Blockchain could fundamentally change the way banks ... · This combination takes our Blockchain...
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Transcript of Blockchain could fundamentally change the way banks ... · This combination takes our Blockchain...
CAPCO CONFIDENTIAL – © CAPCO – 2016
Blockchain could fundamentally change the way banks operate. It promises to offer more efficient and cost effective ways to process transactions
Blockchain is as a combination of multiple existing technologies: A ledger/record distributed amongst
many contributors (nodes)
Shared via a peer to peer network of these nodes
Transactions between nodes are transmitted on the network using secure cryptographic techniques
This combination creates a single version of the truth: In order to add a new group (block) of
transactions to the Blockchain, a consensus must be reached on the network for them to be added
When this happens, the new block also includes some information about the previous state of the Blockchain – the hash
This means the state of the ledger, including all previous states, is known at all times
This makes the Blockchain immutable – it cannot be altered or deleted, only added to.
This creates a complete and robust audit trail at any given point in time
Instantaneous settlement Confirmation broadcasted to entire
network for any transaction
Distributed database of ledger entries – many copies
Trust / ownership defined by algorithms and no central party or system is involved
Smart contracts can be created Coloured coins can be used for
creating customized assets
A chain of transactions posted sequentially in time-stamped blocks
Once entered into ledger changes are impossible
Open public ledger Encrypted with industry standard
Private & Public keys Closed ledger shared between
trusted participants
Ledger entries are stored in strict sequence
Every participant can see each other’s transactions
Blockchain features
Database
Distributed
Immediate
Programmable
Immutable
Secure
CAPCO CONFIDENTIAL – © CAPCO – 2016
The opportunities for banks within Blockchain are vast, the challenges are also significant
Removes the need for a trusted third party, therefore removes cost of dealing with intermediaries Lighter infrastructure means cost per transaction could be reduced significantly
Benefits
Challenges
Offers an e2e solution for removing complex manual processes, promoting simplification and clarity
Provides robust, accurate and timely industry submissions and regulatory reporting. Since all transactions on record are already agreed by consensus in the Blockchain, all records on file are final and can be sent to regulators, viewable through nodes
COST
EFFICIENCY
REGULATORY
The Bitcoin use-case isn't easily translated into the world of investment banking, particularly considering the role of ‘miners’ within that ecosystem. Also Bitcoin’s network is made up of unknown trusted partners whereas in banking, all partners will be known and trusted. This subtle difference impacts network configuration
Without the critical mass of cooperating banks, solutions for cross-industry processes such as payment and settlements would not be possible
Overhauling the existing infrastructure within mature exchanges and legacy payment systems will be expensive and time consuming
TRANSLATION TO BANKING
CRITICAL MASS
INFRA-STRUCTURE
CAPCO CONFIDENTIAL – © CAPCO – 2016
Distributed ledger technology may have a profoundly disruptive impact on financial services
The technology is its infancy, which provides not only an opportunity for financial institutions to gain competitive advantage by being early adopters but also risk
A number of factors impact developing and implementing your Blockchain strategy: • Level of aggressiveness – Are you seeking to be industry leaders or a fast followers?
• Consortia participation – To what extent will you play a part in consortia such as R3CEV and the Open Ledger / Hyperledger initiative? To what extent will you contribute in growing a library of standards and components?
• Operational cost savings – Where are the opportunities to unlock operational cost savings, reduce risk and improve compliance controls through consolidating the management of disparate data sources ?
• Infrastructure landscape – Should Blockchain be adopted instead of or in tandem with today’s traditional database / stored procedure / enterprise service architecture?
There are use cases and approaches that will not be covered by consortia. We have actual thinking to support you rather than the anaemic, pithy points-of-view on ‘what is blockchain’ from others
With such a broad set of opportunities, it can be challenging to know where to focus. Capco has experience of teaming with clients through this journey. We’re looking forward to helping
CAPCO CONFIDENTIAL – © CAPCO – 2016
Innovation leaders need to play a balancing act between lining up the right long-term opportunity and driving the short-term tangible value by unlocking operational improvements and cost take out
What is your optimal, balanced strategy?
Immediate Value Areas
Focus on areas where immediate operational efficiency and cost take-out can be gained through
Internal automation and standardization
Targeted standardization of message and routing where few parties are involved
Building platforms where you have market dominance with little fragmentation of counterparties
Transformative Long-Term Value Areas
Significant opportunity for long term operational improvement, cost take-out, risk reduction through
Distributed ledger industry utilities
Inter-bank settlement
Cross industry messaging standards
Disintermediation of central counterparties
CAPCO CONFIDENTIAL – © CAPCO – 2016
The following are examples of Blockchain use cases we’ve defined and are developing to address specific client problems
Commercial Lending / Syndicated Loans Structured Products * OTC Derivatives Trading Platform
CH
ALL
ENG
E Components of loans are sold on and resold with each transaction entered into a private ledger
Tracking and reconciling activities can be manual and complex
Highly manual & fragmented process from issuance to multi-legged transactions management to the final redemption stage
Changing regulatory landscape Need for central clearing and effective
controls on cost and reconciliations
SOLU
TIO
N
Loans and their subcomponents held on a shared ledger
Records tracked and managed across all owners
Automation of currently manual processes based on pre-programmed triggers (e.g. credit events)
Ring-fenced, front to back automated process using a distributed ledger
Securities can be issued on Blockchain where all events can be processed
Smart contracts can cover all lifecycle events including stock exercise, cash payments, settlement & asset transfer
Distributed ledger used in place of central clearing
Flexible regulatory reporting/submission solution
BEN
EFIT
S Reduced reconciliation and risk of error Increased efficiency & transparency in
process
Reduced cost , regulatory and operational risk
Automation of key processes such as payments and corporate actions
Significantly reduced reconciliation
Reduction in cost, improved process efficiency and regulatory transparency.
Could bypass requirement for reporting by providing direct access to regulators
What are your challenges? What are you use cases? We can help you understand if Blockchain is the right answer.
* See Appendix for detail
CAPCO CONFIDENTIAL – © CAPCO – 2016
We are active in a number of client engagements, in-house studies, business solutions and fintech networks. We also have a wealth of industry knowledge & experience
BITCOIN EXCHANGE SETUP PARTNERSHIP WITH CARNEGIE
MELLON UNIVERSITY JOINT RIPPLE / CLEAR2PAY
PROTOTYPING BLOCKCHAIN FEASIBILITY IN
AIRLINE PAYMENTS
SPRINKLE – A VIRTUAL CURRENCY BASED REWARDS SYSTEM
SETL – A PAYMENT & SETTLEMENT INFRASTRUCTURE FIRM STARTUP PARTNERSHIPS
The Right People Industry Presence Consulting Reach
We have strong technical experts, who understand the tech at a detailed level (e.g. coding smart contracts)
To complement the tech side, we have a strong combination of industry SME and polished change management discipline
This combination takes our Blockchain capability to next level – making it business relevant, defining use cases, leading to real implementation
We have strong partnerships which are relevant to IBs, particularly SETL
We have real credentials in the Blockchain domain
We are plugged into the latest Blockchain knowledge sharing channels, including regular panel/event participation, and understand the market / industry pulse
We have a spectrum of Capco engagements resulting in a rich resource pool, from which we can draw relevant experience for solving our clients’ problems. This spans the entire project lifecycle, from strategy to implementation, delivered for the world’s largest financial institutions
CAPCO CONFIDENTIAL – © CAPCO – 2016
Creating and managing a structured product through its entire lifecycle is one of best ways to demonstrate the potential benefits of a Blockchain solution
Primary Issuance
Secondary Market Client Transactions
Post Trade Processing
Asset Servicing & Custody
Maturity & Redemption
Most capital markets firms have structured products as a part of their service offering The process for creating such products is typically very fragmented and manual with high FTE input requirements
By utilising Blockchain in the creation of structured products, it is now possible to create a ring-fenced process using a distributed ledger With such a solution in place, it is possible to have an end to end view of the process while accurately recording transactions for the purpose
of keeping accurate internal books & records while fulfilling any regulatory obligations in the process
CH
ALL
ENG
E Cost of issuance is typically high
Requires booking of complex, multi-legged transactions
Manual process with high FTE per capita ratio
Manual processing corporate action events & client position mapping
Payments process is fragmented and error prone
SOLU
TIO
N
Issuance straight onto a Blockchain ledger
Single platform with golden source record for all transactions
Potential for automation of many post trade processes
Automated client position data. Smart contracts triggered based on corporate action events
Smart contracts can automate close-out process. Removes need for reconciliation
BEN
EFIT
S Reduced cost of issuance
Front to be back view of all transactions on a single platform
Reduced FTE dependency. More scalable solution
Reduction in operational risk. Automation of critical processes
Automation of payment triggers and payment process
CAPCO CONFIDENTIAL – © CAPCO – 2016
For proof of concepts, we typically follow a 12-16 week approach which delivers a proof of concept, business case and implementation roadmap.
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REVIEW & PRIORITIZE & SELECT
USE CASES
PROOF OF CONCEPT, BUSINESS CASE & IMPLEMENTATION ROADMAP
PROOF OF CONCEPT
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CURRENT STATE
ASSESSMENT
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DEVELOPMENT FINANCIAL BUSINESS CASE
CREATION
EXEC PRESENTATION
IMPLEMENTATION ROADMAP DEVELOPMENT
TECHNOLOGY
& VENDOR
SELECTION
PROOF OF CONCEPT Prototype that demonstrates the concept and the technology with a degree of functionality
VENDOR/TECHNOLOGY RECOMMENDATION Assesses technology options and provides recommendations based on agreed criteria
IMPLEMENTATION ROADMAP Plan for how the technology will be introduced in to the organization across people, process and technology
BUSINESS CASE Financial cost/benefit analysis of implementation and exec level materials
CAPCO CONFIDENTIAL – © CAPCO – 2016
We actively partner with start-ups and incubators to foster disruptive Blockchain-enabled business models
CAPCO CONFIDENTIAL – © CAPCO – 2016
Capco offers global consultancy services dedicated solely to Financial Services, allied to FIS, the world’s largest financial services technology firm
Kim Sgarlata, Partner [email protected] Jibran Ahmed, Managing Principal [email protected] Ben Jessel, Managing Principal [email protected] Alan Philpot, Managing Principal [email protected]
