Standard Kepler

Massive Compliance Cost Savings via Permissioned Blockchains

12/24 – 12/30

Massive Compliance Cost Savings via Permissioned Blockchains
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WEEKLY RECAP

  • Total market cap. reached $129bn (a 3.7% decrease), and 7 day trading volume slumped 21.1% for top 100 crypto


WEEK AHEAD

  • 3 Jan: ADA to release roadmap update


THOUGHTS OF THE WEEK

While we consider the value generated by public chains limited, we also view 2018 as the year of permissioned blockchain. Permissioned blockchains present particularly attractive use cases in reducing compliance costs for banking transactions (txs).

Data reporting and validation costs are a core burden of banking compliance, and omissions in reporting can lead to significant penalties. For example, each tx under the MiFID II reporting standard requires the provision of 65 individual fields of data. Case in point, Merrill Lynch was fined GBP 34.5mn by the Financial Conduct Authority (FCA) for the incorrect reporting of 68.5mn derivative txs in 2017.

Financial institutions (FIs) have been pursuing block-chain as tools for reducing compliance costs during the issuance of financial instruments. The most notable example is the first blockchain bond “BONDI” issued by the World Bank and the Commonwealth Bank of Australia (CBA). The use of blockchain automates the auction and book building process of BONDI, which enables massive savings in validating investor information. Blockchain also facilitates real time updates of investor bond holdings, thus enhanc-ing data transparency and reducing data reporting costs. The streamlined bond issuance process facilitates faster settlement, from T+2 days to T+2 min.

FIs accelerated their exploration of blockchain in 2018, especially in data privacy and storage. Bank of America is one pioneer, filing blockchain patents covering external data validation and the storing of client crypto holdings in enterprise accounts. Patent applications is a noteworthy battlefield between FIs and tech giants (see Chart of the Week), and indicate significant interest in the technology.

Apart from in-house R&D, leading FIs collaborate with permissioned blockchain providers to further simplify the  compliance process. 39 firms including BNP Paribas had completed global trials of KYC on R3’s Corda as of June 2018. The Corda KYC platform eliminates the need for each institution to attest and update KYC records, thereby reducing data validation costs. Permissioned blockchains further preserve data privacy for banks as only authorised participants can request access to stored customer information.

Blockchain technology can bring about significant cost savings when applied properly, most evidently so as permissioned chains. Expect wider adoption of blockchains in financial markets, yet this is likely driven by FIs and permissioned blockchain providers.


CHART OF THE WEEK

Standard Kepler Research - Massive Compliance Cost Savings via Permissioned Blockchains - No Chart title

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