“Blockchain-based solutions can help the CRO, the CFO and the CCO shrink hurdles for data consistency, transparency and lineage.”

Our first post in this series looked at some key definitions around blockchain, the hot new technology making its way into financial firms. But what can this new technology do for Finance & Risk functions?

Blockchain-based solutions can help the chief risk officer, the chief financial officer and the chief compliance officer shrink hurdles for data consistency, transparency and lineage, ultimately supporting more efficient production of risk measures, profit & loss (P&L), stress testing and regulatory reporting. For the chief operating officer, blockchain can mean better management of data-related challenges in managing operational risk, including Know Your Customer (KYC), Anti-Money Laundering (AML) and fraud detection.

What challenges come with blockchain?

Blockchain is, inherently, a data-related paradigm. It is useful for managing any data that is to be reliably and securely identified, versioned and retrieved in the context of a business function.

While early blockchain implementations have focused on transactional data for value exchange, trade matching, clearance, settlement and payments, many other data types are being added to the financial services value chain and that enrich transactions, ultimately resulting in streamlined, efficient Finance & Risk functions.

In general, Finance & Risk processing requires contractual, trade and position-related data sets along with reference data, counterparty and legal entity data. Historically, data sent from the front office to Finance & Risk has been a limited and incomplete subset of the data needed for risk calculations, P&L and regulatory reporting. Data sets had to be reconstructed. Not surprisingly, reconstruction introduced data inconsistency only partially addressed by reconciliation. Finance & Risk managers tackled the unresolved exceptions, often shifting from their daily activities to resolve issues like misaligned allocations and unexpected valuation differences. These same managers then needed to stand ready to explain those differences to auditors and regulators.

We expect the true, transformative value of blockchain for Finance & Risk to be in extending its use, over time, by capturing a single version of the truth at the point of sale—with a complete data set validated and versioned in the blockchain and shared securely across participants.

What about cost savings?

Can blockchain bring real savings? Here are some projected cost savings from Accenture’s recent paper, “Banking on Blockchain”[1] that can be realized with blockchain adoption over the next 5-10 years:

  • Operational risk: Fifty percent potential cost savings on centralized operations
    • More robust digital identities
    • Mutualization of client data among industry participants
  • Risk, regulatory and compliance: Thirty to fifty percent potential cost savings on compliance as transactions become visible to regulators in a mutualized blockchain
  • Finance: Seventy percent potential cost savings on central finance reporting:
    • Streamlined, improved data quality, transparency and controls
    • Elimination of reconciliation
  • Digitized middle and back office: Fifty percent potential cost savings on centralized operations, as recording transactions in a mutualized blockchain eliminates the need for reconciliation, confirmation and trade break analysis

In our next post, we’ll consider several use cases for blockchain.

References

  1. Banking on Blockchain: A Value Analysis for Investment Banks, Accenture, November 2017. Access at: https://www.accenture.com/us-en/insight-banking-on-blockchain

Submit a Comment

Your email address will not be published. Required fields are marked *