Blockchain and banking industry

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Neoma Business School (2019) PGE 2015-2019
SEMINAR PAPER
Blockchain and Banking: how new financial technologies
will impact banking activities and which strategy should
bank assume regarding blockchain adoption?
RICHARD Thomas
Under the guidance of ALOOSH Arash
Abstract
Blockchain is the most promising technological advancement since the dawn of the internet. The
impact it will have on businesses and especially the financial sector is yet to be fully measured. This
paper explores the blockchain technology, within the scope of the banking industry and its potential
for disruption. It highlights the technology’s characteristics and its value proposition for the banking
industry. It will also give the reader a complete overview of the multiple use-cases by which blockchain
will impact the banking sector in every area, ranging from data security to trade finance, as well as new
products such as smart contracts. The paper also describes the many hurdles blockchain technology
and financial players must overcome before its potential can be fully realized. It insists on the fact this
technology will only achieve a widespread use if every actor work together. A single player will not be
able to get a competitive advantage on its own. The only way will be to create common standard and
networks, by working with the competition as well as the regulators.

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Table of Contents
Introduction………………………………………………………………………………………………………………………2
Part 1. Blockchain underlying technology and value proposition for the banking
industry…………………………………………………………………………………………………………………………….4
A. What is Blockchain?.......................................................................................................5
B. What is the value proposition of blockchain-based systems compared to already
existing ones?.................................................................................................................8
C. Smart contracts, or how to replace lawyers…………………………………………………….………10
Part 2. Blockchain use-cases for the banking industry……………………………………..………………12
Part 3. Technical, Regulatory and Industry hurdles to overcome……………………………………..21
A. Obstacles to mass adoption………………………………………………………………………………….…21
B. Creating the right legal and regulatory framework is key…………………………………………23
C. Blockchain technology is still immature and needs improvements………………………….24
Conclusion………………………………………………………………………………………………………………………24
Introduction
On April 18th 2019, the subsidiary of Société Générale, Société Générale SFH was at the origin of the
first covered bonds for €100,000,000.00 as security tokens on the Ethereum blockchain1
. Those “OFH
Tokens” (Obligation de Financement de l’Habitat) were rated aaa / AAA by Moddy’s and Fitch, which
is the highest rating an investment product can get. This issuance was made possible thanks to the
Internal Startup Call (firm’s intrapreneurial program) and the startup Forge.
Blockchain technology has been around for a decade now and its potential for disruption in the
banking sector is yet to be fully apprehended. In 2017 Jamie Dimon, chief Executive of JP Morgan
Chase doubled down on previous criticism toward blockchain and cryptocurrencies, saying it was a
fraud2
. He also said he would fire any trader known to be trading in cryptocurrencies. Of course, the
well (most)-known cryptocurrency Bitcoin was in a predicament at the time and any old-school
banker must have though the same. However only two years later, JP Morgan Chase is launching its
own cryptocurrency, the JPM Coin3
. Jamie Dimon clarified its opinion on blockchain and
1
https://www.societegenerale.com/en/newsroom/first-covered-bo nd-as-a-security-token-on-a-public-
blockchain
2
https://www.bloomberg.com/news/articles/2018-11-20/jamie-dimon-vindicated-bitcoin-s-back-to-where-he-
cried-fraud
3
https://edition.cnn.com/2019/02/14/investing/jpmorgan-jpm-coin-cryptocurrency/index.html

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cryptocurrencies saying this: “We have always believed in the potential of blockchain technology and
we are supportive of cryptocurrencies as long as they are properly controlled and regulated. As a
globally regulated bank, we believe we have a unique opportunity to develop the capability in a
responsible way with the oversight of our regulators.” Moreover, the potential for costs saving and
efficiency gains as always been known according to Umar Farooq, Head of Digital Treasury Services
and Blockchain.
The banking sector is the prime target for blockchain disruption. With the promises of transparency,
immutability, decentralized ownership and efficiency, Blockchain-based solutions have the potential
to solve many problems the banking industry faces nowadays. From Interbank Transactions to Trade
Finance, through Clearing and Settlement or even Anti-Money Laundering, blockchain use-cases are
explored everywhere. A study from the World Bank predicted that by 2017, 80% of banks would
initiate blockchain projects4
. Since 2013, thousands of blockchain-related patents have been filed and
many FinTechs have risen to challenge historical players in the financial world. As such, blockchain
innovations do not only represent opportunities for a better, leaner and more efficient banking
system, but also a threat toward those major financial actors. Banks are at risk of passing
opportunities to reduce costs for example. According to a study from Santander Innoventure, a
distributed ledger technology could reduce operational costs by $15 to $20 billion by 20225
. On the
mid-term, banks are also at risk of losing their competitive advantage. Most customer do not feel a
strong attachment to their bank and usually go to the one with the lowest fees. If via blockchain
technology some actors are capable of providing the same service for much lower fees, banks will fall
behind. Finally on the long-term, any companies will soon be able to challenge banks on their
territory and appeal to younger generations of customers such as millennial (born between 1981 and
2000) and post-2000 gen. According to a study from BBVA, among the 84 million people that belong
to the millennial generation in the United States, 71% would prefer going to the dentist rather than
the bank and 73% would be more excited about new financial service offering from other companies
than their banks6
. So, if smaller companies manage to offer similar services, but with a much more
efficient system and lower prices using blockchain technology, banks that did not make the changes
will disappear.
4
http://pubdocs.worldbank.org/en/710961476811913780/Session-5C-Pani-Baruri-Blockchain-Financial-
Inclusion-Pani.pdf
5
https://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf
6
https://www.bbva.com/wp-content/uploads/2015/08/millenials.pdf

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It appears crucial for banks and any financial actor to adopt this new technology that is blockchain.
From a strategical point of view, it seems the benefits of blockchain and to a lesser extent
cryptocurrencies far outweigh the investment needed to get ahead of the competition. Banks such as
JP Morgan Chase or Société Générale are fully aware of that. Thus, being the first or one of the firsts
to utilize this technology will be better than being a fast-follower.
While blockchain holds the potential for ground-breaking improvements in the banking industry,
there are still many hurdles to overcome. Beyond security issues and new risks7
, blockchain adoption
main obstacles are compliance and regulation. It will require banks and non-financial actors such as
regulators to see the big picture and come together to build the right framework for the technology.
In essence, either everyone adopts blockchain, or nobody does.
The purpose of this paper is to highlight in what ways blockchain could transform the banking
industry and the risks it involves, as well as what has to be achieved to get there.
This paper is organized as follow. Part 1 aims to explain how blockchain technology works and what
its value proposition is within the scope of banking activity. Part 2 illustrates specific ways in which
blockchain and cryptocurrencies may revolutionize the banking and finance sector. Part 3 focuses on
the many hurdles blockchain and stakeholders have to overcome before this technology could see a
widespread use. “There is no point transacting if legally it holds no weigh8
.”
1. Blockchain underlying technology and value proposition for banks
One could compare the development of the Internet to blockchain. The Internet has been the driver
of growth since the 1990s and drastically changed the way we do business and go on in our daily life.
Those who embraced these changes were able to create new businesses, products and services.
While a part of them crashed and disappeared, the rest were able to reap enormous benefits and
become literal giants. In any case, first adopters got a head start.
The situation is similar in the case of blockchain. In the 1990s many did not see the value of the
Internet and failed to adapt to the changes. This is why it is crucial for stakeholders to get a good
understanding of blockchain technology and its value proposition.
7
Off the Chain! A guide to blockchain derivatives markets and the implication on systemic risks, Ryan
Surujnath, J.D Candidate, Fordham University School of Law, 2017
8
Accenture Blockchain - How banks are building a real-time global payment network

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A. What is blockchain?
Don and Alex Tapscott, authors of Blockchain Revolution (2016)9
define blockchain in their book as
“an incorruptible digital ledger of economic transactions that can be programmed to record not just
financial transactions but virtually everything of value”.
A ledger is a book of record, keeping all the financial transactions of an organization.
Blockchain is a distributed ledger, as opposed to a centralized or decentralized one
At the heart of blockchain technology is the way its ledger works. There are three different types of
ledger today: Centralized, Decentralized and Distributed.10
Figure 1: The three types of ledger
Most ledger nowadays are centralized or decentralized. In a centralized ledger, there is a unique
entity that controls the data and validate transactions. For instance, a centralized ledger system is
applied in the case of Clearing Houses. A clearing house is the center of the ledger and keeps a
record of all financial transactions between market actors. It acts as the authority figure and the
9
http://dontapscott.com/books/blockchain-revolution/
10
https://medium.com/@bryzek/the-ultimate-newbie-guide-to-distributed-ledgers-f8cc6950c826

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validator of each transaction. The process usually takes days and the clearing house collects some
kind of fee on the way.
Figure 2: Clearing House centralized ledger system
A centralized ledger has its advantages. For instance, since it is controlled by a unique entity, it is
much more customizable.
However, giving this much authority to a single entity may end up very risky. If the entity in charge
has malicious intent, it has total control on the data and its usage. Moreover, if the entity shuts down
without notice, transactions, or any activities related to the ledger, will no longer be processed.
There is also the security issue, as it is easier to take down one single entity than most of the
network. Centralized data storage provides a single point of failure that can harm the whole
business, if compromised. Moreover, those centralized data storages are prominently targeted by
hackers. WhatsApp was once again attacked in May 2019 for instance11
, putting at risk the privacy of
its 1.5 billion users. In any case, hackers can then leak the information online, putting the company’s
reputation at risk as well as incurring additional costs for legal actions, damage repair etc.
A ledger is decentralized when there is not only one entity that has control over the data. However, a
decentralized network is not always distributed (see image above).
In a distributed ledger, each transaction is recorded chronologically and in near real time across the
whole network. These transactions are then grouped up in blocks which are added to the chain. They
are given a timestamp and are linked to the previous block by a secure hash algorithm12
. Its
11
https://www.businessinsider.fr/us/whatsapp-hacked-attackers-installed-spyware-2019-5
12
https://www.blockchain.com/btc/blocks

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decentralized and distributed nature allows the absence of a central authority. The records are
constructed and held by every single user (or node) in the network. Each node has a total or partial
access to the ledger and its transactions. The absence of need for a central authority brings a real
legitimacy to the network participants. The implication is that the network does not have a single
weakness or entry point and that it makes it almost impossible to hack into and go back in time to
modify the transactions. The only way for someone to take control of the blockchain is to perform a
51% attack.
As it is virtually impossible to create a universal blockchain, catering to the needs of every industry, a
great number of blockchain have been created over the years. They all differ in their protocol and
architecture, while the core principle remained. But among the vast number of blockchain on the
market, most of them belong to one of the two following types:
- Public Ledger (or permissionless blockchain): anyone can read and write data, without
needing a permission from a higher authority.
- Private Ledger (or permissioned blockchain): not anyone can participate in the network. Its
users are known and trusted.
The bitcoin blockchain is a public ledger. It has no central authority which implies it is very strong
against any attack, but it is also harder to develop and implement the technology. Public Ledger offer
many advantages, such as decentralization, a financial incentive under the form of digital asset
(cryptocurrency) to the network participants, anonymity (some blockchain do not require personal
information to participate) and transparency, by design, as anyone can access and read the data.
Permissioned blockchain act as a closed environment and may be well adapted for private companies
that want to benefit from this new technology. A permissioned blockchain is also well-suited for
consortium-type organizations where a limited number of actors interact within the network.
51% Attack: If a miner or most likely a group of miner controls more than
50% of the network’s computing power, the blockchain is compromised.
Controlling more than 50% of the hash rate gives the possibility to prevent
transactions from being confirmed, halting payment for the other network
users but also reverse transactions that were already completed, allowing
for double spending (see definition below).
It is likely to happen in poorly distributed networks and they would suffer a
major loss in confidence from their participants. Because of this there is
not much to be gained from this attack on the long term. For instance, if
the BTC blockchain suffered such attack, the value of the cryptocurrency
would plummet and never recover.

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Advantages of permissioned blockchain can be the possibility to vary the degree of decentralization
and the governance system. In a private company for instance, some users would get an access to
the blockchain only to the extent of the job they have. Moreover, the authority figures of this
blockchain have total control on transparency and anonymity levels. So permissioned blockchain are
a way for companies to take advantage of this system while still being in control.
Figure 3: Process of a blockchain transaction
B. What is the value proposition of blockchain-based systems compared to already
existing ones?
Blockchain technology is able to solve many issues and pain-point banks are facing.
The most obvious ones given what it written above are the issue of trust, how to prevent anyone
from corrupting the data in an agreed chain of transactions, how to reach a consensus on the latest

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correct version of the transaction history and the issue of double spending13
(a single transaction
cannot be recorded twice).
Moreover, as blockchain inherently eliminates the need for intermediaries (at least to a large extent),
it could for example speak the end of actors such as clearing houses. If each bank in the network had
the copy of the ledger and a common protocol and consensus mechanism, it would allow them to
perform and approve transactions within seconds, cutting cost drastically and boosting efficiency.
Blockchain offers the perspective of an almost frictionless trading environment.
Example of Trade Finance
According to the World Trade Organization, 80 to 90% of world trades relies on trade finance14
.
However, the trade finance space is very fragmented15
, banks have to deal with many layers of
complexity such as the growing number of actors, of markets or products. And the more complex a
trade is, the harder it is for market actors to interact with each other in an efficient way. Moreover,
most market or products have specific needs to function and grow. Diamonds need more financing,
the food industry put the effort on safety and retail on traceability.
The other problem with trade finance is that even though everyone is digitalized, everyone also uses
a different platform or system, adding to the space fragmentation.
So, in this ever-increasing complexity, banks that want to stay relevant must do either of those
things:
- Gathering everyone on a single platform
- Being “platform-agnostic, open to connecting with our clients in a way that they want to do
business and changing from the traditional way the bank would want to do business”, says
Michael Vrontamitis (Head of Trade, Europe and Americas at Standard Chartered Bank16
.
13
Bitcoin: A Peer-to-Peer Electronic Cash System, Blockchain WhitePaper, Satoshi Nakamoto
14
https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm
15
BETTING ON BLOCKCHAIN: Evolution of strategy in trade finance required, Standard Chartered, Hotter,
Andrea, Metal Bulletin Daily, 20572379, 1/7/2019
16
See Id
Double Spend: A double spend is creating two conflicting
transactions, one which sends funds to a counterparty,
and the other sending those same funds back to
yourself. This is prevented by the Bitcoin network and
double-spends are not allowed. This is arguably the
primary innovation of the Bitcoin blockchain— an
algorithm for preventing double-spends.

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Moreover, financial institutions act guarantors of payment between each party of a trade. They issue
what is called a letter of credit (preemptively) to the seller. It becomes valid when the buyer receives
the good involved in the transaction. However, those letters have to get through a number of
intermediaries such as banks, export credit agencies etc., which incurs additional cost and efficiency
loss. These costs were estimated at $2.6 trillion on an annual basis17
. The paradox in trade finance is
quite clear: the trade finance market is profitable and growing18
but it also uses outdated systems
with the simple consequence that most of operations processes default to paper and sent globally
through fax and post. Processing time and cost could be greatly reduced by implementing a
blockchain-based system. It would effectively eliminate theses unnecessary steps and outdated
mechanisms and provide costs reduction, transparency, efficiency, security and auditability.
In a nutshell, across every sector but particularly in the banking industry, blockchain offers lowered
costs, security, privacy and speed.
The cost reductions banks would achieve were estimated by Accenture using data from McLagan and
surveying numerous investment banks19
. Potential savings are the following:
- 70% on central finance reporting thanks to better efficiency, transparency, control and data
quality.
- 50% on centralized operations (KYC, Client Onboarding) thanks to a better data quality and
mutualization of data among participants
- 50% on business operations (trade support, middle office, clearance and settlements etc.)
- 30% to 50% on compliance due to improved transparency and auditability.
As a result, on a cost base of $30 billion, investment banks would be able to save $8 billion at the
very least, which corresponds to a 27% cost reduction as a whole.20
C. Smart contracts, or how to replace lawyers
Smart contracts are not new. The idea was first introduced in 1997 by Nick Szabo in The Idea of
Smart Contracts21
where he outlines his idea. At the time of publication, IT technologies and
possibilities were way behind and could not make his idea a reality. However nowadays with
17
https://www.cognizant.com/whitepapers/how-blockchain-can-revitalize-trade-finance-part1-codex2766.pdf
18
ICC Global Survey on Trade Finance 2018
19
Accenture: Banking on Blockchain, a Value Analysis for Investment Banks
20
See Id
21
The Idea of Smart Contracts, Nick Szabo 1997

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blockchain and out computing power, smart contracts became a real possibility and could spell the
beginning of a new and faster way to do business.
Nowadays, the term smart contract has become somewhat miss-used. Szabo defined the term as
computerized transaction protocols with determined terms22
. Nowadays a smart-contract is
generally defined as “a set of computer code between two or more parties that run on the top of a
blockchain and constitutes of a set of rules which are agreed upon by the involved parties. Upon
execution, if these set of pre-defined rules are met, the smart contract executes itself to produce the
output”23
.
In other words, one can say the smart contract is self-enforcing once conditions are met, without any
input from the parties. The first example Szabo took is the vending machine24
, since “anybody with a
coin can participate in an exchange with the vendor” without the intervention of a third-party. This
applies for transactions that would require more complex conditions and sometimes legal advice. For
instance, if one wants to sell some real estate, one has to go through a lot of paperwork and get help
of real estate agents to take care of the sell and the transfer of property process. The seller must
then pay all the third-party agents and it also takes more time to do the whole thing. Smart Contract
can reduce this burden a lot. One can store ownership and payment conditions within the contract
ad get rid of these middlemen. Moreover, there is no risks of fraud because the money and right of
possession transfers are viewed and validated by all the market participants25
.
Smart contracts offer many advantages. They are paperless, efficient, safe, transparent and allow for
massive savings. According to the World Economic Forum, commercial disputes cost trillions globally.
A study from the U.S Chamber of commerce in 2013 stated that the direct cost of commercial claims
is around $870 with $306 in the U.S only. Smart contracts allow for a better enforcement and a far
safer environment of trade. As for banks, multiple applications are literal no-brainers. Smart
contracts can be used in mortgage loans to avoid any lengthy process and confusion. But the
application with the most potential is capital markets26
. Smart contracts could be used to process
commercial paper notes, derivatives contracts or even asset-backed security by streamlining their
executions when conditions are met. According to the website of Eris Industries, one of the first
22
See Id
23
https://hackernoon.com/everything-you-need-to-know-about-smart-contracts-a-beginners-guide-
c13cc138378a
24
The Idea of Smart Contracts, Nick Szabo 1997
25
https://hackernoon.com/everything-you-need-to-know-about-smart-contracts-a-beginners-guide-
c13cc138378a
26
Blockchain's three capital markets innovations explained, Cohen, Lewis Rinaudo, Tyler, David Contreiras,
Buxton, Pamela, International Financial Law Review, 02626969, 7/4/2016

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blockchain-based firm to create smart contract applications, the uses would be “as simple as
upvoting a post on a forum, to the more complex such as loan collateralization and futures contracts,
to the highly complex such as repayment prioritization on a structured note.”
However, we are still at an early stage and the general implementation of this technology will be
possible only if regulators create the right framework27
.
2. Blockchain use-case for the banking industry
As stated in Satoshi Nakamoto bitcoin whitepaper, the basis on what blockchain is built is trust, data
security, agreement on the order of transactions and prevention of double spending. However, there
has been significant progress with this technology over the last decade and many more use-cases,
particularly for the banking industry, have been brought to light.
Blockchain has the potential to disrupt a large number of bank activities. Senior-executives in any
financial firm must be aware of this potential. We are past experimenting to see if some blockchain
applications fit the firm’ strategy. Most of the big players were already experimenting in 2014
according to Strategy&28
. It is crucial for any firm not to be left behind, or it will fail to build a
competitive edge or at least stay in race. Moreover, this ne technology allows new players to
compete with the historical ones. According to a 2017 Fintech Report from PWC29
, surveying around
600 bank executives, around 80% responded that elements of their business were more at risk
because of the emergence of fintech startups powered by blockchain.
27
Off the Chain! A guide to blockchain derivatives markets and the implication on systemic risks, Ryan
Surujnath, J.D Candidate, Fordham University School of Law, 2017
28
PWC A strategist Guide to Blockchain
29
Redrawing the lines: FinTech’s growing influence on Financial Services

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Figure 4: Involvement of major actors in blockchain technology
The technology will affect a very wide range of practices and services or even open new business
opportunities.
Interbank Transactions
Interbank transactions are at the heart of banking business. It allows banks to keep liquidity,
decrease risks, make deals etc. In 2017 alone, according to the Fed net domestic Interbank
transactions between Q1 and Q3 amounted to a staggering $1,662.3 billion30
.
However, bank transactions are complicated. The costs are high since a trusted third party must be
involved in each transaction (clearing house, wire services…) and those costs are paid by both the
banks and the customer if involved. Moreover, those transactions take time meaning an increased
30
https://www.federalreserve.gov/releases/z1/current/html/f203.htm

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risk regarding foreign exchange rates, political or economic uncertainties etc. Accounting-wise, banks
must review their clearing system every month31
which is a long and manual process.
Blockchain is able to tackle these issues thanks to its distributed nature. By implementing a common
ledger for each bank, fees would be drastically reduced if not completely erased since no third-party
would be involved, but the most significant change would be the time to perform a transaction. With
a blockchain system most transaction would only take a fraction of the time it needed before and
consequently, a fraction of the risk.
There are already a few players that are working on providing such services to financial firms. The
most significant are Billion Group32
which aim to create “a high-performance DLT system unifying
national currency transactions, documents on-chain, and identity management into a single
platform” and China Construction Bank which announced in 201733
its partnership with IBM to
streamline transactions on the blockchain, sing the blockchain-platform of the firm34
.
In a nutshell, applying blockchain systems to interbank transactions would result in a faster, more
efficient, cheaper and less risky environment.
Cross-Border Transactions and Remittance
In the US sending money abroad usually takes 3 to 5 days and costs around $42 (between 4 to 6%
fee). But the most dramatic element is an error rate of 5%. Financial transactions over the world are
enormous. In 2014 alone, UK banks registered 427 million transactions35
and MasterCard 13,6 billion
debit transactions for a total amount of $536 billion36
. Moreover, processed transactions and cross-
border payment have been growing steadily over the years, sometimes by more than 15% each
quarter37
. Another metrics interesting to take into account is the number of transactions per second
(TPS) that can be made by the different players. VISA’s payment system for instance processes over
2,000 transactions per second but can go as high as 56,000 if needed38
. One must point-out that to
this day, TPS is the one advantage traditional payment systems have over blockchain technologies. A
31
https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/accounting-for-cash-
transactions
32
https://billongroup.com/en/
33
https://www.finews.asia/finance/25566-china-construction-bank-starts-blockchain-bancassurance-project
34
https://newsroom.ibm.com/ibm-blockchain
35
https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11672021/Mobile-banking-has-
eclipsed-branches-and-even-the-rest-of-the-internet.html
36
http://s2.q4cdn.com/242125233/files/doc_financials/supplemental/2015/2Q15-MA-Supplemental-
Operational-Performance-Data.pdf
37
See Id
38
https://www.ibtimes.com/bitcoins-big-problem-transaction-delays-renew-blockchain-debate-2330143

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bitcoin transaction usually takes between one and a few hours. There are very few blockchain that
can compete with VISA in that regard.
Again, a blockchain-based system would be able to tackle most of these issues. Ripple39
and Wyre40
are two companies that build blockchain solutions to handle money transfers. Ripple is focused on
banks and big institutions only at the moment while Wyre targets both individuals and firms.
Clearing and Settlement
Clearing and Settlement are also at the heart of the banking business. The way it is handled
nowadays is quite inefficient considering the time, costs and number of intermediaries. The SWIFT41
network is a necessary step for each transaction and requires payment, because in the event of a
transaction between two banks, each maintaining a different ledger, it is up to SWIFT to make the
reconciliation. And for each additional intermediary are added costs and risks of failure.
Approximately 60% of B2B transactions are subjected to failure and necessary manual intervention,
meaning further delays.
In a study from the Boston Consulting Group, significant savings could be made just by shortening the
settlement cycles42
.
A distributed ledger of transactions common to every bank would solve theses issues. Banks would
not have to use SWIFT because they would be able to keep track of every transaction with
transparency and auditability. Again, companies like Ripple and R343
, which raised $107 million from
a number of major banks, are building this solution.
Loan Syndication, loans and credits
Loan syndication is not new but has been growing at an impressive rate. In 2017 in the US loan
syndication market reached an all-time-high of $2.41 trillion, a 24% growth compared to the year
before44
. Syndicating a loan offers new opportunities. An investor can reduce its risk exposure by
spreading it with others or take part in a project that would require too much investment if he were
alone.
39
https://ripple.com/use-cases/
40
https://www.forbes.com/sites/julianmitchell/2018/07/31/wyre-the-blockchain-platform-taking-the-lead-in-
cross-border-transactions/#504e932269d7
41
https://www.swift.com/
42
Shortening Settlement Cycles BCG
43
https://www.r3.com/
44
https://www.reuters.com/article/us-uslending-records/u-s-syndicated-lending-topples-records-in-2017-
idUSKBN1ED2NO

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However, the loan system is not consumer friendly. In practice, when someone fills out a loan
application, the bank will evaluate the risk of default by looking at a number of parameters such as
credit score (US), debt-to-income ratio, asset-ownership status etc. In the US, those information are
recorded and kept by three major agencies, Experian, Transunion and Equifax. Thus, the system is
very centralized, which means costs and risks. For instance, Equifax was hacked in September 2018
and personal information of 147.7 million American citizens were stolen45
. Moreover, the Federal
Trade Commission (FTC) estimated in a 2013 report that approximately 5% of American consumers
had errors on their credit reports which most likely resulted or would result in worse terms if they
filled out a loan application46
.
Blockchain-enabled lending system appears way more efficient and cheaper than traditional systems.
Borrowers data would be cryptographically secured in a distributed network, which would also make
the issue of underwriters’ transparency disappear.
Banks must be aware that Fintech startups will soon be able to compete in this segment with
cheaper offers and fast processes. For instance, the company EthLend47
builds a peer-to-peer loan
app on the Ethereum blockchain and uses smart contract to handle its loans. The smart contract is
filled with the amount, interest rate, time frame and legal elements. The borrower must put a
collateral of EthLend token which would be received by the lender in case of default.
Securities
The main problem with securities is to keep track and update the ownership. The current system is
basically the old paper system, but digitalized. There are a vast number of third party involved in
each transaction such as brokers, central exchanges, clearing houses or custodian banks (the biggest
being J.P Morgan, BNY Mellon, State Street and Citi Group, accounting for 2/3 of the custody
industry48
).
As no one wants to deal with the day-to-day management of an asset, it is given for safekeeping to
custodian banks, but they also have to outsource some of the work to other third-party. The sheer
number of actors involved in this system makes any actions very complicated. Each party has to
45
https://www.bloomberg.com/opinion/articles/2019-01-29/equifax-hack-remains-unfinished-business
46
https://www.ftc.gov/news-events/press-releases/2013/02/ftc-study-five-percent-consumers-had-errors-
their-credit-reports
47
https://ethlend.io/
48
https://www.trefis.com/stock/stt/articles/297806/q1-2015-u-s-banking-review-custody-banking-
assets/2015-05-22

of 25
update its own ledger, which result in infancies and most of the time inaccuracy. Moreover, it takes
around three days for every party to get on the same page and all of them charges a fee on the way.
This whole system is a particularly interesting target for blockchain disruption. Implementing a
distributed ledger available for everyone would make transfer of ownership much easier, more
efficient and at a fraction of the costs. The big 4 custodian banks charge a meager 0.02% fee49
for
custody but manage around $15 trillion in assets. A distributed ledger has the potential to bypass
custodian banks and reduce the costs to a fraction of what they originally were.
In practice, a transfer of ownership using a blockchain system is possible through cryptographic
tokens. Companies are working on tokenizing real-world assets. Tokenization is set to take over a
significant part of the global exchanges. The World Economic Forum stated that by 2027 around 10%
of the world GDP would be under the form of tokenized assets50
.
Data Security
Data security is critical in any industry but especially in banking. In 2008 Heartland Payment System
suffered a data breach and over 100 million debit and credit card number were stolen51
, resulting in
at least $134 million fraudulent payments52
. In 2017 data breaches in the finance sector accounted
for 8.5% of the total attacks. According to a study conducted by Generali and Identity Theft Research
Center, financial services firms are 300 times more likely to suffer an attack than a business in a
different industry53
.
Blockchain may be a real lifesaver for financial firms, thanks to its architecture and cryptographic
nature. Its distributed architecture does not leave any particular weak point which hackers could take
advantage of.
Record Sharing and Storage
Surprisingly, banks still use a paper-based record keeping system. However, this method is costly,
presents obvious security issues and also risks of data loss. A blockchain system would eliminate all
49
See Id
50
https://www.weforum.org/agenda/2018/03/blockchain-bitcoin-explainer-shiller-roubini/
51
https://www.forbes.com/sites/davelewis/2015/05/31/heartland-payment-systems-suffers-data-
breach/#29c38bf2744a
52
https://www.csoonline.com/article/2130877/the-biggest-data-breaches-of-the-21st-century.html
53
The impact of cybersecurity incidents on financial institutions

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that. A Deloitte Study estimated that going paperless would cut banks record management costs by
60 to 70%, which would result in a 25% decrease in operating expenses overall54
. Blockchain provides
a stronger security and no risk of losing data.
Transparency
Transparency is a real issue in the banking sector. It involves the bank’s relationship with its
customers as well as its responsibility toward the economy. For instance, salespeople at Well Fargo
opened 2 million fake accounts55
in the name of its customers to attain monthly sales goal and
charged them additional fees, which resulted in damaged credit score and money lost.
The bank was fined $185 million by the Consumer Financial Protection Bureau, the OCC, and the city
and county of Los Angeles.
In 2007, Lehman Brothers was boasting a $19.3 billion revenue and a record net income of $4.7
billion. In 2008 it filled bankruptcy and left 25,000 people jobless.
Blockchain could be the technology allowing for more transparency from banks thanks to its
architecture. It would be a way to expose risky practices and reward responsible executives. It is
crucial for banks to preserve the trust in its relationship with its customers or they will move more
and more toward new players.
Regulatory Reporting
Compliance costs a lot of money. According to a study from Thomson Reuters, compliance costs vary
between $5 million and $40 million56
. Moreover, 66% of the 800 firms involved in the study expect
the costs to increase in the future. Penalties are not soft either, since they amounted for $320 billion
between 2008 and 201657
. This issue has become even more pressing since the financial crisis and
the increase in regulatory requirements.
However, as blockchain is a storage for validated, immutable data, it seems to be the next-best tool
available to perform regulatory work with the regulators. At a fraction of the initial cost, since most
of the processes would be self-executing, less error-prone, which would lead to a downsize of
regulatory departments.
54
Is it time to go paperless? Record Management: the cost of warehousing bad habits
55
https://www.theatlantic.com/business/archive/2017/04/wells-fargo-apology-tour/522558/
56
https://legal.thomsonreuters.com/content/dam/ewp-m/documents/legal/en/pdf/reports/cost-of-
compliance-special-report-2018.pdf
57
See Id

of 25
Anti-Money Laundering and Counter-Terrorist financing
Despite the harsh regulation, it seems that AML and CTF still have a long way ahead to be fully
effective. In 2012 HSBC was fined $1.9 billion for money laundering for the benefit of Mexican
cartels58
. In 2017 Deutsche Bank was also fined $630 million for laundering money for Russian
criminals59
.
In a distributed ledger, providing an extra layer of transparency and compliance AML and CTF would
be more efficient. A common ledger makes it impossible to tamper data and makes it a trustworthy
source of evidence to monitor illegal activities. The direct results for banks are the massive savings in
fine they would not get.
KYC
KYC (Know Your Customer) is a source of expenses for banks. According to Thomson Reuters, in 2017
KYC costs for companies with $10 billion or more revenues accounted for $150 million ($142 million
in 2016)60
. KYC expenses are growing steadily.
Since KYC is a matter of data, blockchain as the potential to disrupt it. Creating a shared ledger with
an automatically updating database for KYC information would save massive time and money.
However, there is no regulatory framework in place at the moment that would allow for such a
system.
Cryptocurrencies investments and banking services
The total value of cryptocurrencies is expected by every financial specialist to increase many folds in
the coming years. The total market cap hovering around $250 billion at the time of writing this paper,
it is expected to reach trillions of dollars in the future. Bank executive have yet to tap fully into this
new potential source of profits and offer comprehensive ways to invest to big players seeking a new
way to diversify their investments.
Nowadays banks have begun to work toward full fledge crypto services. However, there is still huge
regulatory hurdles such as what Bitcoin ETF advocates face. Creating a bitcoin ETF would allow
58
https://www.reuters.com/article/us-hsbc-probe/hsbc-to-pay-1-9-billion-u-s-fine-in-money-laundering-case-
idUSBRE8BA05M20121211
59
https://money.cnn.com/2017/01/31/investing/deutsche-bank-us-fine-russia-money-laundering/index.html
60
https://www.thomsonreuters.com/en/press-releases/2017/october/thomson-reuters-2017-global-kyc-
surveys-attest-to-even-greater-compliance-pain-points.html

of 25
investor to buy a financial product tied to the bitcoin value. The project is ongoing since at least 2017
but the authorization has been postponed multiple times by the SEC61
.
Financial firms that manage to offer crypto services along with regulatory compliance would get a
significant competitive advantage over their competitors.
Serving the Unbanked
Blockchain could be the key to a whole new source of potential customers: the unbanked.
In the US alone, 1 in 13 households is unbanked62
, amounting for 15.6 million American adults (51.1
million underbanked, meaning they used an alternative financing service for the last 12 months).
Even in the world financial hub New York city around 12% of the population is unbanked. Globally,
around 2 billion adults are unbanked63
.
This issue has dire implications for the people and the governments. Being unbanked is a financial
burden since they must resort to unorthodox financing methods. Payment for any basic transactions
accumulate and the money is not used for other needs such as food or clothes. Moreover, since most
unbanked families are on medium to low revenues, they benefit from aid programs such as Food
stamp in the US. If these families were able to save on the transaction fees they pay each month and
use the money on other needs, it would also save the government a huge amount of money.
Furthermore, underbanked people must sometimes resort to hostile lenders with predatory interest
rates and fees.
There are many reasons as why someone is unbanked. One is the combination of a very volatile
income and the fact that a bank accounts cost money every month and require a minimum deposit
to open an maintain. Some people do not have the financial visibility to know if they can afford it on
the long term. Even though alternative financing services cost more, they do not need consistency.
There is also an issue of trust: most unbanked household do not trust banks and believe banks do not
care about them64
.
The fault also lies on the banks’ side. Banks have not taken many steps in favor of financial inclusion
either. The reason being the low profitability.
61
https://cointelegraph.com/news/sec-postpones-vaneck-bitcoin-etf-yet-again-should-we-expect-an-approval-
in-2019
62
https://publicpolicy.wharton.upenn.edu/live/news/1895-financial-exclusion-why-it-is-more-expensive-to-be
63
https://www.forbes.com/sites/alanmcintyre/2017/05/10/banks-need-to-focus-on-a-new-customer-the-
unbanked/#682538a959c8
64
See Id

of 25
Blockchain could be used to solve parts of the problem. A blockchain-based banking platform is
enough to provide security and transparency. A decentralized lending network would allow the
unbanked to move away from predatory lenders. Moreover, blockchain-based systems would be
more profitable as costs are drastically reduces compared to traditional ones.
Trade finance, also a major target for disruption, was covered in Part 1.
3. Technical, Regulatory and Industry hurdles to overcome
While blockchain offers exciting perspectives towards a more efficient, secure and cheaper banking
industry, there are a number of risks and challenges to overcome. While most experts predict a
widespread use of blockchain technology in 3 to 5 years65
, blockchain is still at its infancy.
Figure 5: 6 major obstacles to blockchain widespread adoption
Among the 6 main challenges depicted in the figure above, adoption and legal and regulatory
challenges are the most important hurdles to overcome.
A. Obstacles to mass adoption
Obstacles to mass adoption are many. The first one, which we aimed to correct in Part 1 of this
paper, simply is key stakeholder education66
. According to Accenture, seeing the value and potential
benefits that blockchain can bring to the organization is not always clear. As Blockchain is quite a
new technology, using a one-of-a-kind system which, by the way, is not self-explanatory banks must
65
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/blockchain-beyond-the-hype-
what-is-the-strategic-business-value
66
Accenture Blockchain - How banks are building a real-time global payment network

of 25
make sure their key executives are well-aware of how blockchain works. Most banks make use of
internal and external experts according to Accenture to form specific teams constituted to explore
blockchain projects67
.
Whichever use a financial firm wants to make of the blockchain, it appears it cannot do it alone.
Firms and other actors must make full use of the network effect to favor a mass adoption. The ideal
network must have its rules sand standards clearly defined and offer a very short onboarding
process. It must have a “plug-and-play68
” nature to allow any bank or financial firm to join easily. It
would be very detrimental if the network had some sort of exclusivity elements to it. The risks would
be multiple standards or even bilateral agreements between financial actors. The direct consequence
would be a severe loss of effectiveness. Work is already under way with the R3 Consortium,
constituted of around 70 banks and aims to develop a common blockchain platform for the finance
industry named Corda69
. This platform could pave the way for a common standard for blockchain
systems in the future.
Therefore, banks must end what is called by Brant Carlson in a McKinsey study70
, “the coopetition
paradox”. Indeed, while the potential of network effect is vast for blockchain technology, it becomes
more and more complex as the size of the network increase. McKinsey study makes a compelling
example with a blockchain solution adapted to medias, licenses, royalty payments etc. The amount
of coordination between the various actors and types of activity would be massive.
So, competitors must realize they have to work together and take steps together, to define the
standards and governance system that would be applied in the network.
Finally, banks must create momentum within their organization to make sure blockchain projects do
not stay in an exploration phase and move toward integration and implementation. However, most
banks have trouble to get through this step simply because committing fully in such projects require
to deal with legal, regulatory and compliance issues that still today are not cleared at all.
67
See Id
68
See Id
69
https://www.corda.net/discover/blockchain.html
70
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/blockchain-beyond-the-hype-
what-is-the-strategic-business-value

of 25
Figure 6: Reasons for internal resistance to blockchain
B. Creating the right legal and regulatory framework is key
According to the study from Accenture regulation is the key factor that limits blockchain
development (see Figure above). However, every country does not have the same approach toward
blockchain regulation. In the U.S the US Chair of the Federal Reserve decided to postpone regulatory
measures to favor innovation. The Chinese government is doing the opposite and closely follows
blockchain developments. Li Li-Hui, the former director of Bank of China said in the Opening
Statement on The New Economic Horizon for Blockchain “regulators should be involved in the
formulation of technical and legal rules for financial blockchain technology, and now is the best
time.”
To this day no legal framework exists for blockchain and it will be very difficult to create one,
especially for the finance industry. Indeed, the best legal and regulatory framework should be
applicable globally and across jurisdictions, which means some sort of global consensus must be
reached. Regular legal frameworks are bound to a local jurisdiction, but blockchain technology is
global by nature. Each node of a network can be in a different place, so the jurisdiction blockchain
falls under must be global. Else the risk is to end up with multiple sometimes contradictory
regulations which will at least hinder blockchain development and adoption. Moreover, in case of
conflict, deciding under which particular jurisdiction and court the issue must be resolved can be
quite complex.
Defining responsibility and accountability will also be difficult. Blockchain can be used in many ways
and it will not always be clear who should be held responsible.
Data privacy is also an issue. There are and will be challenges in balancing the concept of opened,
immutable network and data privacy. For instance, regarding insurance or credit scores. Regulators
must think of a way to conciliate the nature of distributed ledgers and the right to be forgotten. If it

of 25
is not the case, it may be the biggest obstacle to blockchain adoption in particular industries where
personal data are involved.
Smart contracts regulation will have to evolve with the technology. A smart contract is a pile of code
and sometimes can be difficult to apprehend. Indeed, some of those are very complete and met the
criteria to be considered as legally binding. In other cases, one can see right away that core elements
are not written. But between these two extremes lies uncertainty. The question regulators will have
to answer is how to evaluate the legal value of a smart contract and what framework to implement
to avoid this uncertainty. Blockchain technology may be compared to the uberization that happened
a few years back. The Uber way to do business back then was a few steps ahead of regulation, which
was at the origin of many issues in the sector. The situation seems to be the same today with smart
contracts and regulators should not lag behind, study this technology in order to keep up with its
development and allow for a controlled and regulated adoption.
C. Blockchain is still immature and needs improvements
Blockchain technology is still very young and is sometimes not optimal to be fully implemented71
.
Scalability and latency are still limits that must be addressed. Nowadays, blockchain systems have to
trade-off between scalability and transaction speed. Only a few blockchain hold the potential for
almost infinite scalability with a decent TPS (IOTA or Elastos to name a few). Moreover, achieving full
decentralization may be impossible in particular sectors. Therefore, it is possible that the future
global blockchain networks will not be fully decentralized. One consequence of this is the significant
switching cost between the traditional system and the blockchain-based one. Most of the old system
will still be around for a while as big players want a trusted system in place, so the real benefits of
switching to blockchain will only happen after the old system is gotten rid of. Moreover, today few
actors have the technology to offer a fully scaled blockchain service.
Conclusion
Blockchain technology has the potential to revolutionize the banking industry, making it more
transparent, trusted, cheaper and efficient. Many use-cases are already being tested and explored.
Blockchain may very well have an even wider impact than the Internet had on this industry. It forces
financial executives to rethink the way they do business or how markets and processes work.
Blockchain is much more than efficiency gains, it represents new opportunities to do business and its
future development will likely be more and more integrated and complex.
71
See Id

of 25
It appears necessary then, that a player will not be able to implement blockchain in a large scale
alone and acquire a competitive edge against all its competitors. Blockchain future involves everyone
and it is the only way we will see a widespread application of the technology. That is why we must
reach a critical number of participants. Despite the regulatory hurdles, the new risks brought by this
technology, the privacy, security or technical issues, initiatives are taken to make sure blockchain
application involves as many actors as possible. The R3 consortium and Marco Polo Network are
significant steps in the right direction.
The history has shown that technical and legal hurdles have never stopped financial advances, so the
probability of a widespread blockchain adoption in the near future is very high. However, regulators
must make sure they stay up to date with the technology, to allow for its development, as much as to
prevent the risks it will inevitably bring.

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