The Rise of Blockchain

November 2021

Fintech & Payments

Susannah Hampton

Senior Analyst

Blockchain came to prominence through its role in cryptocurrencies, but its use has now broadened beyond cryptocurrency transaction data. Blockchain is now being utilised as a way of storing and verifying other types of data in other spheres of finance, as well as areas such as human resources, supply chain, land registry and food safety. In Forbes’ 2020 list of the top 50 blockchain companies, financial services were found to be the leading solution area by a large margin (39%), focused mainly on cross-border payments, digital asset trading, and digital/cryptocurrency.

In recent years, there has been a significant increase in investment and patent filing activity for blockchain-related technologies from stakeholders in the financial services space; Deutsche Bank, UBS, Bank of NY Mellon, USAA and Infosys have been exploring blockchain technology for a number of years. In 2020, more than 8,000 blockchain patents were filed.

A key advantage of blockchain is its ability to reduce or eliminate the number of intermediaries required to complete a transaction or event; helping simplify processes, increase speed and security, as well as reducing costs. 

Blockchain offers a way to minimise the reliance of intermediary service providers (such as central clearing houses) and reduce the potential for abuse of trust. Each process within a blockchain is transparent, independently verifiable and auditable in real-time by each participant. Data records cannot be altered once recorded on the blockchain. The shared infrastructure nature of a blockchain can help streamline business processes and ensure consistency – a significant shift away from the data silo approach which is common in many areas of financial services. Thus, blockchain can also offer a way for enterprises to upgrade expensive and insecure systems, platforms and databases, and makes the whole process of data collection and processing more transparent; increasing the confidence of customers and users knowing that their data is secure and private. In countries where corruption is commonplace, blockchain can serve to increase transparency and preventing money laundering and corruption.

Within eGovernment, blockchain has the potential to improve the breadth and depth of government services, as well as offering enhanced transparency and accessibility of government information, and the ability to share information across organisations. The use of blockchain technology could make government platforms more efficient, thus increasing trust, better protecting sensitive data, reducing costs and improving overall efficiency. Several markets globally are making advances in the area of digital government.

Historically, cross-border payments have not only been slow and costly, there has also been a considerable lack of process transparency. Most cross-border payments still travel via the legacy-correspondent banking system, with a key drawback being that transfers still need to be routed through multiple banks before the transaction is completed. 

In recent years, transferring money internationally has slowly evolved into a swifter, less complex and less expensive endeavour for both individuals and SMBs through the growth of MTOs (Money Transfer Operators). MTOs act as intermediaries between a payer in one country and a payee in another, to enable funds to be transferred via their own system or through an external cross-border banking network. However, there are still considerable improvements to be made in terms of reducing the speed and cost of transactions. In recent years, inroads have been made into increasing the speed of cross-border payments – namely, instant payments. The European Central Bank defines instant payments as ‘electronic retail payment solutions that process payments in real-time, 24 hours a day, 365 days a year, where the funds are made available immediately for use by the recipient.’ Instant payments schemes tend to be updated versions of legacy payment settlement schemes created by individual payments authorities in countries and a key example of the use of instant payments for cross-border payments is SWIFT’s gpi. 

A major competitor to SWIFT gpi for instant payment capabilities in a cross-border environment is money transfer solutions conducted via blockchain. Blockchain uses encrypted distributed ledgers enabling secure real-time transaction verification; eliminating the requirement for banking, clearing house intermediaries or third-party verification.