Citibank: Blockchain technology is still far from golden age

Citigroup says blockchain technology could ultimately improve trade finance and cross-border payments.

Citigroup researchers believe blockchain-based systems have the potential to improve trade finance.

Blockchain is not yet developed to replace banking

That’s more or less the conclusion of a 48-page paper published this week by researchers at Citigroup, written by Keith Horowitz , Adrien Porter and Michael Cronin. The paper is one in a series of papers from the working group, which focuses on the impact of using blockchain systems on cross-border and trade finance in international banking; they wrote a separate analysis of blockchain and securities settlement in January and plan to analyze remittances in another.

Blockchain is the general term for the underlying technology of digital currencies such as Bitcoin. It is a platform maintained by a distributed network of computers rather than a centralized server group. At its core, blockchain is a distributed ledger that records every transaction on the network and allows all participants to view and verify it. Since Bitcoin entered the mainstream public eye, the underlying technology has become a major topic of concern on Wall Street and in the financial world in general.

Citigroup and most other large banks have been studying the technology to see what makes it work, to what extent it could impact the banking industry, and to what extent the banks themselves could choose to adopt it. More than 40 banks, including Citigroup, have partnered with R3 to build a blockchain-based platform. The bank has also tested the technology on its own and created its own currency, called Citicoin, in internal testing.

Mr. Horowitz writes:

“We do not see blockchain as a medium-term strategic threat to the banking industry’s profitable, high-value cross-border payments business.”

He believes that the main reason for this situation is also the reason why the entire cross-border payment infrastructure today came into being in the first place: the lack of a truly international currency.

“Since currencies can only truly circulate within their respective central bank systems, large international banks are needed to transfer value across borders.”

Blockchain technology can help build a new kind of channel within this payment network, he said, but to really get anywhere, it needs a truly international digital currency at its core. He doesn’t think bitcoin can scale to the degree it will need to, and he doesn’t see any other alternative that can.

“The central bank is likely to be reluctant to give up control of the money supply.”

The key word here is “medium term”. It is true that Bitcoin as a currency has limited capacity and cannot yet handle this global business. However, it is not only commercial banks that are interested in this area. Regulators and central banks are also interested, and it is likely that one of them will issue a digital currency to fill the gap pointed out by Citibank, which is probably why Mr. Horowitz mentioned the concept of medium term. What if the People's Bank of China (PBOC), which is happy to give up the dollar, digitizes the RMB? What if the Bank of England digitizes the pound?

Both are asking questions about the prospects. Here is a translated transcript from a meeting held by the People's Bank of China on the subject. Here is a speech by Ben Broad of the Bank of England exploring the possibility. No central bank is going to join Silicon Valley in this space, but they are thinking philosophically about it and trying to tease out all the issues.

Mr. Horowitz sees a more immediate impact from blockchain in the world of trade finance, specifically as a way to replace the trust certificates used to finance about 20% of international trade. He said:

“Today trusting certificates is a manually intensive process and it will take a lot of time to make it digital.”

A typical transaction can contain 150 different records and up to 10 different transaction methods, as long as they sign it. In addition, he said, about 80% of these transactions are delayed when they are settled because of some difference in the method.

On the surface, a type of smart contract written on a blockchain could be set up to record the details of a transaction and release the funds only after certain conditions are met. Mr. Horowitz wrote:

“We believe that blockchain can help solve major issues in trade today by replacing traditional paper-based processes and digitizing them, while adding functionality such as smart contracts that can trigger actions such as payment release or shipment of goods.”

Original article: http://blogs.wsj.com/moneybeat/2016/03/30/blockchains-primetime-still-a-ways-off-citi-says/”>
By Paul Vigna
Translator: Peterhon
Editor: Kyle
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Source (translation): Babbitt Information (http://www.8btc.com/blockchains-primetime-still-a-ways-off-citi-says)