Distributed ledger technology (DLT), also referred to as blockchain technology, could benefit both customers and banks by providing better banking services to users, while helping financial institutions offer services of greater security, quality and efficiency, according to a report by the Hong Kong Applied Science and Technology Research Institute (ASTRI).

Commissioned by the Fintech Facilitation Office (FFO) of the Hong Kong Monetary Authority (HKMA), the report aims to carry out an in-depth examination of the technology and identify possible applications of DLT to banking services.

As part of the research, ASTRI reached out to several banks and industry players including HSBC, Standard Chartered Bank and the Bank of China (Hong Kong) to share their experience, insights and assessments related to the use of DLT in their businesses.

Blockchain in financial services

DLT allows information or records to be transferred and updated by network participants nearly instantly. The process is done in a trustworthy, secure and efficient way, thus carrying enormous potential.

Blockchain has a wide range of potential applicability to many financial services, including cryptocurrencies, post-trade settlements, record checking and management, and cross-border fund transfers.

The technology is even more appealing as a possible replacement for existing processes in which important information needs to be communicated and stored in a highly secure manner, but which are currently largely manual, labor-intensive and paper-based.

Proof-of-concept work

The paper includes findings of the proof-of-concept work carried out on DLT in three particular areas: mortgage loan application, trade finance and digital identity management.

For each area, the report noted the key advantages of implementing blockchain technology.

Mortgage loan applications: A DLT network that connects participants, including banks, law firms and valuation firms, could be helpful for these parties. Notably, it would enable them to confidently share copies of digitized valuation reports and legal documents or even transfer titles, thus reducing the time and cost of transactions.

Trade finance: Trade finance is one of the key banking businesses that involve paper-intensive processes. By digitalizing documents, DLT could help improve the efficiency and accuracy of the workflow by making the entire transaction history and its collateral information more transparent. DLT could also help reduce the risk of fraud by preventing the use of forged documents and the double or multiple presentations of invoices.

Digital identity management: Know-your-customer (KYC) requirements and customer authentication processes are still manually intensive, requiring significant resources from banks. These procedures can be inconvenient for customers and can lead to unsatisfying user experiences. A digital identity management system that uses DLT could automate some of the KYC requirements and the customer authentication process.

The HKMA is planning to release a second white paper in the second half 2017 which will focus on the regulatory implications of DLT. The report will also explore general control principles for DLT for the banking and payments industries.

The central bank set up the FFO in March 2016 to support the development of the fintech industry and help Hong Kong maintain its status as a leading international financial center. The FFO is tasked with initiating banking and payment industry research into the potential application of novel fintech solutions.

Among other things, the office acts as a platform for exchanging ideas of innovative fintech initiatives, an interface between market participants and regulators within the HKMA, and an initiator of industry research in potential application and risks of fintech solutions.

Nurturing fintech talents

In December 2016, the HKMA and ASTRI launched the Fintech Career Accelerator Scheme (FCAS) to nurture talents to meet the growing needs of fintech in Hong Kong. FCAS is supported by 11 banks and nine universities and aims to provide practical internship for undergraduate and postgraduate students. It seeks to help nurture the fintech ecosystem with talents in order to sustain its developments, ensuring Hong Kong’s competitiveness as an international finance center.

“We can foresee strong demand for fintech talents and solutions especially given Hong Kong’s global positioning as one of the top financial hubs, and also the meteoric growth of fintech in Mainland China,” said Franklin Tong, CEO of ASTRI.

According to Norman TL Chan, chief executive of the HKMA, it is critical to nurture sufficient local talents in the long term to ensure the sustainable development of Hong Kong’s fintech ecosystem. “The FCAS is a win-win initiative as it gives students the opportunities to gain practical experience with their knowledge, while allowing banks to source and identify talents for future employment,” Chain said.

Featured image: Image by Pete Linforth from Pixabay