What makes blockchain a game-changer for banks?

By Nicole Miskelly | 3 November 2015

Companies across the financial sector are currently experimenting with blockchain to see if they can use the technology to transform the way the industry works.

The FT reports that blockchain, the platform behind crypto currency bitcoin which has no central authority and has been hailed by fans to be as revolutionary as the internet, is being tested by banks, which are set to invest £1bn in blockchain-related projects over the next 24 months according to a report by Magister Advisers, insurers and companies such as IBM in belief that the technology could reduce costs, and offers the opportunity to transform existing banking infrastructures and streamline stock exchanges.

According to a recent report by Santander, VC Investor Anthemis and management consultancy Oliver Wyman, blockchain technology could cut banks’ infrastructure costs for securities trading, regulatory compliance and cross-border payments by up to $20bn by 2022 and offers banks an opportunity to modernise their outdated IT systems.

Swiss bank UBS, and the other companies are trying to figure out how they can remove the need for middlemen by adapting the technology to connect consumers and suppliers directly from online networks, and according to the FT, UBS is one of the companies that has been testing transaction transfer processes using internal blockchain.

“Blockchain is without question the most significant advancement in enterprise IT in a decade, on a par with big data and machine learning. What JAVA is to the Internet, blockchain is to financial services. We have now reached a fork in the road with bitcoin and blockchain.  Bitcoin has proven itself as an established currency. Blockchain, more fundamentally, will become the default global standard distributed ledger for financial transactions,” said Jeremy Millar, partner at Magister Advisors.

How blockchain works

In its simplest form, blockchain is a network of computers which must approve a transaction has happened before it is recorded within a series of computer codes. In the current bitcoin model, the details of the transfer are recorded on an open network that is accessible to anyone where the digital ledger of transactions is shared, transparent and run by all participants.

What blockchain can do for banks

Blockchain enthusiasts say the possibilities with the technology are limitless, for example in the current banking system all banks check with an electronic central ledger, however, blockchain could be used to provide private blockchain network which has controlled access via invitation and would be the preferred model for banks, the FT reports.

Blockchain applications can also be used for basic processes such as storing client identities, handling cross-border payments, clearing and settling bond and equity trades to creating self-executing smart contracts and bonds that pay interest to the holder on a regular basis. The FT also reports that some experts believe blockchain could even be used to disrupt current disruptive companies such as Uber.

The technology also provides an tamper-proof record of identity which includes transaction history and interconnecting records is an area insurers believe could be useful for cross-checking individuals actions and is one option being explored.

Testing the technology

The FT reports that banks are using different approaches to test blockchain. Citigroup has developed an in-house model called Citicoin, Goldman Sachs has invested $50m in Circle Internet Financial, a company which uses bitcoin to handle consumer payments and Commonwealth Bank of Australia has partnered with open source software provider Ripple to build a blockchain system for payments.

Barclays is one of the bank that regnosises blockchain's potential and is choosing to work with blockchain start-ups through an accelerator programme. “Barclays recognises the benefits of blockchain and the approach we are taking is asking ourselves how can we engage with our internal subject experts, how can we influence and talk to governments and regulators and make sure that they are aware of it, and finally how do we experiment,” Simon Taylor, VP Blockchain R+D at Barclays told bobsguide.

And it’s not just banks that are testing the potential of blockchain, governments are also holding their own investigations. According to reports, the Isle of Man has begun testing the technology with companies on the island and Honduras is using blockchain to handle land titles.

Security

Although the technology has its advantages it still needs to be approved by regulators who require it to be secure and robust and according to the FT, some industry experts are still questioning the safety of blockchain which means until it has proven itself to be secure enough to receive regulatory backing, it still has a long way to go to be widely accepted by the industry.

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