New World Economic Forum report examines nine financial use cases for blockchains

The World Economic Forum (WEF) published a comprehensive, 130-page report on Friday titled 'The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services'. 

The entire document speaks to the subject of blockchain’s usefulness and their effects on the world’s future financial infrastructure. The WEF cited that “Distributed ledger technology will form the foundation of next generation financial services infrastructure in conjunction with other existing and emerging technologies.”

- WEF

The WEF is a Swiss nonprofit foundation, based in Geneva that is widely recognized as the premier international institution for cooperation between the public and private sectors. Their mission is to "improve the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas."

In January, the forum was addressed by IMF director Christine Lagarde to describe “Virtual Currency Schemes” including Bitcoin for the first time. Since that event, the international public sector has produced paper after paper on blockchain technology.

“Using the existing World Economic Forum’s framework for “Disruptive Innovation in Financial Services”, the report identifies potential blockchain use cases from across the industry.”

- Jesse McWaters, Project Lead, Disruptive Innovation in Financial Services, World Economic Forum

The first of the use cases listed, Global Payments, is the one where the most change is likely to be made; especially in remittances. “The focus of this use case is on low value−high volume payments from an individual/business to an individual via banks or money transfer operators,” they said.

A ‘seamless’ Know Your Customer (KYC) process is the first big improvement to existing payments processes that they predict. Leveraging the digital user profiles of both the sender and the receiver stored on-blockchain establishes trust and authenticates both parties quickly, they point out.

Global Payments Future state benefits2

Global Payments Future-state benefits

Also, the payments section suggests that “Banks can leverage cryptocurrency on the DLT to facilitate global payments, eliminating supporting settlement platforms and foreign currency buffers in nostro accounts,” referring to accounts denominated in foreign currencies.

“The use of cryptocurrency will add to additional volatility and will demand additional hedging instruments, and Banks would be required to hold cryptocurrency as assets on their books.”

- WEF

The section concludes by pointing out that blockchains can enable banks to do real-time settlement, reduce their fraud, enable micropayments, and eliminate errors using smart contracts. 

Insurance is another use case and the WEF examined property and casualty (P&C) claims processing. P&C insurance is issued to protect against property losses such as homes or cars and/or against legal liability resulting from injury or damage to the property of others. 

“DLT has the potential to optimize the back-office operational costs of property and casualty insurers,” the report reads. Through a smart contract, claim submissions are simplified and automated, the need for brokers will be eliminated and processing time as well as fraud are reduced.

PC Claim Processing Future state benefits

P&C claims processing future-state benefits

Deposits and lending is an area where the WEF examined two specific use cases; syndicated loans and trade finance.

Syndicated loans are large-scale diversified financing funded by a group of investors. An independent report by Thomson Reuters states that global syndicated lending reached US$4.7 trillion during full year 2015. “DLT has the potential to optimize syndicated loan back-office operations,” the WEF report says, citing its record keeping functionality to provide transparency and automate the selection process.

Some companies are already exploring this usage. In February, Japan's largest financial holding companies, Mizuho Financial Group, announced a blockchain project to use Microsoft Azure Blockchain-as-a-Service for the company's syndicated loan business. In March, Ipreo and Symbiont also announced a project to overhaul the global syndicated loans market.

Syndicated Loans Future state benefits

Syndicated loans future-state benefits

The second area of use case within the Deposit and Lending category is Trade Finance, which is how importers and exporters mitigate their trade risk through the use of trusted 3rd parties and investments. “DLT has the potential to optimize the regulatory and operations costs of trade finance,” the report reads.

The report then suggests that blockchain tech can improve almost every step of trade finance process from real-time review to proof of ownership, providing transparency, eliminating the need for correspondent banks, and preventing double spending problems: An issue that is very prominent in trade finance.

Trade Finance Future state benefits

Trade Finance future-state benefits

This is another area where ongoing projects exist, such as the one between Bank of America and Merrill Lynch, who have been working on their own trade finance platform since March.

The Capital Raising use case outlined in the report is Contingent Convertible (CoCo) Bonds. Unlike regular convertible bonds, CoCo bonds have another threshold which triggers the conversion such as if the bank capital falls below 7.5%. CoCos are also similar to Catastrophe (Cat) bonds but usually have a longer duration and deal in much larger amounts.

Blockchain tech’s record keeping functionality can increase confidence and "lead to developing a “CoCo” bond rating system," the report continued, which would attract large institutional investors. Direct integration of calculations into DLT can also improve data input across banks which can reduce the time to convert CoCos into equity.

CoCo Future state benefits CoCo future-state benefits

The WEF concludes that “No significant applications of DLT within the “CoCo” bond life cycle have been reported or discussed within blockchain research released to date.” However, in June, insurance giant Allianz and Nephila announced that they have successfully piloted blockchain technology for CAT swaps, which is basically the little brother product to Coco bonds.

For investment management, the WEF referred to processes that take advantage of smart contracts, specifically automated compliance and proxy voting.

Blockchain-based ‘Automated compliance has “the potential to increase operational efficiencies and provide regulators with enhanced enforcement tools,” says the WEF. “This use case focuses on the key opportunities in the financial statement audit process to highlight an automated compliance solution.”

Automated Compliance Future state benefitsAutomated Compliance future-state benefits

Proxy voting is already the subject of a test by Nasdaq that started in October 2015. According to the WEF, blockchain technology “has the potential to transfer value irrefutably. This use case highlights the key opportunities to improve retail investor participation in proxy voting,” the report reads.

Proxy Voting Future state benefitsProxy Voting  future-state benefits

Also listed is the use case for Market Provisioning, within which the WEF outlined two use cases; asset rehypothecation and equity post-trade.

Asset rehypothecation is the practice by banks and brokers of using their clients’ collaterals for their own purposes. Clients may be compensated by a lower cost of borrowing or fee rebates.

The report states that “DLT increases processing efficiency, reducing manual processes and associated costs,” citing that there are many proof-of-concepts in the works by various organizations. Examples include the gold market, repurchase markets, and in asset transfers.

Asset Rehypothecation Future state benefitsAsset rehypothecation future-state benefits

In March, Depository Trust & Clearing Corporation (DTCC) and Blythe Masters' Digital Asset Holdings announced a similar plan, in her case using the hyperledger blockchain to manage the clearing and settlement of U.S. Treasury and other agency mortgage-backed repurchase agreement (repo) transactions.

Equity Post-Trade is one of the use cases studied in the WEF report. “DLT has the potential to improve the efficiency of asset transfer,” it stated. “This use case highlights the key opportunities to streamline clearing and settlement processes in cash equities.”

Equity Post Trade Future state benefitsEquity Post-Trade future-state benefits

The report also foresees a possible process where custodian banks sent trade details to the DLT and a smart contract validates the trade details and ensures transfer accuracies for all parties. Finally, confirmation is stored in the DLT real-time and settlement is reduced to real-time, rather than the current trade date plus one to two days.