Banking on blockchain

Despite the often negative headlines related to cryptocurrencies, blockchain technology offers far more than just new forms of digital cash and gives banks the opportunity of creating all sorts of new value adding services.

Ville Sointu, Head of Emerging Technologies at Nordea, explains: “If you read the headlines with regards to cryptocurrencies and their often extreme volatility, you could be forgiven for wondering what that means for banks that are using blockchain and DLT (Distributed Ledger Technology) to create new types of services. The answer is that these kinds of speculative markets for cryptocurrencies are completely disconnected from the very practical and often mundane ways blockchain technology can be deployed in closed networks.”

“In reality, the ups and downs of cryptocurrencies has no effect on the work that banks are undertaking to find new products and services that leverage blockchain because it has absolutely nothing to do with it. When we announce that we are doing something that uses blockchain technology, we are still often asked ‘how do you address the scalability problems of bitcoin when you use this technology’ which implies that it is not yet fully understood that it is separated from cryptocurrencies completely,” he adds.

Short to medium satisfaction

For Nordea, the strategy for using blockchain technology is to focus on developing tangible new services that can be rolled out in the short to medium term. This means placing less emphasis on long term complex standardisation level projects but finding solutions that can already impact customer value in the immediate future. One practical example of this is we.trade, the blockchain based common trading platform that was developed in a consortium with other European banks.

Ville Sointu says: “we.trade is by no means the most complex or ambitious blockchain project out there but it reflects quite well what we want to achieve with this new technology. Back in the summer of 2017 we first started to look around and ask ‘is there any practical implementation of blockchain that we could actually roll out as a service?’ We quickly found we.trade.”

“The first meetings we had with the consortium of banks involved with we.trade where focused around questions regarding the sort of actual product we were going to offer to our customers. Also, we discussed what the user experience should be and how it should look. We were much less interested in talking about blockchain per se but were focusing on the value that could be added for our customers and our business.”

“Once we had that information, we talked to our customers and asked them ‘here is a service, if you were to be offered this, would it be of use to you?’ The feedback was extremely positive from our customer base and already from the beginning, lots of customers were expressing a wish to sign up for the pilot and asking about the launch schedule. Because of this overwhelmingly positive feedback, we were encouraged to make sure we launched the service, which we did in June 2018,” he continues.

Making it work

During the building phase of the we.trade platform, Nordea undertook as much technical due diligence as possible to make sure that it would work.

Ville Sointu says: “Of course when we talk about new technologies there are uncertainties. We knew for example that the underlying Hyperledger Fabric blockchain platform was not really proven in any significant production use at that time. We finally reached a point where we were confident enough to proceed with the project with the full understanding that we would be the first ones to try something on this scale. Therefore, we understood that it will not be smooth and perfect at every turn and our soft launch of we.trade in June showed that in some small cases the user experience could be better. It’s new technology and we are fixing all of the issues as we go along. By the time we open we.trade up to all of our customers, we will be several upgrades more advanced in the technology with a stable and smooth user experience.”

Getting connected

The ambition with we.trade is to extend the platform’s reach even further by getting more banks and interested parties connected to the network. Ultimately, the hope is to connect the we.trade network to other trade finance distributed ledger technology based networks, therefore achieving inter-operability with other projects that are progressing outside of we.trade. This will enable a significant increase in trading volumes, with all of these trade networks working together.

“Previously before we.trade, we had a very limited selection of services we could offer in terms of trade finance for small to medium sized companies. With we.trade, we are able to offer different kinds of financing and guarantee services for smaller invoice amounts and therefore smaller companies which we were not able to do before. One of the biggest reasons why we went for we.trade was the positive business case and the positive customer feedback, making it a win-win in that sense,” notes Ville.

Where else for blockchain?

With the successful introduction of the we.trade platform, Nordea are actively pursuing other projects where blockchain technology can provide value for customers.

“we.trade gave us the experience of deploying this technology into production and has of course taken us on a fantastic learning curve which we are applying to all of the other projects that we are doing. This includes everything from deployment to security requirements, cloud requirements, node structure and everything else, so there are a lot of things that we have learnt,” Ville comments.

One project actively under development is applying the use of DLT blockchain technology to a Finnish real-estate network project. In August 2017 the Finnish government announced its plan to digitise all of the real estate records in Finland, which up until now had been stored as physical paper documents moved around between banks when a piece of real estate changes ownership.

Ville Sointu explains: “The Finnish government decided to build a centralised database to digitise real estate shares and records by January 2019. The one thing that the Finnish government left out was the actual trading and collateral management of these real estate assets, so they told the banks ‘you go figure it out’.”

“There were basically three options on how this would have played out: The first option would have been a direct API to API integration which would have replicated a lot of work for all of the banks and would have been inefficient ultimately. The second option would have been to build a centralised clearing house for all the real estate trading; this was an undesirable scenario because the banks couldn’t really agree on who the central party was to be. Therefore, we took the third option which was we wanted to build a decentralised network where these trades are conducted over a consensus network and a DLT system where we all control our own data and the transactions are only between the parties involved with the trade.”

“That was the start of the project. It began with one other bank and today the project includes 5 banks, covering about 85% of the market in Finland in terms of bank house loans. We went public with the project in December last year and have made it clear that we want this to be open and for everybody to join the network. This only way that it will be successful is that we have significant scale in terms of how many parties are involved in digital trading,” he continues. While this project is currently unique to Finland, the technology may eventually be replicated in other countries that still use analogue paper processes to document real estate ownership.

Mercury next

At Nordea, a small team of specialists gather to discuss which projects might be suitable to pursue from a DLT blockchain perspective.

“More often than not business colleagues themselves come to us and ask if their idea is something interesting. We help with the technical validation and make sure that we work with the right type of partners in these cases and then take it forward. Examples of that are of course in areas where we need to build shared infrastructures with other banks; KYC, AML and digital identity are examples of good candidates for being part of this shared infrastructure. We are working with KYC on multiple fronts right now,” he notes.

Another project currently under development is known as Mercury and is aimed at creating a digital corporate identity in Finland.

Ville Sointu says: “We created a blockchain based digital identity for a corporate with a legally compliant process. The practical use case there is that you can start a company fully digitally and the company information will then be guaranteed, shared and accessed by using blockchain technology. Once the company’s structure and related decentralised identifiers are on the blockchain you can share information and create signatures for example using this publicly verifiable digital identity. It’s almost like a self-sovereign identity for a corporate. You can create powers of attorney in a digital format and anybody can go back and verify the validity of that power of attorney using publicly verifiable proofs.”

“It’s interesting because DLT blockchain is just a technical enabler, it doesn’t really do anything itself. It’s about thinking about data sharing, shared infrastructure and processes in a new and more decentralised way. However, it still doesn’t take away the methods that we deploy to talk and agree with other institutions on how these systems and networks will work. We don’t need central parties to control the data flows, so we can manage the data in a much better way,” concludes Ville Sointu.

About Ville Sointu

Ville is a leading authority on DLT blockchain and is a member of the European Union Blockchain Observatory. This was created by the European Commission as a working group of blockchain experts from different fields including banks and other technology professionals working in the blockchain space. The groups aim is to create guidelines at a governance level on how blockchain technology can be used to create more transparent and better governance processes for the European states.

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