Bitcoin, an open source, anonymous digital currency known for wild swings in value and its association with online black markets, seems an unlikely place for wealth managers to look for the solution to rising compliance costs.
But blockchain, the cryptographic concept behind the currency, is outgrowing its anarchic roots to find a place in the formal banking sector, from trade finance in Japan to commercial property leasing in Australia, to central bank operations in Singapore. In November 2016, the Monetary Authority of Singapore announced ‘Project Ubin’, which will test how the technology could be used to conduct interbank payments.
In a report on Friday, Bank of Singapore said ‘it could change the way that money flows through the economy and the financial system by creating a permanent, unhackable record of all transactions.’
‘All the major private banks are curious about the technology,’ Joe Seunghyun Cho, co-founder and chairman at Marvelstone Group said in an interview with Citywire Asia.
Blockchain is a ‘distributed ledger’, a type of database that is held across multiple servers and locations. Each party, or ‘node’ using the ledger keeps its own complete record of all of the transactions passing through the network. Because all of the nodes collectively verify transactions – a process known as ‘consensus’ – there is no need for intermediaries.
Each of these transactions is encrypted, has a unique signature and is sent to every node on the network to be verified and grouped into timestamped blocks of transactions, hence ‘blockchain’.
‘[Distributed ledger technology] has the ability to transform pre- and post-trade systems and processes for private banks and others, including [anti-money laundering] and [know-your-customer] requirements, regulatory reporting, risk management, and settlement and clearing in various asset classes,’ Chase Gordon, associate of corporate communications and regulatory affairs at technology firm R3 said.
R3 is partnering with the Monetary Authority of Singapore on Project Ubin, and is developing a DLT platform called Corda, backed by UBS, Credit Suisse and Temasek.
According to Marvelstone’s Cho, private banks are likely to focus on the technology’s utility in KYC checks. ‘Private banks have the same customers so they [will] work together to build something to share the database or do third party authentication platform,’ he said.
A 2016 study by Deloitte found that DLT can remove the duplication of effort in carrying out KYC checks, update ledgers on client information in real-time and provide a historical record of all documents shared and compliance activities of a client, saving costs.
‘This is what CEOs, CFOs and CTOs are really engaged with because the benefits of this technology have a very quick and strong impact on [their] P&L,’ Charles d’Haussy, head of fintech at Invest Hong Kong told Citywire Asia.
Lowering the cost of database management is an attractive proposition in an environment of increasing regulatory requirements and slimmer margins in the wealth management industry. DLT is also typically quicker than legacy systems, bringing down the settlement time of a transaction and freeing up liquidity.
Theoretically, DLT is also more secure than existing systems.
‘You can distribute the database and the data is getting replicated across the different nodes, so there is no longer one central point to attack or penetrate. Because it is much more distributed, it is resilient to cyberattacks,’ said d’Haussy.
For all its potential, banks are likely to move slowly into the technology at first. The upfront investment needed will be high, and with technology evolving at a rapid pace, the risk of investing in systems that turn out to be obsolete is high. Talent is hard to come by.
There is also an understandable conservatism in the industry. As Cho said: ‘Blockchain is cheaper and more secure. But nothing is 100% safe. You need to spend money to make it safer.’