Blockchain coming to the fore

UAE banks are hopping on the blockchain bandwagon as it begins to transform the way the banking industry operates. Paritosh Gambhir expands on its many advantages as well as its potential risks. Digital ledgers and peer-to-peer Ahead of the curve A cornucopia of networks are fast becoming the Meanwhile, the Land benefits for banks “new normal” among future-facing Department, in partnership with Research indicates that investment companies, reshaping how the world UAE-based Mashreq Bank, has banks worldwide could save up to transacts. Banks can consider which released a blockchain-based USD 10 billion by using blockchain processes may be ripe for blockchain mortgage platform, which can to enhance the efficiency transformation—for instance, Know serve as a repository for mortgage of clearing and settlement. Your Customer (KYC), derivatives or records. It is also designed to Similarly, trade finance could be securities trading, payments, and enable confirmation that mortgages revolutionized by the technology. customer experience. comply with registration policies. To date, it still tends to rely on Blockchain is a shared digital record Dubai is also aiming to be the paper-based methods like letters of transactions or information of first city to offer blockchain-based of credit and bills of lading, which value, between two or more parties. payment solutions to its residents. require physical stamping. Digitizing Traditionally, online validation Emcredit, a state-backed subsidiary this is a distant prospect but has requires multiple systems that of the Department of Economic the potential to be game changing. can be coordinated by multiple Development, is working on Blockchain utilizes self-executing parties. Blockchain potentially releasing ‘emCash’, a digital protocols that automatically enables a more integrated solution. currency.7 After all, the intention link all support parties to the It is a decentralized, distributed of the pseudonymous creator of transaction, thereby saving time ledger. This potentially means that Bitcoin was to work “on a new and process costs. Banks may reap transactions are shared, replicated electronic cash system that’s fully the advantages of a consortium, and authenticated in real time peer-to-peer, with no trusted third including operational efficiencies, on computers located at every party”, and to create a network that reduction of intermediary costs, node, thus promising verifiability prevents double spending.8 and a culture of transparency, independent of a single source. The World Economic Forum (WEF) without the traditional potential risk Transactions are stored in batches of inaccurate information transfer. inside “blocks” that become part recently published a white paper analyzing learnings from more Each counterparty may obtain data of a contiguous “chain,” with each directly from the source rather than block time-stamped and continuously than 60 governmental and non- governmental entities across the via another involved party, minimizing verified by the blocks that precede the probability of error. and follow it. This makes the ledger UAE that are actively exploring permanent and virtually tamper proof. or implementing blockchain. Eight banks in the UAE are It estimated that “by adopting collaborating with Digital Many organizations across the UAE blockchain technology, the UAE to develop a new blockchain-based have embraced blockchain. For government expects to save trade finance solution, ‘UAE Trade instance, NBD’s ‘Cheque AED 11 billion (USD 3 billion) Connect’.10 Banks that have signed Chain’ has integrated blockchain into in transactions and documents up include First Abu Dhabi Bank issued cheques to strengthen their processed routinely, 398 million (FAB), RAKBANK, Emirates NBD, authenticity and minimize potential printed documents annually and Commercial Bank of Dubai, National fraud. Cheque Chain utilizes a unique 77 million work hours annually.”9 Bank of Fujairah, Mashreq Bank, quick response code which is printed Abu Dhabi Islamic Bank (ADIB), on every leaf of newly issued cheque and Commercial Bank International. books. The code registers each The platform will aim to help cheque on the bank’s platform. After banks address the risks of double the cheque is received and cleared, financing and fraud, validating trade bank staff can validate the cheque’s transactions and checking whether authenticity and access its source at they have already been financed all times, thereby helping to reduce through another bank. the risk of forgery.5

UAE Banking perspectives | 2020 20 There are also applications in trade 1. Overall governance, risk 5. Organizations should ask finance. For example, it is possible management and compliance themselves how they are building for consumers on a blockchain to support are essential to any a stable, scalable blockchain. What include their bank as a node and blockchain implementation. sort of consensus mechanism give consent to provide account Given that there are different (the process of the various details to suppliers of their users — sometimes even blockchain participants validating choosing, potentially providing real competitors — involved in the a transaction) will be built into time settlement and freeing up blockchain, companies need to the blockchain (proof of work, collateral. Doing so can help side- be very clear on specific roles proof of stake, proof of authority)? step lengthy transaction times and and responsibilities related to Considerations include how credit processes. the blockchain much data can be processed, protocols around on and off chain 2. Companies cannot underestimate management, and whether it is More benefits security requirements or make built to be sustainable and meet Faithful, accurate verification of assumptions regarding blockchain future needs. customers and counterparties defense mechanisms. It is underpins the credibility of every advisable to identify and verify As organizations adopt the banking system. A shared digital checks on security and network technology, the costly compliance, utility to record customers’ identities monitoring processes to reduce reporting, and internal control and keep them updated could be risks associated with smart requirements that are typically invaluable to the industry. Blockchain contracts or other attacks associated with it will likely decrease. may be the answer due to its This is especially true if the intent 3. With blockchain’s immutability, cryptographic protection and ability is to integrate blockchain into an data on a blockchain potentially to share a constantly updated existing financial or risk system or 11 cannot be deleted. In a use case record with multiple stakeholders. another legacy process. Knowing where customer information and understanding the technology Dubai International Financial Centre is included in a blockchain and the risks, and establishing (DIFC), Mashreq, and Norbloc, transaction, blockchain organization-wide controls are the leading Know Your Customer participants may find themselves considered essential first steps (KYC) and client onboarding fintech in breach of privacy regulations to unlocking its vast potential. regionally headquartered in DIFC, (e.g. General Data Protection are jointly launching the region’s Regulation (GDPR) Article 17) first production-ready blockchain if they cannot comply with a KYC data-sharing consortium in the request of a customer enacting first quarter of 2020, in line with the their ‘right to be forgotten’ UAE Blockchain Strategy 2021. It is Paritosh Gambhir expected to facilitate faster, more 4. Banks need to understand the Partner secure onboarding and exchange risks that come with blockchain Financial Services of supporting documentation via and determine what internal KPMG Lower Gulf advanced distributed technologies.12 controls are required in order to ensure that every link along the Some challenges chain is performing as expected. Banks should first identify the Following the Committee of problem they are trying to solve, Sponsoring Organizations of the rather than incorporating technology Treadway Commission (COSO) without a purpose. There are framework may help in the concerns around the application of critical stages, as can working enterprise blockchains, including with blockchain consultants challenges of governance around who have already travelled a consortium, and decision- the implementation path making capabilities.

21 UAE Banking perspectives | 2020 When is blockchain needed? Applying blockchain to a situation only makes sense if the following are true... 01 Multiple parties sharing and replicating data? Inter-organizational; inter-organization; or public 02 Multiple parties updating data? Multiple participants recording and propagating data concurrently 03 ‘Semi-trust’ between parties? – Conflicting interests; or – Parties don’t trust each other; or – Siloed data undesirable 04 Rules governing participants are uniform? Usually participants have equal permissions. Although, private blockchains can give different rights to different users 05 Rules do not changed often? Once issued, smart contracts can’t be edited. Changes to blockchain platforms is controversial and consensus to change is difficult. Although it is dependent to the platform 06 Objectivity and immutable logging of information An indelible and unbiased ‘truth’ of historic events