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Industry roundup: 21 February

Securing blockchain transactions with first QKD through team JPMorgan, Toshiba, Ciena

As cryptocurrencies and blockchains continue to fill the financial landscape, security parameters are especially critical in technology computer applications. A research team from JPMorgan Chase, Toshiba Corp. and Ciena Corp. confirmed that a powerful, newly-developed encryption network, a “first-of-its-kind” Quantum Key Distribution (QKD), can be utilized to protect communications on blockchain, unaffected by quantum computing attacks. It has the ability to support 800 Gbps data rates for essential applications under realistic environmental conditions. Furthermore, a QKD-secured optical channel was used to deploy and secure Liink by JPMorgan (the world's first bank-led, production-grade, peer-to-peer blockchain network), demonstrating the first QKD securing a mission-critical blockchain application in the industry.

Researchers from the three organizations, under the leadership of JPMorgan Chase’s Future Lab for Applied Research and Engineering (FLARE) and Global Network Infrastructure teams, joined forces to accomplish this research. Detailed information can be found in this combined research report, Paving the Way towards 800 Gbps Quantum-Secured Optical Channel Deployment in Mission-Critical Environments.

QKD is currently the only solution that has been analytically validated to protect against a possible quantum computing-based attack, with security assurances based on the laws of quantum physics. Steve Alexander, Chief Technology Officer, Ciena, commented that strong encryption is critical as confidential data information continues to be distributed across fiber-optic networks daily.

U.S. Federal Reserve sees potential for CBDC

The U.S. Federal Reserve Board disseminated additional information on the potential role for a U.S. central bank digital currency (CBDC) to strengthen the financial stability in the growing cryptocurrency, stablecoin and international CBDC environment. Governor Lael Brainard, Federal Reserve Board, stated in a recent U.S. Federal Reserve press release that legislators, including the Fed, need to prioritize the future of the payment system and consider innovative technological options while preserving stability.

Brainard emphasized the importance of understanding the significant impact a U.S. CBDC may have, such as how new forms of crypto-assets and digital funds may affect the Fed’s responsibilities to maintain financial stability, a secure and efficient payment system, household and business access to safe central bank funds, and maximum employment and price stability. Brainard further added that a “U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of U.S. currency to transact and conduct business in the digital financial system.”

CBDC supporters commented that a U.S. CBDC could streamline the payment systems, improve financial inclusion and reinforce financial stability. The Fed will not launch a U.S. CBDC without support from the White House and Congress, according to the press release.

AI benefits and challenges for fintechs – latest report from Bank of England and FCA

The Bank of England and Financial Conduct Authority’s AI Public-Private Forum: Final Report details the findings on the benefits, challenges and governance of artificial intelligence (AI) in financial services. According to the report, the use of AI by fintechs can reap benefits but can also increase risk and create new challenges.

As fintechs and financial institutions continue to emerge and design their data strategies, AI plays an important role, and AI-specific data standard and regulations are critical, specifically in wealth management. There is risk awareness in AI models tied to financial services, but the complexity, speed and scale in AI models raise new questions.

In particular, the report emphasizes the importance of regulating AI. One of the main characteristics of AI model systems is their autonomous decision-making capabilities. However, the report states that this may have governing implications on the technology and its results, such as ensuring effective accountability and responsibility. Therefore, fintechs leveraging and adopting current governance systems will help manage their AI systems effectively.

Below are some of the recommendations highlighted in the report:

  • A central framework on AI governance standards within companies.
  • Overall responsibility for AI held by one or more senior managers, with business areas accountable for the outputs, compliance and execution against the governance standards.
  • Transparency and communication within AI governance.
  • Ensuring an appropriate level of understanding and awareness of AI’s benefits and risks throughout the organization.

The success of AI adoption is also dependent on support by regulators in providing concise guidance on how existing regulations and policies apply to AI, along with expected outcomes, stated the report. Additionally, regulators providing descriptive case studies and identifying high-risk use-cases enable companies to have clearer guidance. Creating an industry-specific framework and codes of conduct for AI will help build trust in the technology, specifically as AI continues to evolve rapidly. Financial companies use AI in a number of ways that provide benefits to consumers, businesses and the economy at large. However, methods to mitigate risks and challenges are critical.

Cross-border trade opportunities and challenges in Denmark studied by Banking Circle’s team experts

Banking Circle, a fully licensed tech-first payments bank headquartered in Luxembourg (offices in the UK, Germany, the Netherlands and Denmark), details the opportunities and challenges for cross-border trade in Denmark in its latest white paper, Payments without barriers: Focus on Denmark.

While slow settlement times and high costs are obstacles for companies looking to trade in smaller markets, the improved direct clearing of payments through the Danish National Intraday Clearing System enables companies to achieve market opportunities in Denmark and benefit from quicker and reduced cost payments and collection.

Below are some of the findings reported in the white paper:

  • The total cost of payments in Denmark is approximately 0.8% of GDP, according to the Danish Central Bank.
  • B2B transactions comprise 27% of that total, or Danish Krone (DKK) 4.2 billion.
  • Denmark has the second-highest electronic payments penetration rate in Europe, and the total volume of digital commerce grew by nearly 30% in 2020.
  • 37% of companies transacting in and out of Denmark are looking to improve their trade settlement times – 10% higher than the average across Western Europe.

Banking Circle implemented direct clearing capabilities for the Danish Krone (DKK). Businesses will be able to deliver payouts and collect payments in their own name, rather than that of the financial institution, using Banking Circle’s Payments on Behalf of (POBO) and Collections on Behalf of (COBO) solution, offering lower costs than traditional cross-border payments in DKK and 24 other currencies. Additionally, this enables scaling of accounts, while delivering speedy on-boarding, enhanced payment infrastructures, additional ownership of payments, and seamless reconciliation.

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