South Africa’s financial services sector has made a promising foray into blockchain technology adoption given that all major commercial banks recognize the disruptive potential of the technology and have initiated pilot projects for a variety of use-cases. At the center of the industry, the South African Reserve Bank recently released its Project Khokha report – detailing positive results from its trial aimed at settling high volumes of payments via the blockchain.
Blockchain technology is rapidly maturing in the South African banking and finance industries.
Over the past couple of years, massive investment has surged into this field. We’re at an inflection point, where we’ve moved past the initial hype, and banks are now starting to explore some practical ways to apply the technology to real-world needs.
Blockchain technology holds the potential for a truly game-changing impact in many key areas of finance. However, even more importantly, blockchain’s adoption in the banking sector could be the catalyst for broader use-cases of the technology in other industries as well. Banks are absolutely pivotal to achieving this exciting cross-industry convergence.
Exciting promises of blockchain technology
In the realm of trade finance, for instance, blockchain technology could fundamentally change the way that banks position themselves in these ecosystems – by providing a secure platform for all participants (rather than simply being a trusted intermediary and clearinghouse that connects buyers and sellers). Contracts, assets, and finances can be ‘tokenized’ so that every participant uses the blockchain in their roles within the value chain – sellers, dispatchers, warehousing companies, shipping, and logistics firms, receiving parties, and buyers.
Everything from dispatching orders to receipts, to the bill of landing, can be woven into a number of blockchain smart contracts. The obligations of all parties will be agreed upfront, and once all of these steps have been fulfilled, payment will be automatically executed.
Another great example is found in the area of residential property loans. This is a notoriously lengthy process that can be dramatically simplified and accelerated with the smart application of blockchain technology.
Currently, buying and selling a home involves a number of stakeholders – the buyer, seller, property agents, the Deeds Office, credit bureaus, valuators, municipalities, body corporates, lawyers, and more. With blockchain technology, we will be able to create an immutable record of the property, allowing for ‘trustless’ engagements between the various parties. It would also optimize processes and reduce the need for paper-based documents. All of the verifications and legal considerations will be added to this master record, which cannot be tampered with by any individual party.
Despite the promise, the nervousness and misunderstanding needs to be overcome, if this promise is to become a reality, which can only be achieved through greater information sharing and industry collaboration.
What else needs to happen?
I believe there are four key areas that the financial industry must address, in order for the positive blockchain momentum to continue:
Standards/interoperability: while different banks are running various POCs, the industry doesn’t have collective consensus on many key standards, protocols and processes (for example, some banks are conducting pilots on Hyperledger, while others use Ethereum).
Scaling out: while some isolated solutions are coming to the fore, as an industry we haven’t yet solved the issue of how to reliably scale out transactional networks on the blockchain, to handle the volumes and pressure of millions of transactions.
Governance, regulation and compliance: regulators in the financial services and payments industries are grappling with how to create a regulatory framework that addresses blockchain networks, and balances the need for innovation, with the need for security and customer protection.
Back-end integration into legacy architecture: while the blockchain may well be a more efficient way to connect parties and facilitate transactions, the network must ultimately link up with the back-end general ledgers and other systems-of-record that banks already use.
Solving these four challenges will require strong guidance from the South African Reserve Bank and great collaboration within the industry. The next steps will be to move from insular trials within each bank, to industry-wide projects that solve bigger challenges: the likes of high transaction fees, slow settlement timeframes, securely onboarding new clients into the mainstream economy, and increasing liquidity in consumer and corporate markets.
There are definitely some attractive use-cases which banks should look to address first such as cross-border transfers between the neighbouring counties of South Africa and Namibia (where transactions are technically forex, but both countries use Rands). This would be simpler than true multi-currency forex exchanges.
Blockchain certainly has a very bright future in financial services, and the way it’s used in this industry could well set the tone for the adoption of distributed ledger technology in other sectors.
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