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Blockchain is changing the digital landscape

Blockchain is changing the rules. Like the Internet, Blockchain will disrupt all industries.It will change the way in which traditional digital services are provided across all public sectors, industries and services, globally. Blockchain changes and expand the boundaries of the digital landscape; Blockchain provides new public infrastructure, a digital network upon which new automated services can be built for consumption at no cost to the consumer. It enables the decentralisation of organisations & processes and the automation of transactions & administrations. Ledgers have been at the heart of commerce since ancient times and are used to maintain record if everything including assets such as money and property. They were being recorded on clay tablets to papyrus, vellum, paper and later on computer database which initially was simply a transfer from paper to bytes. However, now, for the first time algorithms enable the collaborative creation of digital distributed ledgers with properties and capabilities that go far beyond traditional paper-based ledgers. A distributed ledger is essentially an asset database that can be shared across a network of multiple sites, geographies or institutions. All participants within a network can have their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds. The assets can be financial, legal, physical or electronic. The security and accuracy of the assets stored in the ledger are maintained cryptographically through the use of ‘keys’ and signatures to control who can do what within the shared ledger. Entries can also be updated by one, some or all of the participants, according to rules agreed by the network.

Blockchain building blocks for enterprise

Shared Distributed Ledger

Blockchain is a disruptive technology platform that uses cryptography and a distributed messaging protocol to create a shared ledger between trading counter parties to execute simple transfer of asset ownership or more complex transactions using ‘smart contracts’. The data on the ledger is pervasive and persistent and creates a reliable ‘transaction cloud’ as that transaction data cannot be lost or corrupted by any of the participants.

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Cryptography

Cryptography ensures authentication and verifiable transactions. The design imperative regarding the inclusion of cryptography is focused on the computational hardness assumption and making it harder to break by any adversarial process in the distributed system. The economic incentive and the system design of bitcoin blockchain makes this interesting, and the cryptographic considerations change when translated into a less democratic or permissioned ledger network.

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Consensus as a trust system

Blockchain uses the power of the network to verify the transaction all validation is done via the consensus system. This is the foundational element and will drive blockchain technology. The cryptographic distributed ledger is replicated amongst the participants in a peer-to-peer network which does not rely on a third party and leaves a cryptographically auditable trail. The concept removes the third party intermediary holding custody on the asset rights as that is managed by ‘smart contracts’ which execute themselves meeting predefined conditions.

Business Rules or Contracts

These are business terms embedded in a transaction database and executed with transactions. This is a rules component, as needed by any business to define the flow of value and state of a transaction. This means translating legal contract languages (legalese) from the lawyers into computer code. Smart contracts are contracts written as computer code which can be stored on the Blockchain, rather than in legal language on a printed document. This code can define strict rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits and penalties which may be due to either party in various different circumstances. But unlike a traditional contract it can also take information as an input, process that information through the rules set out in the contract, and take any actions required of it as a result.

Electronic or digital assets

Building infrastructure on top of the blockchain to facilitate permissioned protocols has many potential uses including things like sharing frequent flyer miles, transferring ownership of land, car or asset titles and stock transferrer.

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Identity or security

Utilizing blockchain identification to access applications, websites or other sign-in experiences can enhance security.

Blockchain use-case across various industries

Blockchain across financial services industry.

The blockchain technology has the potential to redefine the operations and economics of the financial services industry. Despite significant technological gains in capital markets over the past 20 years, middle and back-office functions often remain antiquated, slow and inefficient thanks to overly complex processes involving many counter parties, manual tasks and third-party service providers. Assets that trade electronically in the blink of an eye can still take days to settle. There are many possible applications of blockchain technology in financial services. Use cases include KYC/AML data sharing, trade surveillance, regulatory reporting, collateral management, trading, settlement and clearing. This transformation has the potential to make trading processes far more efficient, improve regulatory control and eliminate unnecessary intermediaries.

Blockchain is particularly useful for complex financial assets where there is no clear central authority to regulate, arbitrate, and/or mitigate risk of trade or counter party failure, hence products benefiting from the technology will be Public & Private Stocks/Bonds, FICC derivatives, Syndicated loans, Corporate Bonds, Factoring, Letters of Credit, and Derivatives Margin/Collaterals. Blockchain technology has the potential to disrupt business models through automation, smart controls and risk and cost reduction. The ability to settle currency, equity and fixed income trades almost instantaneously through permissioned distributed ledgers may create a significant opportunity for banks to drive efficiency, improve regulatory control and eliminate unnecessary intermediaries. Leveraging blockchain technology within the capital markets industry will be significant if the existing legacy technology, operations and infrastructure landscape within the established capital markets players is considered. The number of applications within and outside the banks will be reduced as the blockchain transaction contains all relevant information for the successful transfer of assets and/or related contracts.
Blockchains could become the critical backbone of future capital markets infrastructure addressing significant industry issues, including the reduction counter party risk minimization, reduction of settlement times, improvement of contractual term performance and increased regulatory reporting transparency. Banks and venture capitalists have begun investing significantly in blockchain technology. We can envisage various stages of technology adoption, starting from an internal utilization within a bank to an intermediary stage where capital markets participants run private (permissioned) blockchains until regulation or legislation catches up and defines a new industry technology standard.

Blockchain has tremendous potential, and collectively they do differentiate themselves from core components when measured individually. Enterprise blockchain provides a design avenue where transaction data, value, and state are inherently close to the business logic, and the security of the execution of business transactions is validated by a secure community process, enabling a foundation of trust and the robust processing of transactions. There are virtues of using a blockchain as a technology alternative that is permissioned and conforms to all the regulatory platforms that have evolved over time. The blockchain promise is to solve longstanding industry concerns such as modernizing the financial and trade system and speeding up securities and trade settlements.

Research and Insights