Understanding blockchain use cases

This year is the year when blockchain (distributed ledger) is very popular. It was included in the Oxford Dictionary and was featured on the cover of The Economist and Bloomberg Markets. It can be said that 2015 is the year of blockchain.

Financial institutions have sensed an opportunity. According to CNN, in the past two months alone, 13 financial services companies have invested in blockchain startups, and the total investment in the Bitcoin industry has exceeded $1 billion so far.

Philip Gomm, head of banking and payments at Capgemini Consulting Australia, told Australian Banking & Finance magazine:

“For banks, blockchain offers the opportunity to revolutionize existing banking systems and improve the efficiency of fund settlement, while complying with strict anti-money laundering (AML) and know your customer (KYC) regulatory rules.”

One of Ripple’s investors, the Spanish National Bank, believes:

“In total, the industry could save $20 billion a year using distributed financial technology.”

With the industry focusing on the potential of blockchain development, it seems reasonable to assume that all asset transactions and deliveries will be built on a distributed database. This is well evidenced by the fact that this technology has received investment from a considerable number of financial services companies, including insurance companies, investment banks, and exchanges.

Although financial institutions hope to catch up with the trend of using blockchain technology and strive to unleash innovation, not every application is satisfactory because, in general, a distributed system is not as efficient as a centralized system.

That’s why, generally speaking, blockchain has the best chance of success in the clearing and settlement space, where centralized counterparties don’t yet exist.

Cross-border payments are a good example (it is the support of the world economy and the most basic transaction). To a certain extent, due to political and sovereignty considerations between countries, the world has not formed a centralized institution to handle cross-border payment settlements. If there is a centralized institution in this case, the actual processing mechanism will not be so complicated. If all countries in the world can reach a consensus, even Paypal can easily handle it.

Of course, under today's conditions, geopolitical realities will not allow such a global company to emerge. It is conceivable that Russia will not allow the United States to interfere with systemic payment infrastructure. On the other hand, killer APP applications with blockchain neutrality can provide more efficient cross-border payments.

Of course, the operating rules of other assets are different from those of payments. For example, in the case of securities, in the United States, market participants have agreed in advance to an operating organization to centrally handle settlement matters, which is the Depository Trust & Clearing Corporation (DTCC). DTCC's branches handle the settlement of assets such as treasury bonds, equities, corporate bonds, municipal bonds, and mortgage-backed securities. (Original note: Former DTCC CEO Don Donahue is an advisor to Ripple)

Since the operating institutions that handle clearing and settlement business already exist, changing the past transaction process will bring great costs to the industry and regulators. If so, is it realistic to switch to a blockchain system? Similar to our original intention of designing Ripple to support faster payments, a pain point that is often mentioned is that securities in the United States take 3 days to settle, that is, T+3. Blockchain can change the ownership of securities in real time.

So can we switch to blockchain to achieve real-time equity settlement?

However, the situation is a bit bleak. If we assume that the centralized counterparty is the main obstacle, it is a bit exaggerated. If we do not have a deep understanding of the internal system of DTCC, we cannot arbitrarily assume that the centralized database system cannot be upgraded to a real-time system. In theory, it is easier to upgrade a centralized system than a distributed system.

For example, in the payment sector, more than a dozen countries have upgraded their national payment systems to real-time systems and retained central bank operations as central clearing institutions. In these cases, a centralized architecture has not become an obstacle to T+0.

In 2012, commissioned by DTCC, Boston Consulting Group published an important article: “A Cost-Benefit Analysis of Shortening the Settlement Process”, which stated:

Switching to a T+2 environment (for equity) will require an additional investment of $550 million, and upgrading systems and processes across markets to support T+1 will require approximately $18 billion. Although the total amount is large, it is not large per company. For example, on average, large institutional agents and dealers need to invest $4.5 million to upgrade to T+2 and $20 million to upgrade to T+1, which is mainly used for system/platform upgrades and end-to-end testing and analysis. Similarly, for the same level of upgrades, large retail agents and dealers need to invest $4 million to upgrade to T+2 and $15 million to upgrade to T+1 on average.

All of this seems feasible, but what about upgrading from T+1 to real-time?

T+0 is not considered. It is not possible in the current industry because it requires exception handling and cross-industry support is weak. (Said in 2012)

What is happening now is that when it comes to getting information from traders’ desktops, matching trades and sending them to settlement databases, there is a roadblock in the way - real-time centralized accounting is quite difficult. If the ultimate goal of the design is real-time, it is still not certain that the ultimate solution must be blockchain. And blockchain is not necessarily the lowest cost solution to achieve the goal.

Original article: https://ripple.com/insights/understanding-blockchain-use-cases/
Author: Alec Liu
Translator: gsj
Reward address: 1DHs7hZMdx6tgUHdqXiub3XrovrF6Pte7y
Editor: printemps
Source (translation): Babbitt Information