How enterprise blockchain transforms finance
Financial transactions around the world today are becoming more efficient thanks to decentralization and peer-to-peer exchanges, made possible by blockchain and distributed ledger technology. By design, these technologies have proven to be very effective in simplifying traditional transaction processes and enabling immediate payment solutions globally.
What is cryptocurrency?
A cryptocurrency, such as Bitcoin, is a decentralized digital currency based on blockchain technology. Unlike fiat money, which is a currency declared legal by a central government and backed by the said issuer, cryptocurrency is not backed by any central government. Through distributed ledger technology that can register and synchronize electronic ledgers across multiple computers (known as nodes) globally, rather than a central database, cryptocurrencies also eliminate the need for intermediaries and their related costs.
Although blockchain evolved with smart contracts several years ago, opening the door for blockchain to be distributed across a wider range of industries, banks and financial sectors still represent by far the highest share of blockchain distributions today, mainly for clearing settlements, payments cross-border, and digital identity management. According to a report by Jupiter Research, blockchain placements will enable banks to realize savings on cross-border settlement transactions of up to $ 27 billion by the end of 2030 – reducing costs by more than 11 percent.
What is decentralized finance?
Decentralized finance, also known as DeFi, is the umbrella term used for peer-to-peer financial services using blockchain technology. This makes it an alternative financial system that can compete with centralized services in terms of accessibility, robustness and transparency in a peer-to-peer way.
Here are some of the key features of decentralized finance:
- Asset management: This is considered one of the most useful DeFi applications for users. A key aspect of DeFi is to give users control over areas such as buying, selling and transferring digital assets. As a direct result, consumers are the sole manager of their data and can earn interest by managing their digital assets.
- Data protection: Unlike traditional centralized banking systems, DeFi allows users to keep sensitive data private.
- Know-your-customer and compliance: Traditionally, know-your-customer rules (KYC) are a company’s most important compliance instrument for ensuring measures against terrorist financing (CFT) and anti-money laundering (AML), where privacy plays a key and sensitive role. role between the players. DeFi uses the know-your-transaction (KYT) method, where the decentralized infrastructure provides knowledge about transaction behavior and digital addresses, rather than the users’ identities.
- Data and analytics: DeFi applications demonstrate unparalleled openness to transaction data, enabling data analytics, discovery and untapped decision-making capabilities. The growing popularity of these applications leads to the development of dashboards and tools for assessing risk, tracking asset value and comparing them for the liquidity process.
Benefit with Enterprise Blockchain for finance
Dedicated blockchain enterprise platforms have the potential to change the way businesses operate globally, with the ability to create bridges based on openness, security and trust with other companies, industries and economies around the world.
Here are some of the benefits that blockchain can bring to today’s businesses and their value chains:
- Trust and transparency regarding privacy: The shared and unchanging source of truth enables all parties in a business network to collaborate, enter into agreements and manage selective data, while maintaining integrity and confidentiality.
- Security: There is no single point of error due to the distributed architecture, which reduces the need for data intermediaries. It is tamper-proof against fraud and malicious third parties, making it virtually impossible to tamper or hack.
- Business Logic Programmability through Smart Contracts: Blockchain technology supports business logic implementation and automation through programming code, validating every step of the business process with accuracy, security and step-by-step control.
- High performance: The modern private blockchain platforms are designed to sustain hundreds of transactions per second, as well as periodic increases in network activity.
Enterprise Blockchain utility cases for finance
Many companies have been exploring the benefits of blockchain for years. But even though the technological basis has an untapped transformation potential, most companies are still in the test phase and have not yet rolled out any production-ready solutions.
Ericsson is one of the first companies to have developed blockchain functions in its core business and has already used the technology in selected processes. Just like how Enterprise Resource Planning (ERP) broke efficiency by integrating internal business processes into a business context back in the 90’s, we are now revolutionizing ways of working by using blockchain technology to integrate business processes between companies, suppliers, third parties and customers.
Here are two blockchain use cases that are transforming transaction processes across our value chain today:
Trade Financing: Blockchain Technology and Letters of Credit
Global trade can be a complicated process when importers and exporters from different parts of the world need transaction verifications before they can complete the trade financing transaction. Blockchain speeds up the process by giving all parties access to documents and records as soon as they process them.
By expanding the footprint of the blockchain in finance, Ericsson is at the forefront of implementing a digitized, reliable and fully traceable Letter of Credit (LoC) process streamlined for trade finance activities. The solution enables real-time visibility and reduction of manual paperwork while improving traceability, efficiency in handover of assets or goods, and reducing working capital levels.
Above: Blockchain technology in letter of credit transactions is based on an application that uses blockchain to connect banks and companies for an end-to-end digital letter of credit, without relying on other systems.
International transactions are part of Ericsson’s day-to-day operations. However, the nature of these transactions can be very complex due to the many parties involved and the varying geographical locations. To ensure the implementation of commercial agreements, securing payments and the correct transfer of ownership of underlying goods, a LoC is used in such transactions.
Traditionally, the issuance of a LoC is often dependent on manual paperwork and requires negotiation and repetition by all parties, resulting in time-consuming and tedious processes with low visibility and traceability. By implementing blockchain technology, Ericsson is part of the early development of a digitized LoC, which is streamlined to trading activities and allows unchanging and transparent recordings of critical transactions and real-time visibility.
The goal is to build a future digital Trade Finance that connects the entire ecosystem between all parties – Ericsson, the customer, the issuing bank and the nominated bank. By building on a blockchain and an existing global trade financing together with smart contracts and digital signatures, the LoC can practically be approved and tracked across all parties, and ensure processing with speed and simplicity.
Venus – Internal invoicing
In 2020, Ericsson built a blockchain into its corporate landscape when the first use case for a blockchain went into full production for internal invoicing. Venus – the internal name of the solution, inspired by the Greek goddess of beauty – is the first blockchain platform in Ericsson’s corporate landscape.
Venus is part of an intercompany digital transformation project, which uses blockchain technology in the non-sales order-related (N-SOR) invoicing process.
The solution supports financial processes worldwide, and covers more than 180 countries in which Ericsson operates. Massive efforts after reconciliation are prevented since blockchain makes it possible to reduce potential problems in advance, instead of addressing them reactively. As a result, this has resulted in process quality improvements and a factor of ten improvement in lead time.
Above: The blockchain platform and the Venus solution enable real-time validation of invoices against purchase orders, as well as increase traceability by eliminating manual steps in non-sales order processes.
What now?
Blockchain has the potential to transform economic processes – reduce costs and increase control benefits. It’s a new catalyst for improving from order to cash to procure-to-pay, accounts receivable, accounts payable, general ledger, reconciliation and even payroll.
Through blockchain technology, Ericsson works intensively to improve financial processes by increasing efficiency, reducing reconciliation and generating new revenue streams both across our own value chain and for our customers.
Learn more
Read our previous overview post on how blockchain technology can pave the way for connected industries
Find out why 5G and blockchain can become the building blocks of emerging shared economies
Read the Ericsson Technology Review article: Facilitating online trust with blockchains
