Barclays’ use of Blockchain goes beyond digital currencies
Blockchain made its claim to fame through Bitcoin – it is the distributed, unchangeable public ledger that allows Bitcoin to operate without any intermediaries. While the cryptocurrency’s popularity and value has waned, interest in Blockchain is growing.
In fact, some of the banks that are investing in the technology have already extended its use beyond digital currencies. This was demonstrated last week when Barclays claimed it had made the first ever Blockchain-based trade finance transaction, using start-up Wave’s platform.
Using Blockchain to verify a letter of credit
Barclays recently carried out a transaction to export $100,000 worth of cheese and butter from Irish agricultural food co-operative Ornua to the Seychelles Trading Company.
The transaction used a ‘letter of credit’. Under normal circumstances, this process requires a complicated paper-trail involving international couriers, which can take up to a month to complete. With the use of Blockchain, the process was reduced to four hours.
Blockchain technology was used to handle and approve all documentation on Wave’s digital platform – all parties could track the documents through a secure distributed network. The benefit of using Blockchain for this process is that it needs no intermediary to verify the documents, because of the transparent audit trail. Its strength, as a distributed ledger, lies in its speed, accuracy and transparency.
What is a distributed ledger?
Ledgers have been used to record assets such as money and property since ancient times – when people used clay tablets and papyrus. Our banks use highly centralised ledgers that have a high-cost, single point of failure – if something goes wrong with the bank’s centralised ledger, this has the potential to result in a huge data loss (or breach). The network that Blockchain operates in is distributed. It is one of the main security aspects of the system – no one person, server or computer has direct control over the entire chain.
Transactions are recorded and confirmed anonymously. Everyone has visibility of these records in what The Paypers call a ‘personal’ register. Instead of hosting a ‘main’ register in a central database, Blockchain technology enables this data to be stored on many computers (these are called ‘miners’) that are directly in contact with each other. The information on these computers – their ‘personal’ registers – Is constantly aligned. If conflicting information is found in one or a few computers, the majority will have the final say and the information of the minority’s ‘personal’ register will be corrected – this ensures that there always is one universal ‘truth’.
When a transaction has been completed, it is broadcasted by both the buyer and the seller to the network. Once the transaction has been broadcasted according to agreed procedures, everyone has to update their ‘personal’ registers. These are then compared against each other to correct any potential errors.
Like any innovative technology, Blockchain isn’t without potential weaknesses. One is that the companies using Blockchain are relying on a new programming code, and anticipating flaws in a new programming language is difficult. As a result, there have been some security concerns in recent times. But, as people come to grips with the code, Blockchain is likely to become increasingly secure.
Blockchain for trade finance transactions and more…
Barclays is certainly not the only bank using Blockchain technology for trade finance transactions. Bank of America and HSBC have teamed up with Infocomm Development Authority of Singapore to offer an easier way to transfer letters of credit between banks, exporters and importers.
FinTech provider Ripple is offering the same proposition to a whole network of banks, including Santander, UniCredit, UBS and Royal Bank of Canada.
A different use of the technology was proclaimed at the end of last year when Nasdaq announced a new Blockchain-based trading platform, Linq. The solution can be used by private companies for issuance of shares and digital visibility of share ownership. Note that Linq is using the Blockchain technology but operates on a private distributed ledger, rather than a public one.
Nasdaq is also one of a host of banks that have partnered up with startup R3 CEV, which has kicked off a project to address some of the challenges that banks face, such as internal record-keeping, regulatory reporting and governance, using Blockchain technology.
Lastly, a UK government report found that Blockchain could even come to help with the collection of taxes, delivery of benefits, and issuing passports.
What impact could Blockchain technology have on banking?
The potential that Blockchain has to transform banking has already exceeded digital currencies, and it has inspired banks, FinTech providers and even governments to find additional use cases.
While initially used to underpin a digital currency, one of the distributed ledger’s main purposes outside of monetary transactions is the circulation of verified information. Barclays’ trade finance transaction marked the beginning of what we expect to be an exciting time in banking. How this technology will change financial services in the future will be very interesting to see.
Mapa’s Director of Research and Analysis, Ceri Stanaway, comments: “For most banking customers, Blockchain will often seem a complex financial technology that has little to do with their daily financial needs. But if, as advocates hope, it streamlines and speeds up the unwieldy manual process of authorising payments at different stages, it has the potential to make many financial transactions quicker, slicker and potentially cheaper for bank customers too.”