My session for IIM Bengaluru for the Executive Leaders of Public Sector Banks in India about the principles, paradigms, platforms, protocols and potentials of Blockchain Technology in 2020.

1. Blockchain in Banking Sector
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2. In 2014, it was
estimated that global
spending on
Anti-Money Laundering
(AML) compliance alone
amounted to $10 billion

3. The banks are coming under
pressure from investors and
analysts to reduce costs, but
many expect the budgets for
their compliance teams to
increase in the coming years
rather than decrease.

4. In addition to the financial
burden, KYC requests can also
delay transactions, taking 30 to
50 days to complete to a
satisfactory level. Current KYC
processes also entail
substantial duplication of effort
between firms.

5. On December 2015, Nasdaq made its first
ever share trade using Blockchain.
As of June 2019, about 430,000,000
blockchain based transactions were done.
There are more than 47,140,000 blockchain
wallet users as of March 2020.

6. Currently, 77 percent of
financial sector companies
are experimenting with
blockchain technology to
make their services more
secure, seamless and
transparent.

7. Financial institutions
alone have spent
about $552 million on
blockchain powered
projects.

8. The costs of
transactions using
blockchain are millions
of times cheaper than
transaction costs in
traditional economy.

9. The transaction fee for
transferring
849,999.99939168
Ether (which is equal to
$261,833,999.81) is
only $0.19.

10. In one pilot project, blockchain
made it possible to trace
individual mangoes back to the
farm in 2.2 seconds.
Walmart says that without
blockchain it would take more
than six days to identify the
original farm.

11. Some of the world’s largest banks are
investing about $50 billion to build a
blockchain-based digital cash
settlement system.
According to a Reuters report, the banks
include UBS, Banco Santander, Bank of
New York Mellon Corp, State Street
Corp, Credit Suisse Group AG, Barclays
PLC, HSBC Holdings Plc, and Deutsche
Bank AG.

16. Global FinTech Report 2017 on Blockchain Adoption

21. Blockchain for KYC

22. Pain Points
Duplicate Efforts
Know Your Customer (“KYC”) requests
currently can cause delay to banking
transactions, typically taking 30 to 50
days to complete to a satisfactory level.
Current KYC processes also entail
substantial duplication of effort between
banks (and other third-party institutions).
While annual compliance costs are high,
there are also large penalties for failing
to follow KYC guidelines properly

23. Pain Points
Economy of Scale
The average bank spends £40
million a year on KYC Compliance,
according to a recent Thomson
Reuters Survey, which also revealed
that some banks spend up to £300
million annually on KYC compliance,
Anti Money Laundering (“AML”)
checks and Customer Due Diligence
(“CDD”).

24. Pain Points
Regulatory Fines
Since 2009, regulatory fines,
particularly in the USA, have
followed an upward trend with
record-breaking fines levied during
2015. On-going regulatory change,
with no one internationally agreed
standard, makes it increasingly hard
for banks to remain compliant.

25. KYC Statements
on Blockchain
Chris Huls of Rabo Bank
“KYC statements can be stored on the
Blockchain.” Once a bank has KYC’d a
new customer they can then put that
statement, including a summary of the
KYC documents, on Blockchain which
can then be used by other banks and
other accredited organizations (such as
insurers, car rental firms, loan providers
etc.) without the need to ask the
customer to start the KYC process all
over again.

30. Blockchain and Trade Finance

34. Traditional Trade Finance Workflow

44. Blockchain in Capital Markets

45. Case Study
Buying and Selling Assets using
Blockchain Technology
By removing the middleman and
asset rights transfer, blockchain
lowers the asset exchange fees and
reduces the instability of the
traditional securities market.
According to one source, moving
securities on a blockchain could
save from $17 to $24 million each
year in global trade processing
costs.

46. Pain Points
Complex Ownership Constraints
Buying and selling assets like stocks,
commodities, or debts are based on keeping
track of who owns what. Financial markets
accomplish this through a complex network of
exchanges, brokers, clearinghouses, central
security depositories, and custodian banks.
All of these different parties have been
constructed around an outdated system of
paper ownership. This system is not only slow
but riddled with errors and prone to deception.

47. Pain Points
Disconnected Custodians and
Disjointed Ledgers
Buyers and sellers don’t rely on the same
custodian banks, and these don’t always
rely on trusted third parties to hold onto
all the paper certificates.
If you’re buying or selling an asset, the
order will be relayed through numerous
third parties. That’s why transferring
ownership is so complicated. Note that
each party maintains its own version of
the truth in a separate ledger. The
system is not only inefficient but also
imprecise.

49. Over 14% of companies in
the capital markets sector
report having moved on
to the successful
deployment of at least
one blockchain solution.

50. Case Study
The Australian Stock Exchange
The Australian Securities Exchange (ASX), the
16th largest financial exchange in the world, is
to replace its CHESS clearing and settlement
system with a DLT-based alternative. The new
system has been developed with Digital Asset
Holdings, a blockchain consultancy ASX holds
a stake in.
ASX CEO Dominic Stevens estimates
Australian companies listed on the exchange
will save $23bn in costs from efficiencies. The
DLT will be supported by AI to parse real-time
exchange data, simplifying regulatory
compliance.

51. There is only one
blockchain project
underway that is
bigger than the
ASX/Digital Asset
Holdings endeavour.

52. Case Study
DTCC
It is the Depository Trust and Clearing
Corporation (DTCC) move its $11trn Trade
Information Warehouse onto New York
start-up Axoni’s Axcore blockchain.
The DTCC owns the largest financial
infrastructure in the world, processing an
annual $1.6 quadrillion-worth of
securities transactions.
The company’s Trade Information
Warehouse services nearly every global
derivatives dealer in the world as well as
around 2,500 buy-side companies.

53. The most interesting thing
about the DTCC project is that
the huge clearing company
represents exactly the profile of
financial middlemen that the
integration of blockchain
technology in capital markets
threatens.

54. In the equity derivatives market
everybody is managing connections to
all the various counterparties
independently.
They’re each managing their own data
systems, their own calculations
systems, and what that leads to is a
substantial amount of breaks.

65. One of the biggest
unanswered questions for
blockchain in capital
markets is if a smart
contracts solution can really
replace clearing houses.

66. Clearing houses ensure the
failure of one counterparty to
fulfil their obligation to a
transaction does not lead to
systemic risk. Regulators will
have to be convinced that an
automated, decentralised
blockchain could fulfil this role.

67. Case Study
Blockchain to Replace
Clearing Houses
Blockchain technology to facilitate
trustless delivery vs. payment (DVP)
settlement without any intermediary.
Blockchain-based multi-chain atomic
swap technology will become a
peer-to-peer alternative to a central
clearing counterparty that normally
facilitates the DVP settlement of
financial assets.

68. Current State
Today, assets are mainly settled in
the form of a so-called free delivery.
Under free delivery, a trading Party
A first needs to either deliver an
asset - in case of a sell trade - or pay
for an asset - in case of a buy trade -
while Party B pays or delivers
accordingly only after the receipt of
assets or funds from Party A.

69. Pain Points
The main disadvantage of this form of
settlement is settlement risk as well as
counterparty risk, i.e., the risk that the
parties can default on their obligations.
These risks should not be
underestimated as a default of an
involved party can lead to substantial
financial losses.
Therefore, several financial
intermediaries are involved in the
settlement process to mitigate these
risks.

70. Existing
Alternatives
An alternative to free delivery is DVP. A
typical DVP process involves the
simultaneous delivery of an asset to a
trading party in exchange for the receipt
of the respective payment from this
trading party.
Usually, DVP settlement is facilitated by
an independent third party such as a
clearinghouse. Although DVP settlement
manages to reduce settlement and
counterparty risk, it also has drawbacks:

71. Issues with
Alternatives
● First, there is still a counterparty
risk on the clearinghouse
involved, although the risk is
relatively low compared to the
case of free delivery.

72. Issues with
Alternatives
● Second, involving additional
intermediary results in
increased settlement
(transaction) costs. Only
members or clients of members
of clearinghouses can benefit
from the clearing service and
DVP settlement. -

73. Issues with
Alternatives
● Third, various assets are
cleared through various
clearinghouses that imply more
complex and less efficient
liquidity management. In such a
situation, a treasurer needs to
optimize cash flows among a
number of clearinghouses and
constantly monitor sufficient
funds.

74. Blockchain
Approach
Delivery Linked Payments
First, using a blockchain makes it
possible to decrease counterparty
risk as it enables a trustless
settlement process that is similar to
DVP settlement in a way that the
delivery of an asset is directly linked
to the instantaneous payment for
the asset.

75. Blockchain
Benefits
Savings in Settlement Costs
Besides, if a blockchain is used for
settlement, a third party
intermediary that helps to facilitate
settlement in the case of a
conventional, not DLT-based DVP, is
no longer necessary.
This implies peer-to-peer settlement
that leads to substantial cost savings
for the settlement.

76. Blockchain
Approach
Atomic swaps enable direct “barter”
operations when one tokenized asset is
directly exchanged for another tokenized
asset (delivery versus delivery).
Here, “directly exchanged” means that
the technology guarantees that both
transfers have to happen.
It is technologically not possible that only
one transfer is executed if the other
transfer is interrupted for whatever
reason.

78. Cross Chain Atomic Swaps for Trustless Settlements
● One example for a cross-chain atomic swap is the trilateral case when Party A needs to
deliver Asset 1 to Party B while Party B needs to deliver Asset 2 to Party C while Party C
needs to deliver Asset 3 to Party A.
● A real-life example is the three-party agreement among a crypto payment processing
company, crypto liquidity provider, and a merchant such as an online shop.
● Nowadays, the processing company accepts digital assets from an end customer, sends
them to the liquidity provider that converts digital assets to fiat currency, and sends it to
the merchant that, in turn, provides a service or delivers a good to the customer.

79. Blockchain Based Settlement Workflow in Detail
A common example of a two-asset swap, i.e., exchanging one asset to another, works as follows:
Party A sends an initial settlement instruction and Party B sends a matching settlement instruction.
In a blockchain world, a settlement instruction is a smart contract that includes relevant information
such as asset 1, asset 2, quantity 1, quantity 2, blockchain addresses of both parties etc.
Atomic swaps allow the execution of two smart contracts in a way that Party A receives an asset
from Party B only if Party B has received an asset from Party A (and vice versa).
In such a setup, the task that is typically conducted by clearinghouses is solely implemented by a
computer program without any possibility to interfere with the execution.
Consequently, a reconciliation conducted by a financial organization is not necessary anymore.

80. Blockchain for Anti Money Laundering

92. Thank You!
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