WEF: Distributed Ledgers Are the Foundation of New Financial Infrastructure

The World Economic Forum (WEF) just published their latest report in their ongoing research into the future of distributed financial technology and its potential to remake the foundations of the world’s financial infrastructure.

In “The Future of Financial Infrastructure: An ambitious look at how blockchain can reshape financial services,” WEF summarizes twelve months of research into the current state of banking, zeroing in on the use cases where distributed ledger technology can address financial pain points and build a better system for the increasing demand created by the Internet of Things.

The World Economic Forum weighs in on the future of distributed ledger techfor global payments. Tweet This

WEF identifies six key value drivers for DLT through an analysis of nine financial services use cases:

  • Operational simplification: distributed ledger technology (DLT) reduces / eliminates manual efforts required to perform reconciliation and resolve disputes
  • Regulatory efficiency improvement: DLT enables real-time monitoring of financial activity between regulators and regulated entities
  • Counterparty risk reduction: DLT challenges the need to trust counterparties to fulfill obligations as agreements are codified and executed in a shared, immutable environment
  • Clearing and settlement time reduction: DLT disintermediates third parties that support transaction verification / validation and accelerates settlement
  • Liquidity and capital improvement DLT reduces locked-in capital and provides transparency into sourcing liquidity for assets
  • Fraud minimization: DLT enables asset provenance and full transaction history to be established within a single source of truth

Unsurprisingly, many of these drivers are of particular interest in the case of global payments. The report points out that global remittance payments volume is increasing at a rate of 5% yearly, and are slated to reach US$ 601 billion in 2016. Growth is constant over the world, but faster in areas like Asia and Brazil. Low-value, high-volume cross-border payments are also very expensive for consumers, with an estimated final cost of 7.68% of the amount transferred per transaction.

WEF points out the specific use case for DLT by combining the volume, cost, and long settlement times with a diagram explaining how the payments process works today, using SWIFT as a messaging platform. The current payments process is shown in step-by-step detail, pointing out that is inefficient, vulnerable, costly, slow, and error-prone. The report also points out that SWIFT proposed its Global Payment Innovation Initiative (GPII) as a partial solution to the clear dilemma, but that SWIFT’s offering is not a DLT solution and only promises same-day settlement, rather than real-time.

GPIIWEF

 

WEF contrasts that with what a possible payments system could look like, using a distributed financial solution like Ripple and the Interledger Protocol. This model is seamless, making real-time fraud prevention and immediate settlement the norm, while reducing costs to both payment providers and the end user.
Future

WEF defines in no uncertain terms that the benefits of widespread adoption of DLT are essential to the financial infrastructure of the future; immutability, transparency, and autonomy are “transformative characteristics of distributed infrastructure.” The challenges of standardization and harmonious regulation seem small and surmountable when the problem and the solution fit so neatly together.

Read the full report here.