Deutsche Bank: Pursuing Blockchain Opportunities

1. Blockchain has the potential to disrupt the banking sector and create new business models around a peer-to-peer
community. In banking industry tracking payments, transactions and bond trades, equities and loans required the
involvement of banks, traders, and other intermediaries and implementing blockchain would reduce the lead time
from days to minutes.

Blockchain has the following core functionalities

Core distributed ledger functionality:

Blockchain offers a consistent, immutable recording of data distribution across a network. Historical data cannot be
easily or secretly changed by any single actor, making it practically sacrosanct. Databases (ledgers) are replicated
automatically across network participants. Validation of data is performed via a predefined algorithm rather than a
central authority.

Encryption & signature validation

Data “fingerprints” generated through one-way encryption makes checking data integrity fast. In distributed ledgers,
identity and permissions are continually validated with each transaction.

Smart contracts:
Allow business logic and workflows to be built into a distributed ledger. Capable of updating the ledger (e.g., making
payments) based on pre-defined conditions

These features give block chain the following advantages

 Richer data sources
o Comprehensive and txransparent audit trail
o Near real-time access to accurate data across multiple parties (single version of truth).
 Frictionless value transfer
o Ability to record transfer of digital assets without central authority
o Efficient transaction processing with settlement finality
 Malleable and robust data environment
o No single point of failure

2. Deutsche bank experimentation with Block Chain

Deutsche bank was facing tremendous global pressure to update its banking infrastructures and systems due to
1) the increased regulatory demands after the financial crisis
2) and the changing client demands based on the new technology trend.

It did not require much research to see the potential applications for block chain technology. Deutsche bank sitting
on 1.7 Trillion dollar assets, committed itself to become a more digital bank and decided to invest 1billion euros to
capture new revenue opportunities that would arise through the early adoption of emerging technology.

For any trading company, the main source of income would be from post-trade and securities settlement, payments,
and other forms of trade finance transactions. Blockchain is an alternative to the expensive cross-border payments
process. It could also be used in securities space, providing them the capabilities to trade financial derivates outside
of the current financial markets allowing private parties to trade. Securities settlement and clearing was the most
promising area for exploring Blockchain implementation.

3. What lessons did Deutsche Bank learn through their experiments with Blockchain?

There were certain challenges inhert with the usage of blockchain which had to be overcome before adopting it. The
challenges include
Interoperability: Organisations are developing their own DLT and applications to run on top of them. Many different
chains are therefore being developed by many different organisations to many different standards. This defeats the
purpose of distributed ledgers, fails to harness network effects and can be less efficient than current approaches.

Privacy: The Distributed Ledger Technology allows full transparency on transactions. Many potential applications of
DLT require smart contracts for transactions to be indisputably linked to known identities, and thus raise important
questions about privacy and the security of the data stored and accessible on the shared ledger

The above challenges were addressed by the following developments

A Smart contract created using block chain. Smart contract is a computer program that directly controlled and
triggered the transfer of digital currencies or assets between parties under certain conditions. Smart contract
defined the rules and penalties around an agreement in the same way that a traditional contract did but it also
executed the actions required by the contractual causes. They secured the funding and backing of the Banks’ COO
and further developed the smart contracts. Using Blockchain smart contracts, they were successfully able to create
and execute corporate bond contracts.

Also, In pursuance of Block Chain, Deutsche bank became a founding member of Distributed Ledger group
consortium formed around the block chain start-up R3. Founded in 2014, r3 leads a consortium of more than 200
members and partners from both the private and public sector, making it the largest collaboration of its kind in the
blockchain space.

R3 started working on Corda, an open-source blockchain platform. The Corda platform is designed to remove costly
friction in business transactions by enabling businesses to transact directly.

Corda’s core capabilities include:

 Consensus: Bringing participants to consensus on shared facts, removing costly and timeconsuming
reconciliation.
 Privacy: Minimizing information leakage by only sharing required transaction data.
 Integration: Corda has been built to easily integrate and interoperate with existing systems.
 Cross-industry: Corda provides a gateway to a vibrant network of blockchain applications for cross-industry
complex, real world problems.

Corda’s capabilities could create system that enabled near-instantaneous and error free settlement once
transactions had been agreed on. This was a significant improvement for the settlement process within the financial
service industry.

From the experiments they learned that

1) Trades can be executed using ‘smart contracts’.
2) Parties in the trade could theoretically exchange a contract without an intermediary.
3) Reduced clearing and operational risks
4) Significant effort is needed to capture all elements of a complex, multi-party financial transactions.
5) Significant legal, political, and market obstacles still remain which need to be addressed before the product
can be commercialized.
6) Framework on verifying, if the contract is executed as intended and which all parties needed to be involved
are yet to be in place.
7) Certain concerns exist about sharing of intellectual properties, which will have impact on testing the block
chain in multi-participant setup to test the market-infrastructure implications.

4. What should be the path ahead for Deutsche Bank to benefit from Blockchain?

Duetsche bank should continue its innovations with block chains, it should build on the initial POV for the smart
contact corporate bond.
It should focus its attention on

1) Facilitating customer interactions through remote advisory channels

2) Improving platform efficiencies through automated or digitized processes
3) And Increasing process efficiencies

Some of the processes which it could target could be

 Replacing the SWIFT bank transfer system with the block chain.
 Creating Distributed system for loans and deposits based on ledger technology. This would be a
decentralized system which would be immune to bankruptcy since there is no one specific organization
controlling the deposits.
 Extending the technology towards “Know Your Client” (KYC). With blockchain, users will be identified once,
and the information will be stored in a secure location where all banks in the system can access it.
 Traditional insurance can also be enhanced by automating insurance payments. Smart contracts that are
performed automatically will eradicate the long bureaucratic delays, making it possible for people to receive
payments instantly, when they can be of immediate use.