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State Street Insiders Split Over Key Blockchain Use Case

There’s no shortage of breathless hype about blockchain.

What’s harder to find is a sober and nuanced discussion of the technology’s merits and drawbacks for a particular use case. For such a perspective, it can help to talk to different people at the same company who have been studying the matter and reached divergent conclusions.

It’s not a secret that State Street, the giant U.S. custody bank, is looking to streamline the complex business of securities lending using blockchain. A decades-old industry, securities finance today is a continual dance of manual reconciliation, involving a string of market participants and lending parameters, all of which has become even more complicated since the 2008 financial crash.

In theory, distributed ledger technology (DLT), with its shared view of the truth, removes the need for multiple processes and lots of intermediary players.    

But it was never going to be a simple transition – and that’s one thing at least that executives from different parts of the bank can agree on.  

In terms of how peer-to-peer securities lending could be deployed, people from the technology architecture and product teams are bullish about what they consider an inevitable change.

From the product development side, Nick Delikaris, head of global trading and algorithmic strategies, said that “the whole industry” is looking at a peer-to-peer version of securities lending, and blockchain based solutions are definitely on the cards.  

He also acknowledged the scale of the challenge, telling CoinDesk,

“It’s not an on-off button, like you can wake tomorrow and be doing everything peer-to-peer.”

Delikaris said he expects to see a mix of products and services. “Different counterparties will have different flavors, and to start with some of this tech may actually make things harder,” he said.

“I think that’s what we are going through right this second. But at the end of the day, we will have a better industry set up.”

Meanwhile, the pragmatists in the front office, who perhaps take more of a legacy marketplace position, remain wary of such a transformation.

Doug Brown, head of alternative financing solutions at State Street, said he sees potential value in using blockchain to enable P2P lending of securities, but cautioned that most of the market isn’t ready for it.

“If you look at that marketplace and the people who borrow securities, there are very few institutions that have the technology or the operational infrastructure in place to do that themselves today,” he said.

Brown added that “there is a real question about whether it’s worth their time to build that infrastructure, the cost to do it, the staffing to do it – or whether the model they are using today is efficient enough.”

Pros and cons

Taking a step back, “peer-to-peer” lending in this context means a client who wants to lend securities (typically a large mutual fund or pension plan) directly faces the borrower (normally a hedge fund), as opposed to having a broker-dealer in the middle managing the whole operation.

State Street has a panoramic view of the securities lending landscape; the bank has two components under its roof that most people don’t have, explained Delikaris.

“We have an arm called enhanced custody, which is basically akin to a prime broker,” i.e. a provider of specialized services to hedge funds, he said.

“We also have the biggest agent lender in the world,” he added, referring to State Street’s business of lending securities to institutions on behalf of its clients.

This means that testing out a blockchain idea – which State Street began doing in 2016 with a proof of concept (PoC) for digital tokens to post collateral – has evolved to a point where the bank is mapping out the entire securities financing ecosystem for potential transformation.

And this, in turn, has led to markedly different views inside the bank on the pros and cons.

From his front-office perspective, Brown conceded a P2P model might make it a little cheaper to borrow securities, while State Street’s traditional lending clients might make a bit more on the transaction.

But he also reeled off a list of challenges, and in so doing told a familiar story about the real benefits intermediaries and brokers bring to a market.

Prime brokers, for example, manage all aspects of liquidity and are charged with finding substitute collateral when required to do so. In addition, going P2P without anyone in between means counterparties would need to do credit due diligence on each other.

Plus there would no longer be borrower default indemnification, which is pretty much expected across the industry, noted Brown. In other words, if the borrower in a P2P transaction fails to return the borrowed assets, the lender is out of luck, whereas in today’s market an intermediary like State Street will cover the loss.   

“A P2P model, where everybody faces each other and negotiates contracts, where the protection is gone and both parties now need credit teams, would likely not be a broad industry solution,” said Brown.

“That model might work for a small subset of institutions. But if you only had a small number of institutions participating I think it might be challenging to convince people there was enough liquidity to really move that market in a large way,” he said.

Delikaris took on board the very real concerns of his colleague, agreeing “this can’t simply be done in a lab” but involves talking to clients to find out “what keeps them up at night.”

However, he defended a P2P model which he said could be offered to lenders with an appetite for more risk, who might not care about the indemnity – adding that things could be priced differently because of that.

“My own personal feeling is that if some things get transformed because of this technology I think what you’ll see are other products and services that will come and piggyback off that to help where those issues arise,” he said.

Evolution, not revolution

Meanwhile, other banks are forging ahead with securities lending using blockchain, but like State Street, they expect a long transition period.

Back in March this year, ING and Credit Suisse completed a live securities lending transaction using a collateral-lending blockchain application co-developed by HQLAx and R3.

Herve Francois, blockchain initiative lead at ING, said that for now his bank is “leveraging the existing infrastructure of tri-party agents and custodians in order to go to production faster, as this constitutes a legal framework by itself.”

Francois acknowledged that market participants might be left with missing services if they moved to a P2P model, and in the event may need to outsource to the current intermediaries.

“That could be a way for those actors to still play a role in the short- to medium-term,” he said. “It’s a step in the blockchain evolution which in the long run should be able to disintermediate them.”

Guido Stroemer, CEO of HQLAx, which is focused on tokenizing baskets of securities to help bank treasurers manage and transfer liquidity better, agreed the legacy marketplace requires many operational stages to be carried out in a well-established manner

Going forward, Stroemer said some assets lend themselves to DLT better than others, with securities first, then cash, and maybe gold.

“Successful use cases will only thrive in the real world when they have relatively low barriers to entry,” said Stroemer, concluding:

“Anything that requires a market user to go through a ‘big bang’ change has no chance of creating market wide adoption.”

State Street image via Shutterstock

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Banks Ink Blockchain Trade Finance Transaction with Food Giant Cargill

Banking and financial services giants HSBC and ING have completed a trade finance transaction for agri-food trading company Cargill using a single blockchain system.

Claimed as a “world first,” Reuters reports, the live commercial trade finance transaction saw an export of a shipment of soybeans from Argentina to Malaysia, during which Cargill Geneva sold the goods on behalf of its Argentine arm team and Cargill Singapore received them on behalf of the Malaysian arm of the firm.

HSBC said that while other trade finance deals have been carried out using blockchain together with other technologies, the Cargill trade was the first to use a single blockchain application, the report indicates.

According to news source GTR, the transaction was carried out using a letter of credit tool within R3’s distributed ledger technology (DLT) platform Corda.

The letter of credit involved was issued by HSBC, while ING served as the advising bank, and the process was slashed to 24 hours from the paper-based standard of 5-10 days. While the letter of credit was exchanged over the blockchain, while bill of lading and other transaction elements were not, the report adds.

Following the successful transaction, HSBC is focusing on more live tests and ultimately aims to promote the system for industry-wide adoption, Vivek Ramachandran, global head of innovation at HSBC Commercial Banking, told GTR.

“We’ve still got a few more steps to do before we get to widespread adoption,” he was quoted as saying.

The news comes after HSBC revealed its plans in February to launch several pilot programs based on existing proof-of-concept (PoC) projects.

“Going from that PoC in 2016, we’re at the tipping point of getting our customers involved in live transactions in the coming weeks and months. The technology has come a long way, we’re much more comfortable with its security and scalability,” the bank’s senior innovation manager Joshua Kroeker, said at the time.

Shipping containers image via Shutterstock

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Banking Giants Send $30 Million in Securities over DLT Platform

Two major banks say they have successful sent securities worth €25 million ($30 million) over a blockchain-powered platform.

In an announcement today, Credit Suisse said it completed the live securities lending transaction with Dutch bank ING, adopting a collateral-lending blockchain application co-developed by a financial resource management firm HQLAX and enterprise blockchain consortium R3.

Credit Suisse said the application, built on R3’s Corda distributed ledger platform, enables the two banking groups to swap legal ownership of Dutch and German government securities in a more efficient manner than with traditional systems.

According to a previous release, HQLAX launched the application in April 2017, in a joint effort with R3 and five of its member banks, including Credit Suisse and ING.

Romain Dumas, head of Rates Repo and Collateral Optimization at Credit Suisse Securities said of the trial:

“The success of this first live transaction speaks to the potential for blockchain technology to help improve collateral fluidity by creating a more efficient, transparent, and cost-effective marketplace for liquidity transfers.”

While it’s currently at the testing phase, Herve Francois, a blockchain initiative lead at ING, said in an interview with Reuters that the firms are expecting to see the application go live by the end of this year.

Credit Suisse image via Shutterstock

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Dutch Bank ING Says Crypto Exchange Bitfinex Is An Account Holder

ING Groep NV confirmed Tuesday that cryptocurrency exchange Bitfinex has an account with the Dutch bank.

According to Bloomberg News and Reuters, a spokesperson for the financial services company acknowledged Bitfinex’s account but declined to share any other information, citing confidentiality. The reports made no mention of Tether, the affiliated company behind the USDT token at the center of much of the controversy surrounding Bitfinex.

The ING spokesperson did, however, state that the bank performed “more extensive due diligence” on transactions conducted by cryptocurrency companies, though this did not extend to companies which occasionally transact with cryptocurrencies.

According to Bloomberg, he said in an email:

“With companies that are active in the crypto market we are very reserved … not with companies that are in traditional markets and receive or do payments with cryptocurrencies, but with parties that are in the chain of cryptocurrencies.”

This marks the first major financial firm to confirm a working relationship with Bitfinex since Wells Fargo suspended transactions early last year. Since then, Bitfinex has apparently operated without a major banking partner until it opened its account with ING.

It remains unclear when this account was opened, though a Dutch-language investigative journalist website called “Follow the Money” implied there was a relationship between the two entities in a report from Feb. 14.

Bloomberg reported that Bitfinex may have had an account with the Polish Bank Spoldzielczy late last year, but this relationship was not confirmed.

A spokesperson for ING did not immediately respond to a request for comment.

ING image via Mauvries / Shutterstock

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Commodity Merchant Louis Dreyfus Trials Blockchain for Soybean Trade

Louis Dreyfus, a major commodities trading company, has announced that it has piloted a blockchain-based transaction system developed by a group of financial institutions including ING.

In addition to Louis Dreyfus, one of the world’s largest commodities traders, the test involved Shandong Bohi Industry Co., Ltd (Bohi) and financial institutions ING, Societe Generale and ABN Amro. The Easy Trade Connect (ETC) platform, as previously reported by CoinDesk, grew out of efforts at ING and has been subject to testing by firms like Mercuria.

Yet instead of oil, the latest test focused on agricultural products such as soybeans, of which Bohi is a significant trader. According to the companies that took part, the test involved a shipment of soybeans from the U.S. to China, with all of the relevant documentation (including the sales contract and the letter of credit) existing within the platform.

Shipping firms Russell Marine Group and Blue Water Shipping also took part, according to today’s announcement.

“Distributed ledger technologies have been evolving rapidly, bringing more efficiency and security to our transactions, and immense expected benefits for our customers and everyone along the supply chain as a result,” Gonzalo Ramírez Martiarena, Louis Dreyfus’ CEO, said in a statement.

In remarks, Martiarena suggested that the company would play a role in future developments around the project, including on the standardization front.

“The next step is to harness the potential for further development through the adoption of common standards, and welcome a truly new era of digital trade flow management on a global level,” he was quoted as saying.

Soybean farm image via Shutterstock

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Bitcoin Likely to Become 'Niche' Product, Says ING's Top Economist

The chief economist for Dutch banking giant ING believes bitcoin will likely wind up as a niche financial product, according to a new report.

In a report from Dec. 18, ING’s principal economist Teunis Brosens argued that actual use of the cryptocurrency will be limited to “tech nerds, people obsessed about their privacy, [and] people afraid of (hyper) inflation of traditional currencies,” among others.

“In the long term, bitcoin has little to offer to a wider audience, and will likely return to being a niche product for a select group of enthusiasts,” he wrote.

Bronsens’ opinion is perhaps at odds with other pronouncements about bitcoin in recent days, which has seen its price trade in excess of $18,000 amid the launch of derivatives contracts on regulated exchanges in the U.S.

Indeed, he argued that some of bitcoin’s characteristics that are often cited as strengths – the lack of a central intermediary, for example – would keep it out of arm’s reach from a more mainstream audience. He also posited that the price volatility around bitcoin makes it a poor method of payment for most consumers.

“For bitcoin to function as a means of payment, it needs to be stable. A world in which your money buys you a large latte today, but only a small espresso tomorrow, is hardly convenient,” he wrote.

While the economist’s commentary mostly focused on bitcoin, he also extended his criticism to cryptocurrencies in general, arguing that one of their core features  – being open source – is also ill-suited for mass-market use.

“While cryptocurrencies do compete with each other for users, and can create value for their users by providing an extensive network of other users, they are not able to create unique value for their users by being a distinctive platform with special features not found elsewhere,” Brosens wrote in the report.

While casting a critical eye on bitcoin, Bronsens struck a largely positive note about blockchain, writing:

“Blockchain is an impressive technology that may bring progress to a variety of fields, ranging from finance to health care, and from notary to voting. Long live the blockchain.”

Image Credit: Bjoern Wylezich /

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Shell, BP Among Energy Giants to Back Blockchain Trading Platform

Several major energy firms are partnering on a new blockchain-based trading platform.

BP, Shell and Statoil are backing the platform, which represents the latest application of the tech to the energy space. The consortium of firms built around the platform also includes ING, ABN Amro and Societe Generale, as well as trading firms, Gunvor, Koch Supply & Trading, and Mercuria.

The idea is that the blockchain-powered platform for energy trading will eventually be open to all market participants. Those involved in the effort say it will controlled by an independent entity, with a plan to be fully operational before the end of 2018.

The energy industry has become more complex as new entities have entered the industry, ING representative Carolien van der Giessen told CoinDesk in an email, explaining:

“Earlier this year another joint initiative among some members of the consortium (ING, Mercuria, and Societe Generale) presented compelling results with what we understand to be the first blockchain prototype test in the sector. The experiment involved an oil cargo shipment containing African crude oil which was on its way to China. The results of the experiment demonstrated that a blockchain based platform can greatly improve the efficiency of certain processes.”

With several of the world’s largest energy suppliers taking part, the hope is it will establish a platform that will attract market participants of all sizes to one platform.

There have been several experiments in using a blockchain to track energy trading, such as one by BP and Eni in gas trading, which Reuters reported this summer. Enel and E.on have also conducted trials using Ponton’s blockchain platform, and o of Australia’s largest electricity providers is currently testing a platform called Power Ledger.

Oil pump image via Shutterstock.

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Banks Back Syndicated Loan Market Built on Corda Distributed Ledger

A group of banks and financial technology providers have unveiled a new syndicated loan marketplace built on top of the Corda distributed ledger platform.

The list of banks involved includes BNP Paribas, HSBC, ING, State Street and BNY Mellon, with two other unnamed institutions also taking part in the initiative. Today’s unveiling from Finastra, which was formed by the merger of software firms D+H and Misys earlier this year, follows a previous pilot phase.

The project aims to create a new kind of syndicated loan market, where multiple lenders pool resources in order to fund single debtors. The idea is to use R3’s Corda platform (which saw its 1.0 version released on Tuesday) as a hub for administering loans and sharing key information on things like fees and interest rates in real-time during the lending process.

Philippe Boulas, head of financing solutions for BNP Paribas CIB, said in a statement:

“We believe that the distributed ledger is appropriate in syndicated lending to deliver one single position that is immediately updated when a contract is being handled. The Finastra-led utility, Fusion LenderComm, would allow us to share position data more efficiently and pave the way for a more fluid industrialization.”

The platform, dubbed Fusion LenderComm, already has its own official website, and while its launch date wasn’t disclosed in today’s announcement, the companies behind it are seeking additional backers – particularly lenders who would bring liquidity to the marketplace.

Fusion LenderComm’s unveiling is a notable one, given that the past year has seen a number of banks test applications for syndicated loan markets.

A proof-of-concept platform for issuing syndicated loans, spearheaded this past spring by Credit Suisse, saw participation from a variety of firms, including State Street. Credit Suisse said in August that it is planning a commercial-scale release for sometime next year.

Money image via Shutterstock

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Ideation to Realization: How Dutch Banks Are Harnessing Blockchain

Sanja Petkovic and Arnab Sinha are management consultants at Accenture, the Netherlands, where they specialize in blockchain within banking and digital payments, respectively.

In this opinion piece, Petkovic and Sinha discuss how financial firms in the European country are approaching blockchain, and how trends in the technology are shaping their work and progress.

Dutch organizations and banks have been at the forefront of European blockchain initiatives since 2013–14.

Driven by the dire need to improve return on equity (RoE), these initiatives experimented on the technology’s potential to enhance efficiency, trust, transparency, reach and innovation in the banking model.

It is therefore quite telling that, bolstered by the learning from the past three years, the summer of 2017 is seeing all the leading Dutch banks making significant headways in realizing their blockchain agendas.

Early in July, 2017 two leading Dutch banks – ABN AMRO and Rabobank joined SWIFT’s blockchain proof-of-concept (PoC) initiative for the Global Payments Innovation (GPI) service. At the same time, ING successfully completed the testing of blockchain-powered trade confirmation platform in partnership with Calypso and the R3 consortium.

While the Dutch have traditionally been known for their innovation (Netherlands ranks third in Global Innovation Index), this success story in blockchain is often attribute to a focused coherence between policy, collaboration and supervision, propelling the Dutch banks to the forefront of multiple global initiatives. This article aims to highlight some of the key blockchain-related themes observed in the Dutch banking landscape over the recent years, the outlook for 2017–18 and reflects on few key learnings from their success.

Dutch banks have made significant strides in blockchain adoption and are exploring opportunities across business lines

Research suggests that most large Dutch banks have intensified their blockchain initiatives in 2016–17 and are evolving from the paper-based exploratory phase by mobilizing proofs-of-concept across different business lines.

ING worked on 27 proofs-of-concept in six business areas: payments, trade finance and working capital solutions, financial markets, bank treasury, lending and compliance and identity. Tangible key performance indicators (KPIs) were used to validate the results and suitability of these proofs-of-concept. For instance, the PoC on trade finance showed considerable gains in an otherwise paper-based process, resulting into potential cost savings of 10–15% and revenue uptake of 15%.

On a similar vein, ABN AMRO has launched a pilot to explore how the blockchain application “Torch” can allow parties involved in a real-estate transaction to seamlessly record and exchange information. The bank also explored how blockchain might solve issues in financial auditing and compliance, in Financial Recovery and Restructuring (FR&R).

Rabobank focused its initiatives on cross-border payments and micropayments, while SNS Bank moved out of traditional banking areas to test out the use of blockchain in addressing inefficiencies in healthcare system.

Collaboration is driving momentum

Close collaboration continues to be an absolute necessity for exploring the opportunities using blockchain. The search for the right blockchain technology and appropriate use cases led the Dutch banks to partner with other banks and fintechs, or in joining regional and global consortiums.

In 2016, ING worked with partners inside and outside the bank, including consortiums such as R3, the Dutch central bank, the Dutch Payments Association and the European Banking Forum. The bank also partnered with Société Générale and trading house Mercuria to test a live oil trade using blockchain.

ABN AMRO collaborated with Dutch university (TU Delft) and Port of Rotterdam and 14 other parties to explore blockchain opportunities in logistics. This $2.2 million project focuses on the delivery of three concrete use cases: supply chain financing, inventory financing and circular economy. Meanwhile Rabobank worked with accelerator programs like Startupbootcamp, Footbytes, Rockstart and Nexus labs, and with technology providers like D+H.

These developments were followed by the coordinated and open network approach envisioned in the Dutch market through the formation of the National Blockchain Coalition (in March, 2017), representing  possibly one of the leading government-driven efforts to develop and create the “conditions for reliable and socially acceptable blockchain applications.”

Preferred platforms emerge

Also emerging have been specific platforms that are now favored by these institutions.

Over the last 18 months, many proofs-of-concept were built leveraging the ethereum or Hyperledger technologies. These are among the most mature technologies for the permissioned blockchain where external actors are allowed, and as such have been widely accepted by the Dutch banks.

Also, smart contracts, programmable contracts defined with computer code which can facilitate, verify, execute and enforce the negotiation or performance of contract terms automatically, are making an impact as leading blockchain use cases. They are built on top of the blockchain solution itself.

ING, ABN AMRO and Rabobank are using smart contract solutions to reap the benefits of “less paperwork” and thereby reducing transaction processing costs.

Outlook for 2017-2018

While 2016-17 focused on exploration and proofs-of-concept across a wide range of business lines, it is likely that in 2017–18, the Dutch banks will concentrate their efforts on selected operating areas and use cases and narrow down on solutions ripe for commercialization.

The coming year will see notable advances in blockchain use by the Dutch banks – evolving from the concept phase to full blow solutions. All leading Dutch banks will have blockchain prototypes ready and will also have these solutions tested for performance and scalability. It is likely that some of these solutions will be launched as pilots (typically for payments, supply chain and trade finance offerings) and the initial concrete steps for commercialization will be taken.

This evolution is in line with Accenture predicted maturity journey for blockchain, which foresees regulatory certainty steering early adoption in 2017, followed by a growth phase between 2018–24 and the technology becoming mainstream in 2025.

In essence, while we are still few years away from broad market adoption, 2017–18 is likely to be the year when blockchain in banking can move from promise to real solutions.

Takeaways for blockchain initiatives

An assessment of the ongoing initiatives, proof-of-concepts and the resulting success stories provide a clear indication that blockchain readiness among the Dutch banks is considerably higher compared to many European and global markets.

This is often attributed to the vibrant startup scene in the Netherlands, where technology output is driving the economy.

At the same time, there are larger trends at play among technologists, and these could provide headwinds. These include:

  1. Importance of clearly defined governance: Arranging a governance structure while keeping in mind the cooperation on different standards from different stakeholders is key to mobilize a blockchain program.
  2. Understanding the “known-unknowns” on the legal aspects of blockchain – especially when we look at the area of data privacy some challenges are expected if traditional databases are to become obsolete in an otherwise blockchain powered solution.
  3. The immutability and distribution of data: This does not typically go hand-in hand with data retention laws like the “right to be forgotten”. Human errors or mischiefs very much restrict use cases currently.
  4. Performance, data privacy, scalability and maintainability:  Data privacy is still an area that Dutch banks are struggling with as trust is seen as highly important. Before rolling out into real solutions, banks must ensure that technology will not compromise client data.
  5. Early alignment with risk and compliance partners in a changing risk environment: Risk management functions within banks are traditionally not well equipped to work with multiple stakeholders. Success of blockchain initiatives are often dependent on how evolving risk parameters are addressed.
  6. There are too many different blockchain technologies currently available. To stimulate collaboration, stakeholders should have a clear vision on a single technology that will drive the implementation.

Parting thoughts

While the idea of blockchain and its challenges are still being explored, the potential impact of the technology on bank bottom lines are increasingly becoming evident.

An Accenture-McLagan research estimates that blockchain based database systems can reduce 70 percent of central finance reporting cost, lower 30–50 percent of compliance cost and can further provide 50 percent potential cost savings on business operations.

Such compelling numbers will provide sufficient justifications as global banks prioritize their blockchain agenda for 2017–18.

Blockchain has often been termed as the “biggest thing since the internet” and while its adoption in traditional environments (after the bitcoin initiative) has been gradual and incremental, there is still every possible sign that the technology can be truly transformational and banks can harness its potential to disrupt the “status-quo.”

Dutch flag image via Shutterstock

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