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The emergence of blockchain-based financial services

Javier Osorio


April 24th, 2019

How three financial institutions are using blockchain to provide new services

Blockchain and banks have had a rough relationship mainly due to the understanding that bitcoin poses as a “threat” to the financial sector: a practical way of sending funds from A to B, without A knowing B or B knowing A, with no C’s – intermediaries – involved. However, blockchain is the underlying technology that empowers this cryptocurrency; it’s just a medium. Indeed, as of today, more than 2000 cryptocurrencies worldwide rely on specific blockchains such as Ethereum (ETH), Cardano (ADA), NEM or Tron (TRX), amongst others.

For starters, blockchain is a digital ledger that uses cryptography to secure information with an interesting feature: it is immutable. It’s virtually impossible to edit or change any data. This is the core difference to a traditional database, as well as the fact that it’s distributed and does not belong to a centralized entity.

Having a distributed, transparent ledger is a feature that can benefit banks all around the world. In this order of ideas, blockchain can be used to improve the services offered by financial institutions in terms of efficiency and security. Despite its nascent stage, blockchain already has the potential to disrupt some of the services offered in the financial world. In this article, we will highlight some specific examples of how this technology is being applied in the financial industry and it’s massive potential disruption for the fintech world.

Ripple XRP: Blockchain for banks

Ripple is a US-based company that has taken advantage of blockchain in order to enhance international remittances for banks and financial institutions. Compared to the traditional SWIFT system that can take 3-5 business days for an international bank transfer to be completed, with Ripple it only takes seconds. The process is quite simple yet efficient: Ripple has developed a private blockchain – not public but centralized – that uses their own cryptocurrency called XRP. Ripple converts Fiat money into XRP, sends it through their blockchain and then finally converts it again to Fiat. All this happens within seconds, which improves efficiency and avoids volatility.

When XRP was launched back in August 2013, its price was around $0.005, later on during the crypto hype of Q4 2017 – Q1 2018, it achieved an all-time high of $3.36; nowadays it sits around $0.31. Taking these numbers into consideration, you see that XRP had a 672x increase in value, outperforming other cryptocurrencies such as bitcoin.

Click here to check out the historical value and market cap of cryptocurrencies.

The added value Ripple offers has already gained several big players such as Banco Santander, MoneyGram, Itaú and MUFG Bank. Up to now, all their benchmarks have complied with the expected standards in terms of performance and reliability. According to Cory Johnson, former Chief Market Strategist at Ripple, with regards to their clients: “Many of them are using XRP to do transactions across borders to lower their costs from 40 basis points to 4 basis points and from 4 days to 2 minutes. That can only be done using these digital assets or cryptocurrencies.”

As expected, not everything has worked like a charm for Ripple. On the one hand, the crypto community has been reluctant in adopting Ripple’s XRP since its concept challenges the direction of the original intent of blockchain: that of an open decentralized distributed ledger. On the other hand, when Bitcoin appeared after the 2008 recession, many activists believed that its main purpose was to circumvent the financial industry and come up with a peer-to-peer solution: Ripple decided not to follow that path and instead support banks and financial institutions, enhancing their services through blockchain.

Stellar: Blockchain for the unbanked

Stellar was created in 2014 by Jed McCaleb, co-founder of Ripple. Its concept is very similar to that of Ripple: facilitate international remittances in terms of time and cost efficiency using blockchain technology, however, its target audience is different: Stellar is mainly focused on the average person, especially those in developing countries. Stellar aims to promote inclusion. This doesn’t mean banks cannot use it, however, it’s not their main focus.

Stellar works pretty much the same as Ripple: a native cryptocurrency – Lumens (XLM) – that is exchanged through a private blockchain. Despite not having as wide a client portfolio as Ripple, it has an interesting partnership with IBM which recently announced a payment system called “World Wire”. Through it, IBM has already signed 6 important banks across the globe in places like the Philippines, Indonesia, Korea, and Brazil in order to allow instant transfers.

Click here to learn more about IBM’s partnership with Stellar.

JP Morgan makes a crypto move

JPMorgan Chase & Co, the American multinational investment bank and financial services company, recently announced their plan to launch their own digital asset called JPM coin, which offers instant bank transfers using the blockchain network. The main characteristic of this asset is that it’s meant to work as a stable coin, hence its 1:1 ratio towards the US dollar.

 

“The JPM Coin isn’t money per se. It is a digital coin representing United States Dollars held in designated accounts at JPMorgan Chase N.A. In short, a JPM Coin always has a value equivalent to one U.S. dollar. When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars, reducing the typical settlement time.”

Umar Farooq, head of Digital Treasury Services and Blockchain at JPMorgan

 

Click here to read more about the JPM Coin.

This new move has come as a surprise since it was not long ago that JP Morgan’s CEO, Jamie Dimon, strongly criticized bitcoin, stating it was a “fraud” and “worse than tulip bulbs” referring to the infamous Dutch tulip bubble of the 17th century. As it turns out, their managerial perception has shifted into a more “convenient” stance about the potential of blockchain. Appropriate diplomatic approach after all. As David G.W. Birch, a leading digital financial services advisor, states:

 

“Is it a “cryptocurrency”? No, it isn’t. A cryptocurrency has a value determined, essentially, by mathematics in that the algorithm to produce the currency is known and the value of the cryptocurrency depends only that known supply and the unknown demand (and, of course, market manipulation of various kinds). It is not set by an institution, government or otherwise.”

Source: http://blog.dgwbirch.com/?p=442

 

Conclusion: Early days, but blockchain has clear potential

By now it is clear that blockchain is a technology that has the potential to benefit banks and financial institutions. Building blockchain-based services remains a major challenge, and why there are still limited examples of existing banks using blockchain. As the New York Times recently pointed out, uncertainty around cryptocurrencies and bitcoin have helped put the brakes on many developments from leading financial institutions.

However, these remain early days. In this article, we’ve highlighted three examples of how the technology is creating new business opportunities – particularly in specific areas, such as in remittances. the disruptive opportunity window is open and reinvention is imperative in order to offer the best products and services to a more demanding consumer. XRP, XLM, and JPM are just the beginning of what seems to be a promising field of instant, low-cost remittances. The setting is ready for disruption to shift the current financial paradigm.
 

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