New Blockchain Solutions Emerge in Banking, Trade Finance and Payment Processing
Blockchain continues to disrupt the financial services industry by enabling new products that promise to transform banking and payments. Binance, one of the world’s largest cryptocurrency exchanges, has announced plans to invest in a venture that seeks to become the world’s first “decentralized bank,” an emerging concept that would involve an ownership structure based on blockchain-based tokenized equity products. The bank will seek to establish itself in Malta, a jurisdiction that has become increasingly friendly to the blockchain industry.
The Hong Kong Monetary Authority recently announced plans to launch a blockchain-based trade finance solution in partnership with a Chinese fintech firm and a group of 21 banks, with the goal of improving access to banking services for new businesses. In Singapore, a technology firm issued a press release this week launching a permissioned blockchain network “built for the trade communities to boost overall efficiency, security and transparency for global trade” by enhancing security and efficiency in the management of trade-related documents, to include applications for trade finance.
In the U.S., a major technology firm has announced a partnership with a blockchain startup, Stronghold, and a state-chartered trust company, to build a new cryptocurrency that would be backed by U.S. dollars held in bank accounts insured by an institutional provider of deposit insurance. The new cryptocurrency would be hosted on the Stellar blockchain protocol and would be the latest development in the competition to create a so-called “stablecoin” that is able to avoid the price volatility issues experienced by most cryptocurrencies.
In the payments space, two major U.S. credit card companies recently had patent applications published that seek patent protection for blockchain-based solutions to improve payment processing systems. Also this week, BitPay, one of the world’s largest providers of merchant cryptocurrency payment processing services, became the eighth company to receive a virtual currency license from the New York Department of Financial Services. This will allow New York-based businesses to use BitPay to receive payments in bitcoin.
More Blockchain Enterprise Solutions Announced
This week the U.S. Department of Energy announced that it will award a grant of nearly $1 million to a blockchain startup in connection with efforts to advance the development of a decentralized energy grid. The startup’s project employs blockchain in the development of a decentralized solar power system that can share energy data from multiple sources (e.g., homes, buildings and electric grids) in a way that promotes energy efficiency and reduces the threat of cyberattacks.
In the aerospace and defense industry, there has been continued interest in blockchain-based solutions for reducing maintenance costs, minimizing errors in tracking parts and preventing falsified data. Earlier this week, a global consulting firm revealed a project that leverages blockchain to track, trace and authenticate aircraft parts and materials for suppliers, manufacturers and operators. Also this week, a multinational aerospace and defense company announced plans to use blockchain technology in the development of a traffic management solution for unmanned aircraft systems.
In the insurance industry, a new blockchain proof-of-concept (PoC) was announced that aims to reduce the costs in reinsurance contracts by eliminating inefficiencies related to excessive paperwork, lack of standardization and extensive signoffs. The PoC leverages a smart contract and creates a single and immutable version of the reinsurance contract that is accessible to all the key parties: insurer, broker and reinsurer. All negotiations occur through real-time messaging on the blockchain platform. Upon execution, the smart contract automatically calculates the premiums due and triggers payments upon the occurrence of a valid event. The PoC reportedly could become a commercially viable product as early as January 2019. Another notable blockchain solution in the news this week comes from a Boston-based startup that is building a blockchain platform to synthesize inter-country real estate protocols, lists of reputable industry personnel, real estate information, and real estate developments, so that individuals on the buy and sell side of real estate transactions can work more efficiently and make better decisions.
More blockchain solutions for supply chain also debuted this week, including an announcement from a data technology company of plans to launch a blockchain platform that will verify data, like packaging claims, and address compliance concerns with data regulations. The platform is currently backed by a major consumer packaged goods company. And in the metals and mining industry, a new cloud-based blockchain platform has emerged that seeks to reduce the inefficiencies of paper tracking and offer pricing transparency. The platform reportedly has 100 registered members and has plans to expand.
Finally, this week the R3 consortium launched Corda Enterprise, a commercial blockchain platform that hosts trade-specific blockchain applications. For example, one application processes mineral interest royalty contracts, and another tracks the trade of precious metals. The platform uses a proprietary firewall to improve data security and is currently available on a licensed basis.
Blockchain Continues Heavy Influence on Capital Markets
Amid continued scrutiny of ICOs, several firms are racing to build regulated platforms for the issuance of so-called “securitized token offerings,” or STOs, that would seek to launch blockchain-based digital assets that are registered as securities under applicable laws. The Gibraltar Stock Exchange (GSX) recently announced that it will be engaging in efforts to obtain regulatory approval for listing and trading such security tokens. If granted, approval will permit the GSX to trade both security tokens and traditional securities. Similarly, the Malta Stock Exchange (MSE) recently announced its intentions to work with the digital asset exchange OKEx to develop a security-tokens trading platform. The MSE and OKEx hope to combine their capabilities in security expertise and client due diligence in order to develop “the world’s first regulated decentralized global stock exchange.”
This week, U.S. cryptocurrency platform Coinbase announced that it had received approval from the U.S. Securities and Exchange Commission (SEC) for its proposed acquisition of three entities that would move Coinbase closer to being able to operate as a broker-dealer. This announcement, however, was later rescinded, as the SEC was not involved in the approval process and any discussions between Coinbase and the SEC regarding the acquisitions took place on an “informal basis.”
According to news reports this week, the asset management company BlackRock has begun investigating a potential foray into the world of cryptocurrency by setting up a working group to study cryptocurrencies and gain a better understanding of the capabilities of blockchain more generally. Also of note, the CFA Institute, the entity responsible for training financial professionals, recently announced that it will be adding topics covering cryptocurrencies and blockchain to its Level I and II curriculums, and adding related questions to its 2019 exams.
Update on Cryptocurrency Cybercrimes and Enforcement Actions
In international news, local police in the Guandong province of China recently seized more than $1.5 million worth of cryptocurrencies, including bitcoin, ether and litecoin, as part of a raid against an illegal online gambling platform that utilized the currencies to hide the proceeds of its activities. In Greece late last week, a Greek court ruled to extradite Alexander Vinnik to France, where he stands accused of defrauding French citizens through the cryptocurrency exchange BTC-e. Mr. Vinnik also faces charges in his native Russia, and many speculate that his extradition to France may be only a layover en route to the U.S., where he has been indicted on 21 charges including identity theft, facilitating drug smuggling and over $4 billion in money laundering through bitcoin.
Domestically, the IRS has announced a new campaign to improve reporting compliance for cryptocurrency-related gains and losses. The two-pronged campaign consists of heightened review of previous filings coupled with public outreach to increase awareness of filing rules for cryptocurrency gains. The campaign begins with a “carrot” approach by offering safe harbor to individuals to correct erroneous filings without repercussion as the IRS publicly signals its intent to move to a less lenient enforcement scheme over time.
In a recently released report, cybersecurity firm Kaspersky Labs stated that over $10 million worth of ether has been stolen this past year via social engineering tactics, with investors interested in ICOs becoming the most popular targets. According to the report, scammers use phishing emails, fake websites and even Twitter to trick investors into sending funds to wallets that the scammers control. The report found that since the beginning of 2018, cybercriminals have triggered more than a hundred thousand security alerts from cryptocurrency-related schemes, including an increasing trend of “cryptojacking,” in which attackers infect servers or computers with malware that surreptitiously siphons the machine’s processing power for crypto mining.