being owned or controlled to produce value, is considered an asset – can be tangible or intangible – value can be converted into cash. • Cash also an asset. • Asset examples: – Cars, value clothes (physical) – Bonds, securities, repurchase agreements (intangible) – Licenses & patents (intangible assets) – Music, video, games (intangible, digital)
- 5. Participants, Transactions & Contracts • A participant is a member of a business network – Customer, Supplier, Government, Regulator – Usually reside in an organization – Have specific identities and roles • A transaction is an asset transfer between two or more participants, for example – John gives a car to Anthony (simple) – John gives a car to Anthony, Anthony gives money to John (more complex) • A contract is set of conditions under which transactions occur, for example – If Anthony pays John money, then car passes from John to Anthony (simple) – If car won't start, funds do not pass to John (as decided by independent third party arbitrator) $
- 6. Blockchain in a nutshell Shared Contract Cryptography Shared Ledger Consensus Ensuring secure, authenticated & verifiable transactions Business terms embedded in transaction database & executed with transactions All parties agree to network verified transaction Append-only system of record shared across business network Broader participation, lower cost, increased efficiency
- 7. Distributed Ledger Independent permissioned blockchain Distributed virtual machine (Turing- complete) Smart contracts govern off- chain assets Network achieves settlement finality Distributed Ledger - Components http://www.ofnumbers.com/wp-content/uploads/2015/04/Permissioned-distributed-ledgers.pdf
- 8. IBM Blockchain 2015 BLOCKCHAIN For Financial Services
- 9. Why blockchain? Blockchains are an emerging technology pattern that can radically improve banking, supply-chain and other transaction networks, giving them new opportunities for innovation and growth while reducing cost and risk. Economic transactions on a distributed ledger can be programmed to record virtually anything of value: your identity, a will, a deed, a title, a license, intellectual property, and also almost any type of financial instrument. “How seriously should we take this? I would take it as seriously as we should have taken the concept of the Internet in the 1990s.” —Blythe Masters, DAH http://bit.ly/1JENgb4
- 10. Reduce costs and complexity Participant Participant Centralized Repository (today’s system): most participants are disconnected from their asset depository, settling transaction would require participants to collaborate in a flow that is slow, inefficient, and expensive ….. … Blockchain technology offers a way for market participants to access dematerialized assets directly without always going through other participants needlessly Participant Depository Depository (assets dematerialized on shared ledger) Trading Platform Trade Repository Custodian Bank ….. … CCP Shared Repository: all participants can interact with depository directly without going involving third parties, potentially making post trade operations cheaper and faster
- 11. Financial Industry Applications best suited for Blockchain • Stack of Processes – Clearing Networks – International Transfers – Clearing and Settlement – auditing, reconciliation, reporting, settlement – Asset Ownership • Financial Instruments – Payments – Cross Border, P2P, Corporate and Interbank – Private Equity – Bonds – Derivative commodities – Trading records – Spending records – Mortgage/Loan records – Microfinance – Servicing records
- 12. Blockchain for Financial Market Derivative Contract 1 Derivative Contract 19 Securities Contract Oracles ….. ….. …..….……. ……... …..….……. ……... Integration Bus Clearing/Settlement On-chain Off-chain …..….……. ……... …..….……. ……... Market Trading Application Off-chain /On-chain Oracles are off chain services that integrate on-chain contracts with existing systems; network participants do not interact with oracles directly. Oracle Trading/exchange applications can live either on-chain or off-chain (i.e. off-chain applications are often more centralized, but likely offer better latency). Market Final clearing/settlement of financial assets can be automated through smart contracts, which have direct access to assets defined on chain. Clearing/Settlement Live Feed Exchange Application Trading, clearing, and settlement functions can all be automated on a blockchain network using smart contracts and oracles.
- 13. IBM – Financial Services use cases for Blockchain Blockchain for Banking Letters of Credit As a bank handling letters of credit (LOC) for my clients, I need a common ledger that allows me and all counter-parties to have the same validated record of transaction and fulfilment of conditions, so that we can increase trust and speed of execution from 4 days to <1 day. If we can drive out 99% of the time and cost, we can offer innovative LOC solutions for a wider range of clients, including start-ups that are “born global. Corporate Debt As a bank handler of corporate debt, I need a Blockchain based system so that I can pay vendor invoices for my corporate client immediately and win the highest NET discount while immediately letting my client validate that the invoice was executed and the money paid, and also so that I don't need to build another system for innovative factoring use cases and government oversight measures — one API for all. I want to do this at a market-level, so that I don’t have to build one for each of my client relationships, and so that I can spread the cost of building and maintaining the system. Repurchase Agreements As a repurchase agreement trader, I need a transparent marketplace of bids and asks, so that I can discover, trade, and execute agreements with relative assurance that there will be no repudiation or other issues. I don’t want to have to be subject to the string of counterparties exerting control over the market; rather, I want to be an equal partner in the network, trade directly, and spread the costs/risks. Supply Chain and Self-Executing B2B Contracts As a corporate buyer, I want to be able to submit my purchase contract to a network I share with the supplier, which will convert the agreement into a validated, trusted, self-executing process, so that when the PO is appended to the ledger, supply has been received, and other events occur, the terms of the contract are automatically executed, and both the suppler, me (the buyer), our banks, logistics partners and other stakeholders all can have visibility and be assured of proper completion of the transaction.
- 14. IBM – Financial Services use cases for Blockchain Blockchain for Banking Consortia Security Services Security Settlement: Once financial assets are dematerialized on a shared ledger, all stakeholders will have direct access to the asset depository and the power to settle trades, without always going through intermediaries needlessly. Post Trade Operation: Post trade processes such as trade capture, enrichment, confirmation/affirmation, clearing, and settlement can be automated on shared ledger, potentially reducing post trade operation time from days to seconds. Trade Repository: By design, Blockchain is a secure record repository of ordered collection of financial transactions. It records the history of asset control and state changes, reducing the need of maintaining a separate trade repository for record keeping. Capital Market Derivative Trading: Connect potential buyers and sellers on a decentralized network. Offers placed on Blockchain network can be automatically seen by all participants, the network will be cheaper and potentially bigger than ECNs today because the risk and cost of maintaining the network is spread across all participants (there will not be a single owner charging premium for maintaining the service. Derivative Post-Trade Management: Derivatives contracts can be managed and automated through smart contracts on shared ledger, significantly cutting down the management cost and time while reducing the intra-day risk. Syndicated Loan: Help borrowers and arrangers to broadcast their offers to all potential investors on a Blockchain network, and to automate the syndication process. Trade Finance Cross-Currency Payment: Automatically connecting market makers and bypassing intermediaries to significantly reduces time taken for cross currency payment from days to seconds. Card Operation KYC: Creditor card issuers can record customer credit histories on a shared ledger so that customer information can be easily shared (or sold) between companies.
- 15. IBM Blockchain 2015 BLOCKCHAIN Financial Services Ecosystem
- 16. IBM Blockchain 2015 Source: EverisDigital FinTech Landscape – Disruptive Forces in Financial services
- 17. IBM Blockchain 2015 Source: Lets talk Payments Blockchain Adoption – Understanding the Disruption
- 18. IBM Blockchain 2015 Investment Interest in Blockchain • Blockchain has the potential to reduce infrastructure cost by up to $20 billion a year. • P2P money Transfer across international borders - segment worth $500 B. • Anderseen Horowitz ( VC firm) has invested over USD $100 million into Blockchain technology • All time Public/VC investment into Blockchain startups - $894 million. • Over 4000 active fintech startups in the NY arena and investment in the sector tripling last year to $12 billion. Source – LTP,Finextra
- 19. Public Network Fabric Business Adoption Challenges 1. Designed for public network 2. Slow and inefficient 3. Built-in virtual currency 4. Difficult to push upgrades 5. Heavily forked 6. Lack enterprise support Private Network Fabric Business Adoption Challenges 1. Incomplete & usually untested 2. Usually too simple & inflexible 3. Still lack critical enterprise features such as identity management system 4. Generally lack community support 5. Not standardized There are two options for building private network for businesses 1) Reconfigure a public network fabric for private use, or 2) Build on top of a untested private network fabric that’s available Why isn’tblockchain ready for business?
- 20. IBM brings the advisory capabilities as well as necessary tools … World Wide Cloud with Government Certification : one-click international multi-node geographic deployment of validating Blockchain peers that can be assigned to parties in the network, all on Softlayer. World experts in identity and cryptography research, significant IP in works. World leader in business rules processing. Domain experts in financial services, government systems, and supply chain. …to execute in this field: Identity, Certificates: In order to transact on the Blockchain without exposing strategic information to others, a party’s identity must be both transparent to the party it’s transacting with while opaque to others. This requires sophisticated identity management, which IBM is researching and developing. Inter-network services: In addition to identity management, current Blockchain platforms are challenged in enabling cross-ledger services. Say, for example, a bank performed KYC on a merchant in one network, and now the same bank is working with the same merchant in another network. Why do KYC twice? IBM can provide the support for this and other cross-network managed operations. IBM – What we bring and what needs to be done
- 21. IBM Blockchain 2015 Back up
- 22. IBM Blockchain 2015 http://www.digifinancegirl.com Silos of the Financial Services Industry
- 23. Phases of Blockchain Innovation 23 Dec. 9, 2011 Business Value Add services Overlay Services Pioneering These include exchanges, wallets, and consumer and merchant services. Bitcoins, alt-coins, the initial stage of blockchain fabric technology Business value-add services and blockchain applications. These include embedded transactions, collateral networks (such as Interledger), conditional payments, and smart contracts and business applications that leverage the overlay networks.
Editor's Notes
- #8: Source: http://www.ofnumbers.com/wp-content/uploads/2015/04/Permissioned-distributed-ledgers.pdf