Blockchain adoption moving rapidly in banking and financial markets

Blockchain adoption moving rapidly in banking and financial markets

Commercial blockchain solutions are rapidly being adopted throughout banking and financial markets, dramatically faster than initially expected, finds two new IBM studies. 15 % of banks and 14 % of financial market institutions interviewed by IBM intend to implement full-scale, commercial blockchain solutions in 2017. Mass adoption isn’t that far behind with roughly 65 % of banks expecting to have blockchain solutions in production in the next three years.

Conducted by the IBM Institute for Business Value (IBV), the banking study revealed that more than 70 % of trailblazers surveyed, or early adopters, are prioritizing blockchain efforts in order to break down current barriers to creating new business models and reaching new markets. These trailblazers are better positioned to defend themselves against competitors, including those untraditional disruptors like startup non-banks. For financial markets institutions, seven out of 10 trailblazers surveyed are focusing their blockchain efforts on four areas: clearing and settlement, wholesale payments, equity and debt issuance, and reference data. 

Keys to Success: Banking trailblazers view blockchains as a means to create new business models and access new markets, yet, outside of early adopters, banks feel there are many barriers to success when adopting blockchain. According to those surveyed, the top barriers to success include regulatory constraints (56 percent), immature technology (54 percent) and lack of clear return on investment (52 percent).

Financing international business: in the eye of the blockchain cycle!

This summer banks announced the successful testing of real-time cross-border payments based on the blockchain. Since then, the question for panelists is not if, but when the blockchain will be adopted by the commodities market. ING bank, one of the major players in trade finance, has put in place a smart contract system based on this technology. The idea is to create a space where each party involved in the transaction can reliably, chronologically and irrevocably provide their validation to the requirements of the transaction. Once all validations are given, the payment can be released by the bank.

The blockchain entails a real paradigm change. Although the internet allows digital sharing of a photo, it is nevertheless very difficult to authenticate the creator of the photo, and impossible to know whether the sender has kept a copy. With the blockchain, it is possible not only to preserve transaction history but also to carry out irrevocable value transfers.

The advantage is not purely technical, as highlighted by the R3 consortium, but is also proving itself in governance matters. In fact, in 2015 nine banks signed a partnership with an American R3 company for the use of the blockchain in financial markets: P Morgan, State Street, UBS, Royal Bank of Scotland, Credit Suisse, BBVA and Commonwealth Bank of Australia. Meanwhile Citibank has announced its intention to issue its own cryptocurrency, the Citicoin.

From a technical point of view, banks and other stakeholders could also share a large database. But what about maintenance? IT rights? Where will the data be stored? Who will be responsible for security? A system based on a distributed register, such as the blockchain, would enable all this to be managed, as opposed to a centralized model.

Stock exchanges are also interested in this technology, including Paris. Just as training organizations such as Eurêka are offering courses for financiers and insurers to discover how any centralizing body can be replaced by cryptographic algorithms and to assimilate the programming tools for digital, decentralized financial assets. BNP Paribas Securities Services and SmartAngels signed a strategic partnership in April 2016 for the application of blockchain technology which would enable non-listed companies to issue equity on the primary market and investors to access the secondary market by using blockchain technology.


Securely operating blockchain networks

Since blockchain is an emerging technology, until now there has been little clarity on the requirements to securely operate blockchain networks in the cloud. To help speed the adoption of blockchain for business, IBM announced in April a new framework for securely operating blockchain networks, as well as new services on the IBM Cloud that are designed to meet existing regulatory and security requirements. Some cloud environments leave back doors open to vulnerabilities that allow tampering and unauthorized access. Working with teams of security experts, cryptographers, hardware experts and researchers, IBM has created essential new cloud services for tamper-resistant, trusted blockchain networks.

"Clients tell us that one of the inhibitors of the adoption of blockchain is the concern about security," said Jerry Cuomo, vice president, Blockchain, IBM. "While there is a sense of urgency to pioneer blockchain for business, most organizations need help to define the ideal cloud environment that enables blockchain networks to run securely in the cloud."


IBM is addressing security needs in several ways, including cloud services with the highest Federal Information Processing Standards (FIPS 140-2) and Evaluation Assurance Levels (EAL) in the industry to support the use of blockchain in government, financial services and healthcare.

With the recent opening of the IBM Garage in New York City, IBM is also working to accelerate the design and development of a unique application for securities lending, using a blockchain network to trade and transfer assets. “With this new initiative, IBM is providing an environment that will allow companies like us to collaborate more easily and more securely and in a more standardized way, which is critical to advancing meaningful use cases for blockchain.” said Suresh Kumar, CIO, BNY Mellon.


Defining a Security Framework for Blockchain in the Cloud


IBM Cloud will allow production blockchain networks to be deployed in minutes, running signed, certified and tested Docker images with dashboards and analytics as well as support.


These new cloud services have been optimized for cloud-based blockchain networks by providing an auditable operating environment with comprehensive log data that supports forensics and compliance. Tamper-resistant storage of crypto keys and complete protection around the cryptographic module detects and responds to unauthorized attempts at physical access. Additionally, the IBM Cloud services enable blockchain peers to run in protected environments to prevent leaks through shared memory or hardware.

IBM will work with JPX to jointly evaluate how the IBM open source blockchain code could be used for trading and settlement in low liquidity markets.


"Blockchain is one of the emerging technologies that is being closely watched by financial communities throughout the world," said Atsushi Santo, Head of New Business Development, Japan Exchange Group. "We plan to explore blockchain fabric to evaluate technical limitations and the potential of blockchain for post-trading service for low volume traffic by fully utilizing IBM global resources including IBM Research, Tokyo." The verification tests will adopt a framework based on the open source blockchain fabric. 

Blockchain and biometrics: two key elements for the financial sector of the future

The blockchain will provide a reliable and fast way of transferring value across a distributed network, and biometrics will become a precious tool to manage access to this network. Integrating these two technologies remains, for now, an open question. Indeed, “we do not yet know whether it is possible to undertake biometric authentication in the distributed network environment (and at low cost) of the blockchain.” explains Lúí Smyth, director of blockchain research at Infosy.