The future of financial infrastructureAn ambitious look at how blockchain can reshape financial servicesAn Industry Project of the Financial Services Community | Prepared in collaboration with DeloittePart of the Future of Financial Services Series August 2016ForewordConsistent with the World Economic Forum’s mission of applying a multistakeholder approach to address issues of global impact, creating this report involved extensive outreach and dialogue with the Financial Services Community, Innovation Community, Technology Community, academia and the public sector. The dialogue included numerous interviews and interactive sessions to discuss the insights and opportunities for collaborative action.Sincere thanks to the industry and subject matter experts who contributed unique insights to this report. In particular, the members of this Financial Services Community project’s Steering Committee and Working Group, who are introduced in the Acknowledgements section, played an invaluable role as experts and patient mentors.We are also very grateful to Deloitte Consulting LLP in the US, an entity within the Deloitte1 network, for its generous commitment and support in its capacity as the official professional services adviser to the World Economic Forum for this project.2WORLD ECONOMIC FORUM | 20161 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee “DTTL”, its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL also referred to as “Deloitte Global” does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.This publication contains general ination only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.ContactFor feedback or questionsR. Jesse McWatersjesse.mcwatersweforum.org1 212 703 6633The Distributed Ledger Technology project is the most recent phase of the Forum’s ongoing Disruptive Innovation in Financial Services work3WORLD ECONOMIC FORUM | 2016THE FUTURE OF FINANCIAL SERVICESThe Future of Financial Services project explored the landscape of disruptive innovations in financial services, provided the first consolidated taxonomy for these disruptions, and explored their potential impacts on the structure of the industryBEYOND THE FUTURE OF FINANCIAL SERVICESThis phase of the disruptive innovation work explores two topics with key potential as foundational enablers of future disruption2015 2016This project explores the potential for distributed ledger technology to trans the infrastructure of the financial services industryThe future of financial infrastructure An ambitious look at how blockchain can reshape financial servicesA Blueprint for Digital Identity The Role of Financial Institutions in building Digital IdentityThis project explores the potential for digital identity in financial services and beyond and lays out a blueprint for the implementation of effective digital identity systemsContents4WORLD ECONOMIC FORUM | 2016Acknowledgements 5cutive SummaryContext and Approach.. 13Key Findings. 17Use Case Deep-DivesApproach.. 32Summaries.. 37ModulesPayments Global Payments. 46Insurance P instead it should be viewed as one of many technologies that will the foundation of next-generation financial services infrastructureApplications of DLT will differ by use case, each leveraging the technology in different ways for a diverse range of benefitsDigital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat legal tender, along with other emerging capabilities, has the ability to amplify benefitsThe most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementationNew financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business modelsThe World Economic Forum’s analysis has yielded six key findings regarding the implications of distributed ledger technology DLT on the future of financial services18WORLD ECONOMIC FORUM | 20161234561 2 3 4 5 6These key findings are explored in depth in the following pages, based on the use case deep-dives conducted across financial services. Key findingsDistributed ledger technology has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes19WORLD ECONOMIC FORUM | 2016The following six key value drivers for DLT were identified through the in-depth examination of nine use cases from across financial services.Value drivers1 Operational simplificationDLT reduces / eliminates manual efforts required to per reconciliation and resolve disputes2 Regulatory efficiency improvementDLT enables real-time monitoring of financial activity between regulators and regulated entities3Counterparty risk reductionDLT challenges the need to trust counterparties to fulfil obligations as agreements are codified and cuted in a shared, immutable environment4 Clearing and settlement time reductionDLT disintermediates third parties that support transaction verification / validation and accelerates settlement5 Liquidity and capital improvementDLT reduces locked-in capital and provides transparency into sourcing liquidity for assets6 Fraud minimizationDLT enables asset provenance and full transaction history to be established within a single source of truth1 2 3 4 5 6Distributed ledger technology is not a panacea; instead it should be viewed as one of many technologies that will the foundation of next-generation financial services infrastructure20WORLD ECONOMIC FORUM | 2016Over the last 50 years, technology innovation has been fundamental to financial services industry transation. Today, multiple technologies poised to drive the next wave of financial services innovation are converging in maturity.1960s 1970s 1980s 1990s 2000s 2010s futureEmerging technologiesMainframesTerminals and PCsLocal networksInternetSmart devicesMobileEnabled batch overnight processingAutomated banks and branches and facilitated offline remote bankingEnabled data centres,intranets and corporate systemsFacilitated the global exchange of data and enabled a series of international businessesCreated a new medium to interact with clients and collect dataSpearheaded frictionless paymentsSemiconductormicroprocessorsAllowed the replacement of physical recording by digital data1 2 3 4 5 6DLT is one of many transative new technologies that will shape future financial services infrastructure and should be seen as part of a toolboxDigital bankingCreditcardsMessagingservices e.g. SWIFTATMs ElectronictradingBiometricsMachine learning /predictive analyticsCognitive computingQuantum computingDistributed ledgertechnologyCloud computingRoboticsExamples of DLT value drivers and benefitsValue driver BenefitsApplications of distributed ledger technology will differ by use case, each leveraging the technology in different ways for a diverse range of benefits21WORLD ECONOMIC FORUM | 20161 2 3 4 5 6Enables the near real-time point-to-point transfer of funds between financial institutions FIs, removing friction and accelerating settlement Settlement time reductionGlobal paymentsProvides faster and more accurate reporting by automating compliance processes that draw on immutable data sourcesRegulatory efficiency improvementAutomated complianceEnables real-time multi-party tracking and management of letters of credit, and enables faster automated settlementOperational simplificationTrade financeProvides market participants with an improved line of sight into assets, enabling improved risk uation and decision-making Liquidity and capital improvementAsset rehypothecationUse caseDigital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat legal tender, along with other emerging capabilities, has the ability to amplify benefits22WORLD ECONOMIC FORUM | 20161 2 3 4 5 6Digital identity Digital fiat Future innovationsCurrentstateCorrect identity ination is critical to ensuring financial transactions are accurate and compliant – but integrating physical identity protocols with DLT creates frictions and increases the potential for errorsDLT systems are frequently denominated with tokens that are native to the system –but users of al financial infrastructure will demand high levels of liquidity between assets on the system and fiat currencyThe advent of the fourth industrial revolution is rapidly altering the financial system and broader economy through the exponential acceleration of innovationCapabilityenabler A fully digital system for storing and transferring identity attributes could be directly integrated into distributed financial infrastructureDistributed fiat currencies issued by central banks could be employed within distributed financial infrastructure, ensuring the availability of liquidity even in the event of systemic instabilityOpportunities for integration may emerge between distributed financial infrastructure and a range of innovations, such as artificial intelligence or the rapidly evolving internet of thingsFuturebenefits Faster and accurate anti-money laundering AML and know-your-client KYC processes Seamless customer onboarding Improved counterparty matching Settlement to liquid cash-equivalent tokens issued by a central bank Elimination of the need for an inefficient bridge between cash and new financial infrastructureThe potential benefits of these integrationsare highly uncertainThe most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation23WORLD ECONOMIC FORUM | 2016Updating financial infrastructure through DLT will require significant time and investment. Three key observations must be taken into consideration for this implementation to be successful. 1 2 3 4 5 6Key observations and insightsLegal, regulatory and governance frameworksInfrastructure replacementCompeting interestsReplacing existing financial infrastructure by DLT will require significant time and investmentAligning key stakeholders for collective action will require difficult balancing of interests in the face of diverging interests and zero-sum games Implementing new financial infrastructure will require changes to existing regulations, standards of practice, and the creation of new legal and liability frameworks. Specifically, the implementation of smart contracts will require additional stakeholder alignment and governance considerationsAchieving all three key observations will delay large-scale, multi-party DLT implementations in highly regulated markets. However, if successful, these could enable scalable infrastructure fabrics, industry-wide solutions and standardized processesa b cNew financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business models24WORLD ECONOMIC FORUM | 2016Assumptions that are central to today’s financial business models will be impacted both intentionally and unintentionally by the shift to distributed financial infrastructure, requiring incumbents to adjust their business practices in response.1 2 3 4 5 6Current-state assumptions Transative characteristics of distributed infrastructure Implications for market participants within financial servicesInation silos drive the need for detailed reconciliation activitiesLack of a single version of the truth and audit trails creates arbitrage concernsAsymmetric ination between market participants drives the proliferation of central authoritiesLack of transparency increases regulations on FIsLack of trust between counterparties creates the need for central authority oversight in contract cutiona immutabilityb transparencyc autonomyEliminates need for reconciliationProvides historical single version of the truthEliminates imbalance of ination among market participantsIncreases cooperation between regulators and regulated entitiesEnsures agreements are cuted to agreed upon business outcomesDisintermediates supporting entities established to resolve disputesCurrent stateDLT transative potential Financial services implicationsDistributed ledger technology will question the need for individual books of record through immutable and distributed record-keeping25WORLD ECONOMIC FORUM | 2016DLT provides transaction immutability, which is a key requirement for eliminating the need for an enforcer of trust in the ecosystem. Tamper-proof distributed data enables an environment in which trust is not an issue and allows counterparties to operate with a single version of the truth. Challenges ination silos between market participants and eliminates the need for inter-firm reconciliationAt its core, DLT is a growing repository of transactions organized in chronological blocks where the technology intrinsically makes changes to previous transactions functionally impossibleTraditionally, asset and transaction ination was stored within physical books to independently reference previous actions internally and externally. As technologies advanced, physical books were translated into digital ledgersDLT has been designed to replicate data among participating nodes in real time, ensuring all parties operate off of a single version of the truth at all timesDisintermediates central intermediaries and reduces the fear of arbitrage within the ecosystemEnables audit trails to be established for assets and transactions with a significant reduction in disputesToday, every FI maintains its own digital “book of record” repositoryAs a result, central intermediaries proliferate in the industry, providing unbiased reconciliation