As we left off in the last blog, the BFSI is among the early adopters of the BlockChain Technology.
And no wonder why they are…. Why not adopt by technology rather than being disrupted by it?
Let’s quickly summarize what we had discussed in the last article:
Blockchain is highly secure.
Smart contracts are really smart.
They save time, efforts & money!
Well, we’re all ready to dive in!
The BFSI always had a fear that this technology could disrupt their business lines one by one, so they adopted & accepted & more importantly embraced the change. As they came to together in a consortium: R3 to figure out ways in which Block Chain can be used in various subsets of the Industry.
One of the ways was to, Issue Commercial Papers on Block Chain,
And yeah, it has happened in India too, Vedanta Ltd recently issued their Commercial Paper on Block Chain! (The Merchant Bank was YES Bank & fintech consultant was a New-York based start-up MonetaGo) Other than this, Block Chain has the capability of offering a wide range of Trade-Finance related solutions & they can come handy for legit business looking out for short-term financing & credit specifically being in an economy having recessionary pressures & preventing the economy to going through deceits like the Nirav Modi scam.
So how could Nirav Modi get away with such fraudulent acts?
The answer could be a high amount of TRUST was bestowed upon a person or a group of people by all the stakeholders at the PNB!
The scamster got away with it as he had these so-called trustees in his pockets.
However, the truth is if this was a Block Chain setup, the basic rules would’ve just rejected their application for LOUs every time they were made, without manual intervention & our country could’ve saved millions!
As we know that, for availing a trade finance a legit small business has to go through a strenuous process of paperwork then those documents are scrutinized and then after some time the entity gets the amount it desires to have.
Behind this a lot of manpower, man-hours are invested. A Block Chain setup saves a lot of resources here. It has the capability of making trade finance available by having much simpler processes.
It can have a check on the stock, receivables and payables of an organization on a real-time basis thus, it then helps build a trust-less mechanism for banks & thus the financing arrangements are granted on the go!
Along with this the Banks also can introduce innovative products like discounting of sales invoices on the Block Chain maybe even securitize them.
Speaking of Innovative instruments, there was a venture capital fund set up on the Block Chain called The Decentralized Autonomous Organization (The DAO) which was a pool of cryptocurrency just like any other fund & it invested in businesses, all over the Block Chain! Surprisingly the Number of Fund Managers & employees in the fund was 0.
How was it possible?
Because of smart contracts, the logic was coded in such a way that voting was conducted amongst the investors before deciding to invest in a project.
Also, there are many Crypto Asset hedge funds, which invest primarily in Cryptocurrencies
As we know cryptocurrencies have privacy as pseudonyms are used, traceability by authorities is again in question. The AUM of this industry is approximately around 1 Billion US$ now, with 55% in the Cayman Islands (Tax-haven), 17% in the US & 13% in the British Virgin Islands (Tax-haven).
What do these hedge funds do?
There are 3 sub-types in this category of Hedge Funds:
1. Fundamental
2. Quant
3. Discretionary
We have heard about fundamental analysis in equity investing, but how can one invest fundamentally in a crypto-asset which is supposed to be so volatile?
The Fundamental Crypto investors invest in ICOs & enter into SAFTs.
The terms seem to be much complex than they are but believe me, they’re not. Here’s some clarity on the definition:
Initial Coin Offering (ICO): A counterpart of IPO in the Equity market. Wherein a Business to raise funds doesn’t have to give away its ownership rights & can still raise funds by issuing ‘Tokens’ as in their own currency!
Example: A particular e-payment company comes up with an ICO wherein the customers of the company also make/receive payments in that token only. Thus there is an active market for those tokens. Now this corporation to raise funds sells these tokens to Investors.
Thus as the demand for the product rises in the market, the value goes up as the number of tokens remain the same & as more transactions happen the more liquid the market is. This makes it an attractive deal for the investor.
Simple Agreement for Future Tokens (SAFT): Counter-part of the Pre-IPO stage funding in Equity Markets. Wherein the Investor invests in the business to provide the business with funding that is required to develop the product.
But the Investor enters into an agreement with the business to provide him with the equivalent number of tokens when the token is listed on the Crypto – Exchange.
Also, the value at which the SAFT investor is allotted Tokens is generally at a discount to the price at which the ICO is listed. This is to provide the investor with an advantage for investing at the nascent stage.
Along with all these innovative products, Block Chain has a capability to disrupt the Brokerage business too as it also involves record-keeping.
Wondering, when will the storm of disruption be coming to India? Let’s cross our fingers!
But are we ready for such a change? How is the regulatory authorities’ reaction on all of this?
An interesting topic, which can be touched upon as a separate topic of discussion!
Hope this was value-adding, would love to know your thoughts in the comments section below!
The newbies' guide to modern convention 