New Uses for Blockchain Technology & How it Will Influence Banking
Bitcoins are trading above $2,500 as of June 2017. Which helps explain why more and more people are taking note of cryptocurrency and its revolutionary framework: the blockchain. Though bitcoin is the best-known utility, many industries are exploring new uses for blockchain.
What is the Blockchain?
Blockchain is an open-source ledger: when a transaction is made, everyone involved in the transfer “chain” shares access to the information. As Monica Eaton-Cardone explains, “Blockchain technology is like Google Sheets. [The blockchain] is hosted from countless different computers at the same time, and can be accessed and verified at any time from any computer running the software.”
With a blockchain, it’s possible to verify data against the shared record whenever needed. Also, because the information is so widely distributed, there is no single point for failure. Even if multiple nodes in the network fail, the data is still hosted by other users.
Blockchain’s reputation for secure, error-proof tracking has caught the interest of many industries. Companies and individuals are looking at ways to use blockchain technology to improve industries and institutions including:
- Health Care
- Leasing & Personal Financing
- Public Assistance
- Supply Chain Management
- Public Voting
Benefits Offered by the Blockchain
The banking industry is close to a breakthrough in wide-scale adoption of blockchain. Major banks—including Barclays and Deutsche Bank—trialed the technology in 2015. Other institutions, like Citigroup and JP Morgan Chase, have also expressed interest. It has been estimated that widespread adoption of the technology could save the banking industry up to $20 billion a year by 2022.
Advocates suggest that adopting blockchain to banking offers serious benefits:
Most banks rely on centralized data with transaction information stored in one place. This practice leaves them open to fraud attacks. Banks also need constant updates to defend against new vulnerabilities.
Blockchain requires much less complex infrastructure for fraud prevention. The distributed ledger is harder to steal from and allows for real-time verification.
Streamline “Know Your Customer” Procedures
Blockchain technology would make banks’ regulatory and national security responsibilities cheaper and more efficient to maintain.
Under the current system, financial institutions like loan providers need to establish their own reserve of customer data. By adding clients to a blockchain, however, banks can make their data accessible to other accredited organizations. This eliminates redundancy and enables faster recall of data. Blockchain also minimizes the risk of duplication or error between institutions.
Make Securities Trading More Transparent
A blockchain model would make securities trading more transparent.
First, a central authority would authenticate and tokenize each security. Those tokens would then be tradeable on a blockchain exchange. Tokenization makes forgery of securities considerably more difficult.
Some exchanges, like the NASDAQ, are already experimenting with this model and developing it for wider use.
Banks Could Transfer Payments Directly
The current banking system uses payment schemes (SWIFT, for example) as middle men to move transaction funds between banks. Handling this process with a blockchain would improve the speed and security of cross-border payments—not to mention the efficiency.
Using blockchain technology, banks and their customers wouldn’t need to wait days for payments to clear; the funds could transfer from one account to another in a matter of seconds.
Obstacles to Blockchain Adoption
Of course, there are still roadblocks to broader adoption of blockchain technology, including:
- Privacy: Openness is one of blockchain’s strengths, but it’s also a drawback. A banking blockchain would need to be permissioned to meet consumer privacy standards.
- Integration: Blockchain wouldn’t supplant all banking procedures overnight. The technology needs to be compatible with existing systems … and accepted by banks and consumers.
- Regulation: Blockchain is alien to current regulation standards. New rules governing how the technology works are needed before it can be implemented on a wide scale.
- Scalability: This is already becoming an issue for the bitcoin blockchain. A network as complex as banking would require future needs to be thought out well in advance.
Blockchain may also open doors for data miners to track interactions for big data analysis.
People already release some data through their online interactions. Associating data collection with finances, however, still makes people uncomfortable. Adding in new technology that most don’t understand is likely to make people even less enthusiastic about blockchain.
Will the changes necessary to adapt blockchain for banking use strip its appeal? Possibly; it will depend on the strictness of the regulations compared to the potential benefits. The key will lie in how much the implemented technology will need to vary from its original, agile model.