April 17, 2022
The blockchain boom has paved the way for the financial world to transform like never before. Digital financial instruments are being curated from digital assets, smart contracts, and programmable money with an exceptional level of connectivity and programmability between products, services assets, and holdings.
Financial firms adopting blockchain technology will likely tap into underserved markets and improve their bottom line by shedding some of the operational costs associated with traditional international payment gateways. Trending blockchain use cases within financial services include Capital Markets, Asset Management, Digital Payments, and Insurance.
So, what makes businesses choose the emerging tech in recalibrating the value chain? Is it limited to the flexibility to incorporate change, a create degree of centralization or improve the business experience? Now, if we apply the principle of “modularity” within Hybrid Cloud, every adoption stage makes you feature-rich by being native and cohesive across the ecosystem and building a synergized trust-based collective, “we” between traditional and contemporary.
Financial Instruments as Code [FIaC] is an idiom of modern transaction banking between market participants, making expressive association between business functions and emerging tech. This, in process, creates & delivers “new products” to existing and “new markets.” FIaC is a set of technology-enabled high-value business bundles that can create new shared revenue models in partnerships with marketplace participants. Platform firms are re-bundling internal and third-party services into their own packaged offerings to their established customer base. Ecosystem Providers are accumulating data and building a more extensive, stickier revenue base by offering bundled services that reduce the friction for both the consumer and the ecosystem.
Presently, FIaC is getting wrapped in Fundraising, Credit & Loans, Trade Finance, Digital Identification Verification, Accounting & Auditing, Hedge Funds, and P2P Transfers. It removes the regional barriers surrounded by data privacy regulations and integrating transactions into one digital identity, which is updated in real-time and can be accessed by all network members. Consumers will need to register their identity only once on blockchain network to add & retrieve transaction receipts, a joint register distributed over the network.
The most popular innovation in this area is Zero-Knowledge Proof [ZKP], with several countries and large corporations now working on solutions based on ZKP. FIaC has a built-in enriched application layer of a digital notary, pay for invoices automatically, real-time transaction acknowledgment, secure loan processing, single digital identifier, reliable & secure international payments etc.
One of the central building blocks of FIaC is Cryptocurrencies, a vehicle with great prospects and potential to outperform conventional banking products while offering greater efficiency, less bureaucracy, and more transparency.
Cryptocurrency in the system of financial instruments
The Office of the Comptroller of the Currency (OCC) stated that banks and savings associations could provide crypto custody services for customers, including holding unique cryptographic keys associated with accessing private wallets. Banks are offering interest-bearing crypto accounts, where customers could invest the crypto on the back end or through other financial tools, which are then used for transacting FIaC products.
Banks are utilizing public blockchains, including Stablecoins, to speed up payment processes for FIaC products. Banks are / should reinforce trust within Smart Contracts by becoming a reliable third party that utilizes these smart contracts for mortgages, commercial loans, letters of credit, or other transactions. In 2019, the Financial Crimes Enforcement Network (FinCEN) determined that any cryptocurrency transactions and custody services must still abide by AML/KYC regulations. Currently, blockchain technologies are automating AML and KYC verifications and are at different maturity stages.
Regulatory bodies are concerned about the fact that not all crypto transactions are being tracked for AML & KYC considerations, which could lead to illegal activity and scams to the network. Governments worldwide don’t want to have decentralized currencies outside of their control, plus many countries see it as a threat to their national currencies. Cryptocurrency adoption and usage continue to evolve through regulatory lenses of countries, with some nations taking an approach to building their own National Crypto, serving as a medium of scale FIaC products.
The road ahead
Financial Instruments as Code will further boost co-creation of the value chain by re-bundling internal and third-party services into packaged offerings to the marketplace, also a derivative to Open Finance. FIaC will peak within Embedded Finance, both for banks and non-banks, via real-time payments and Trade Finance. Embedded Finance is the future of fintech, but there are already many exciting products on the market built with Embedded Finance principles. FIaC will shape Embedded Finance with a more interactive experience via IoT models, and that’s going to be something to watch out for.
The author, Anand Chandra, is the Global Head Banking, Financial Services & Insurance Presales & EU/APAC Growth Leader at Accolite Digital,
The article has been originally published in The Times of India.