BLOCKCHAIN: A Future for Banking?
Have you heard of Blockchain? Intrigued?
You should be. This innovative, bitcoin-underpinning technology is guaranteed to stimulate interesting discussion in the realm of finance and banking. While the bitcoin project, introduced end October 2008 by Satoshi Nakamoto, became a viable mode of transaction for global crime syndicates with its initial vision as a financial turning point for an era of crypto-currencies, interest died down over the years. Nevertheless, attention in the underlying mechanics of this type of currency have continued to grow, especially amongst leading tech-figures operating in Silicon Valley.
While the process of blockchain technology itself is very complex and difficult to explain, for the purpose of this article, what is only relevant to understand is that it is essentially a type of peer-to-peer system of running a currency of which its innovative nature is viewed as on par with revolutionary introductions such as limited liability for corporations, for example. Furthermore, it is a giant ledger tracking the amount of bitcoins owed by a party just like in traditional banking, as we know it, a bank keeps track of how much money is kept in each of its accounts.
And at this point, the blockchain technology and traditional banking begin to differ…
Contrary to bank ledgers, which are private and centralized, blockchain is public and has a wide distribution. It may be downloaded by anyone and, yes, transparency is almost absolute, apart from the fact that identities are protected by sophisticated cryptology. Not only does the blockchain measure who owns bitcoin today, but it also holds a record of who has held bitcoin since the very beginning.
In basic terms, units of currency are transferred from one party to another as a component of a new ‘block’ of transactions added to the existing chain. New blocks are appended to this chain approximately every 10 minutes, extending it by a few hundred lines.
For those of you truly interested in the inner workings of blockchain, here is a suggested article to read into:
Great! You’ve now got a basic understanding of what blockchain technology is, but here are the two important questions we need to address:
How can this distributed-ledger technology be used in Banking? What is sparking the interest?
What are the limitations or current obstacles still facing this shift in banking systems?
To address our first question here is a fantastic short interview from The Economist in London:
With this picture in mind one thing is certain, there is space for endless discussion and experimentation with regard to the possibilities and opportunities that can arise from exploring not only a revolutionized banking system but also service provision by financial incumbents. How would the adoption of blockchain technology affect the landscape of many other industries and what flow on effects could we expect?
Various innovative technology companies have begun to work on crypto-ledger projects aiming to extend the capabilities of blockchain for further uses beyond transferring value. One such ambitious undertaking is known as Ethereum, which is exploring the possibilities of “smart contracting” whereby computer systems can enforce contractual compliance by an engaged party, for example. Essentially, there are still many obstacles to overcome, especially related to security concerns, the unforgiving nature of the technology (ie. Lost password resets are not possible yet), components in the transaction process needing refinement and the bypassing of ‘correspondent banks’ to facilitate cross-border money transfers amongst banks. Additionally, finding the capacity of knowledgeable staff remains challenging for global banks, though teams are already working on decentralizing ledgers and investigating processes where blockchain could be effective.
Whether this technology is foreshadowing a revolutionary future as to how we financially operate in the world remains uncertain, but fact is that this movement has sparked the interests of many and speculating on the topic is crucial in evaluating its viability.