Blockchain in the Financial Industry (incl. the use case Project Batavia) Clemens Müller 28 th Februrary 2018
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Decentralization in a trustless environment Bank A Bank B Bank A Bank B Bank A Bank B Action Action Action Action Action Action Perception Perception Perception Perception Shared Perception = Truth Processing Processing Processing Processing Shared Processing Logic Communication Communication Internet Shared Communication Before the Internet Now After Shared Ledger March 18 Page 3
Potential benefits of Blockchain in banking Operational simplification Counterparty risk reduction Liquidity and capital improvement Clearing and settlement time reduction Fraud minimization Regulatory efficiency improvement reduces / eliminates manual efforts required to perform reconciliation and resolve disputes challenges the need to trust counterparties to fulfill obligations as agreements are codified and performed in a shared, immutable environment reduces locked-in capital and provides transparency into sourcing liquidity for assets disintermediates third parties that support transaction verification / validation and accelerates settlement. implements asset provenance and full transaction history to be established with a single source of truth activates near real-time monitoring of financial activity between regulators and regulated entities March 18 Page 4
When is blockchain relevant? Answering a few questions can determine if blockchain is appropriate for banks Is this a business process that crosses trust boundaries? Do multiple parties manipulate the same data? Are there any intermediaries that control the single source of the truth? Does the process involve low-value, manual verification steps? March 18 Page 5
Blockchain use cases for Financial Services TRADE FINANCE / LoC KNOW YOUR CUSTOMER DIGITAL ASSET TRANSFER BANK GUARANTEES SUPPLY CHAIN FINANCING GLOBAL PAYMENTS LOAN SYNDICATION MORTGAGE REGISTRATION March 18 Page 6
Development timeline where are we now? PRODUCTION PARALLEL PRODUCTION PROTOTYPE PoC IDEATION 2014 We are here 2015/16 PILOT MATURITY 2025 2017/18 Proof of technology and ideas generation Initial use-case and capability assessments 2016/17 2019-22 2020 Mainstream adoption Blockchain begins ascent into mainstream Projects move into production alongside legacy Certain products go viral, new providers/models emerge Technology tested & partnerships / investments increase March 18 Page 7
Estimated DLT Adoption Timeline Progression from proof-of-concept 2015 Exploration & Development Initial capability and use-case assessments Early adoption likely for internal reconciliation Year of the Hype 2016-2017 Early Adoption Leading banks see the value and begin deployments for asset classes bilateraly traded and/or have no central clearing authority Regulatory certainity drives adoption for external uses Regulatory authorities realize the benefits for auditing and compliance, rule-making Year of the PoC Year of the Pilot 2018-2024 Growth Banks begin to see the benefits experienced by early adopters and, combines with regulatory guidance and certainity, the network effect takes hold New service providers and models eerge Deployments go viral accross numerou asset classes New products/services are created; incumbent processes/services are discarded 2025 Maturity Production cases Blockchain adoption is considered mainstream and integra to the capital markets ecosystem March 18 Page 8
Defining our first use case in Trade Finance Value chains are becoming increasingly fragmented, leading to increasing trade volumes 737 Classic at start of production 10% outsourced 747 Series at start of production 20% outsourced 787 Dreamliner at start of production 80% outsourced Parts built by Boeing in-house Parts outsourced Boeing has transformed itself into a systems integrator and has outsourced and increasing proportion of its aircraft production March 18 Page 9
Rarely automatized and heavily paper based An average letter of credit consists of 36 documents 30 different documents per shipment Physical goods are travelling faster than the letter of credit documentation is cleared 10,000 billion sheets of paper every year Paper processing cost 10% of value of global goods sold Re-key error as high as 50 % March 18 Page 10
Document Player 20+ Players interact with the data fields captured in the 10-20 Documents to create ~5,000 data field interactions IMPORTER EXPORTER IMPORTER S BANK EXPORTER S BANK FREIGHT FORWARDER INSURER PRE-SHIPMENT INSPECTOR EXPORT CUSTOMS DOCUMENT COURIER SHIPPER IMPORT CUSTOMS DOCUMENT COURIER CORRESPONDENT BANK LETTER OF CREDIT BILL OF EXCHANGE COMMERCIAL INVOICES ORDER FORM INSURANCE POLICY BILLS OF LADING CERTIFICATE OF ORIGIN WEIGHT / PACKING LIST PAYMENT COMFIRM ATION KYC /AML / SANCTIONS Data Elements March 18 Page 11
Batavia - Truly Innovative Trade Finance Ecosystem Seller Seller wants payment before shipping Trusted intermediary Absorbs risks Bridges cash flows gaps Facilitates trade flows & settlements Buyer Buyer wants goods before paying March 18 Page 12
Seamless, digital and end-to-end automated multi-stakeholder flow across supply chain Safe and convenient Smart Contracts represent legally binding trade transactions Contractual conditions digitally and immutably signed-off in advance by all participants Automated and conditional processing triggered upon defined events through data integration with participants Documents dematerialized for process acceleration and simplification Convenience maximized for clients through lean and fully digital interface March 18 Page 13
Know Your Customer Managed Digital Identities Attestation and sharing of information stored in a digital locker Non Optimized Process Process Transformation with Blockchain Multiple Identity Cards & Documents High KYC Costs Easy Intra-Bank Communication Easy Inter-Bank Communication Multiple & Repeated KYC Checks Multiple Registries & Inadequate Databases Bank Receives Customer Data from Blockchain Verifies & Confirms KYC Status Blockchain Blockchain Blockchain Customer Uploads Documents (POI & POA) Receives KYC Compliant Status Easy Accessibility & Verifiability of KYC Status by External Agencies Multiple Bank Departments RECORDSKEEPER March 18 Page 14