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Law Experts: Why Banks Are Scared of Blockchain

Last Updated March 4, 2021 4:50 PM
Olusegun Ogundeji
Last Updated March 4, 2021 4:50 PM

According to law experts in South Africa, most banks are scared of blockchain for its power to disrupt their sector.

A Senior Associate at Norton Rose Fulbright in Johannesburg, Nerushka Bowan, said the adoption of blockchain among banks has the potential to disrupt the global banking industry.

Using the blockchain technology and its digital distributed ledger to confirm batches of transactions just as it does for bitcoin, it can take over functions such as verifying payments. She added that though banks are a trusted intermediary for the exchange of funds, they will be cut out once the use of blockchain is embraced. Hence the fear in the banking sector.

Norton Rose Fulbright’s global operation is looking at the implications of the blockchain. This is because the technology, which underlies cryptocurrencies such as bitcoin, has been grabbing the attention of banks in various parts of the world including South Africa.

R3 Consortium

In July, a top South African bank Absa became the first financial institution from Africa to join the R3 blockchain consortium. The R3 group is a partnership with over 50 of the world’s leading financial institutions which aim to work together to design and deliver advanced distributed ledger technologies to the global financial markets.

R3 and some 15 member banks, this week, announced the development and use of smart contracts on R3’s Corda distributed ledger platform to process accounts receivable (AR) purchase transactions (or invoice financing or factoring) and letter of credit (LOC) transactions.

These prototypes are to improve the traditional processes of trade finance which are mostly paper-based, time-consuming, and prone to risk and fraud. They are also expected to lower these transactions costs by 10 percent to 15 percent.

Blockchain Not Mature Enough?

Director and Head of Technology and Innovation for Africa at Norton Rose Fulbright, Rohan Isaacs, says that regulators across the globe, including the South African Reserve Bank (SARB), are also looking at the blockchain.

However, he said regulation has not been in place yet because regulators can only work out what the regulations would be when they understand what they’re regulating. He added that the blockchain market is also not mature enough yet.

Though the law firm is helping banks across the globe with their legal questions around blockchain, Bowan pointed out that there’s a range of legal risks when it comes to the blockchain. She also said their firm is looking at other issues such as the supply chain and privacy.

Norton Rose Fulbright have legal experience in the following key industry sectors: financial institutions; energy; infrastructure, mining and commodities; technology and innovation; transport; life sciences and healthcare.

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