Opportunities to utilize blockchain technology in asset finance
There is a growing consensus that blockchain technology will fundamentally change the way we think about asset financing and how banks and financial institutions operate.
Blockchain is a type of distributed ledger (i.e. a list of transactions that are replicated across numerous computers rather than being stored on a central server). Three features of blockchain with significant potential to impact the asset finance sphere are:
Smart Contracts – Self-executing contracts on the blockchain. These contracts are fully automated such that no one can manipulate the process, hence everyone can trust the outcome.
Hashes – Mathematical function which turns data into unique identifiers. If you make a change to the data, the hash changes. Hashes are the basis of blockchain immutability, which makes the technology so secure.
Security – Transactions on the blockchain are immutable due to the decentralized nature of the distributed ledger.
It is the combination of these three blockchain features that will be fundamental drivers for asset finance companies adopting blockchain technology. So where are the opportunities?
Cross border – In trade financing there are multiple stages in the exchange of goods between interested parties (e.g. letters of credit, bills of lading, and import/export authorization). Imagine if all these interactions could be done on the blockchain. For example, we can divide the interested parties into: Ledger Participants (e.g. exporter, importer, shipping company) and Authentication Nodes (e.g. transaction banks, export and import port authorities). If all parties interacted on the blockchain via smart contract they would each have a shared and secure view of each step of the transaction process from initial order to shipping, settlement and final delivery. Consequently, blockchain technology can help optimize settlement times, add greater transparency to disputes, improve capital efficiency and lower transaction costs.
Transaction efficiency throughout the supply chain – If all interested parties in a physical supply chain have a shared view of an asset and document all interactions with the asset on the blockchain, there are substantial saving to be made in middle and back office process and services.
Blockchain has unparalleled potential to improve the efficiency and governance of the financial industry. We at Emric are thrilled to be participating in the proliferation of this disruptive technology.
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Interested in blockchain? Here's some more reading about the topic:
Blockchain – A Platform for the Next Generation Connected World by Markus Hautala, Blockchain - A dawn of new digital world by Pasi Iljin and Blockchain and the new era of trust by Markus Melin.