Financial Services: How cryptography unlocks next generation financial services

Brian Tang

Brandon Caruana, Brian Tang

While we may not realise it, cryptography has been a part of our everyday life for the last decade – from our Facebook password to our Netflix account details – and now it is changing how people go about their financial business.

As the financial services industry starts to replace the services offered by traditional financial services providers (FSPs) with applications that help both businesses and individuals to be more time- and cost-efficient, to be more in control and, above all, more secure. In this article we explain how cryptography is helping corporations and consumers alike do business – and why the leading innovators in the trillion-dollar financial technology space are looking to the Cayman Islands for support.

Cryptography started as a means to secure communication across time and distance. Scrambling letters using a pattern or according to a predetermined value (for instance A becomes C, B becomes D, C becomes E and so on) prevented messengers or other parties delivering the message from being able to decipher the content. Securing communications against unintended recipients has been an ongoing ambition since humans first started communicating.

In today’s always connected, information-based world, securing communication has evolved to a fundamental truth: data is the new gold, (i.e., value) and cryptography is the new Fort Knox (i.e., secure infrastructure). Creating and distributing value is the engine of the global economy, and cryptography has evolved to keep pace with this electronic-based economic model. When you can be 100% assured that information has not been altered, that an entity is what it says it is, that a contract will execute when information is valid, that it can be verifiable that an entity has control over what they represent to have (assets, contracts or authority), you can build an absolute trusted chain of events that builds on top of each other without the need for trusted or semi-trusted third-party intermediaries.

As the sixth largest financial centre in the world, and a leading jurisdiction for financial services, the Cayman Islands cannot ignore the evolution that is occurring right before our eyes. The development and adoption process of new technologies may seem slow and gradual, but the transformation occurs overnight. The jurisdiction must understand the transformative potential of the new application of cryptography, have an open mindset, and be at the forefront of its implementation.

The key to cryptography

Public key cryptography consists of a public key, a private key, and one or more transmitted messages. An oversimplified analogy would be that your Facebook account profile is your public key (open for everyone to see), your password is your private key (only known to you), and Facebook posts are your securely transmitted messages (only performed by you to others). Other Facebook users can validate that you made those posts because only you have your password (private key), and those users can also read your posts by logging into Facebook with their own account profile (public key) and password (private key).

In the world of financial services, public key cryptography has the potential to create a more efficient and verifiable data transmission platform. Let’s begin with the Know Your Client (KYC) process, where FSPs must validate the identity of a potential client. Currently, regulation in the Cayman Islands requires that the clients bring in the identification documentation for verification firsthand or provide a certified true copy from a qualified certifier or notary. For clients living abroad, the second method is the only reasonable option and these clients need to have a notary or equivalent endorse that the copy of the original document is a true copy of the original document. That document will then need to be sent to the Cayman Islands’ FSP.

The next generation of financial services

This process can be significantly streamlined using public key cryptography. Instead of physically stamping the document copy, a notary can use their private key to digitally sign the document and use the intended FSP’s public key to secure and encrypt the document. The intended FSP will then use its private key to decrypt the document while also using the notary’s public key to identify and authenticate that the notary was the true originator of that action.

Another practical example is obtaining the signature of appropriate directors for a resolution. Using public key cryptography, each director has their own unique combination of public and private key and use their private key to digitally sign resolutions. The director then secures and encrypts the content of the signed resolution using the intended recipient’s public key. Once received, the intended recipient: (i) uses their own private key to view and decrypt the resolution’s content; and (ii) uses the director’s public key identify and validate that the message was sent by that director or signatory.

Public key cryptography ensures that the confidential communication between the sender and the recipient is secure. Because the public key is mathematically derived from the private key (but not vice versa), public key cryptography creates a trust system that validates that a signature or message has not been altered or modified and preserves that the sender and intended recipient are the true authorities over the message.

Brandon Caruana

The way we do business is already changing

While cryptography began as the foundation for secure transmission of simple messages, communication now encompasses a large number of use cases and the potential possibilities are much greater: validate identity; validate ownership; prove provenance; assign digital rights; provide a better financial system; securely store data in the public domain; enable e-commerce; protect assets; enable privacy; or prove a truth with zero knowledge about the underlying data.

The list of potential current and future use cases can be a bit overwhelming at first glance, but rest assured cryptography is not mysterious magic that is too complicated to understand. In fact, quite the opposite is true, as the field has been thoroughly researched and based on sound and proven mathematics. The entire global economy is fully dependent on its deployment across countries, products, and services. However, instead of separate processes and forums (and account names and passwords) for Facebook, notarising documents, and signing resolutions, imagine one holistic network to access and perform all these actions. This would fundamentally change the way value transfer occurs. Cryptography ultimately has the ability to create trust among geographically dispersed and unrelated parties. The bedrock of financial services is that although Alice doesn’t know or trust Bob, Alice trusts Bank 123 and Bob trusts Bank 123. Bank 123 then provides a means for Alice and Bob to exchange services and value by trusting a connected intermediary. The application of a network that relies on cryptography and promotes security can now create trust between Alice and Bob because both parties trust cryptography and the network without relying on a sequential relay of intermediaries that only trust each other.

Cayman’s future as an innovation island

As this application of cryptography continues to gain momentum, businesses will be attracted to locations where the jurisdictional onboarding process – incorporating an entity, conducting resolutions, opening bank accounts and appointing service providers – offers the path of least resistance. Financial centres with burdensome procedures, checklist-type approaches that mitigate illogical risks, and outdated technologies will be left behind. Cryptographically secure networks streamline the above process globally.

Exploration and experimentation continue as fast, scalable direct Alice-to-Bob solutions are being developed. Financial institutions must embrace these developments and potential networks as long-term partners and not as adversaries. Open discussions should be had to discuss the possibilities and collaboration should be explored to integrate these new technologies locally.

Leading fintech companies such as Omise Holdings, already recognise the attractiveness of the Cayman Islands and understand that the jurisdiction has the ingredients necessary to support the next fintech unicorns (billion-dollar companies). Jun Hasegawa, founder and CEO of Omise Holdings, the leading online payment provider in Asia, recently spoke on the real-life applications of blockchain in GAIMOps Cayman’s keynote interview, as the company looks to the Cayman Islands for its next major operational hub.

The Cayman Islands is a well-developed Caribbean nation, offers first-class professional services, and is home to more than $2 trillion in institutional capital. Let’s work together to attract these companies and adopt these solutions; otherwise, we may be left behind as the world rejects jurisdictional onboarding and instead onboards itself to the global network.

Brandon Caruana and Brian Tang are the co-founders of Cartan Group LLC, a Cayman Islands-based management consulting firm.