Blockchain is an emerging technology that’s disrupting many industries, from banking to cloud storage. Due to its complex cryptography, blockchain is a distributed ledger that can be used for many different purposes.
While blockchain was first associated with Bitcoin, the original cryptocurrency, blockchain technology has a greater purpose than just creating a digital currency.
How does banking benefit from blockchain?
Many within the banking sector consider blockchain to be a disruptive force. Some organizations and institutions in the finance world are more supportive of the technology than others. Those who are afraid of blockchain and slow to adopt will miss out on many benefits.
Banks are slowly realizing how cumbersome record keeping, matching, and verification can be done in a quicker and smarter way. Blockchain can provide a massive cost reduction with improved accuracy, faster transactions, and increased transparency.
Loan applications processing, trade matching, and recording for audit purposes… these all require large data centers and storage. Much of the old technology for settlements and clearing systems is built on legacy software which requires 20-30 percent of the IT manpower and millions of dollars annually. The manual interventions of multiple parties in a loan application process is an example how costs can go up for the central agency (the bank) maintaining these records.
So the blockchain ledger, open to all and operable by authorized parties, will help create a transparency in the operational maintenance as any changes done on one node are visible to others across the chain. This makes it fraud and hack-proof and can become a coveted manner of operations that will automatically meet the standards of quality and checks as required by central banks.
What has banking down with blockchain so far?
J.P. Morgan has tied up with Digital Asset Holdings to look into the “liquidity mismatch” problem using blockchain. In 2016, it aimed at investing $9 billion in new technologies including blockchain, big data, and robotics.
Big banks like Goldman Sachs, J.P. Morgan, and few others came together in 2015 to form a collaborative approach on blockchain called R3. However, as recently as May 2017, Goldman and Santander walked out of this consortium and Intel, Bank of America Merrill Lynch, HSBC and dozen others have jumped into the fray.
There are about 40 investors in the fray and have collectively raised about $107 million for R3. This is part of the first two tranches of funding for R3 and the third round will be raised later this year. The first tier investment was open to all, the second round was funding with governance rights and responsibilities of sitting on certain committees for future decision-making. The third tier will be for investors putting in large sums looking for a board seat.
The other top investors are SBI Group, Bank of America Merrill Lynch, HSBC, Intel, and Temasek as well.
There is another consortium of thirty-something investors called the “Enterprise Ethereum Alliance,” which debuted in New York in February 2017. Here again, a few big names have tied up to build enterprise-ready versions of the software behind Ethereum, which is now an established payment system. Here J.P, Morgan along with Santander demonstrated “spot trade” on a foreign exchange market for global currencies using Ethereum as the settlement layer.
Ethereum alliance also includes Accenture, BBVA, BNY Mellon, BNP Paribas, BP, Cisco, Credit Suisse, ING, Thomson Reuters, and UBS.
There are few other efforts such as IC3, or the Initiative for Cryptocurrencies and Contracts, an academic group consisting of researchers from universities such as Cornell University, UC Berkeley, and Israel’s Technion.
J.P. Morgan has been a step ahead and has created what is called as “Quorum” and is the basis of this blockchain technology and is already using this in the bank’s code to add privacy protections.
R3’s product called “Corda” is going to be an open source distributed ledger platform which will connect member banks and investors on nodes and be interoperable. The main reason for a consortium is to have system that is uniform and not have companies work on diverse distributed ledgers which will have transfer issues.
The uses of “Quorum” are hoped to be in post-trade settlement, payments between banks, and supply chain tracking, while competing on applications and services built atop the networks. The top priorities for the alliance now include ensuring scalability and security.
The estimated savings for banks as per a study done by Accenture is expected to be $12 billion annually in back-office costs.
We are still in the early days of blockchain technology. Banking is only one of the major industries that will face a significant disruption in how business is done. While some of these changes may be difficult to develop and implement for some financial institutions, ultimately blockchain technology will reduce costs, improve transaction times, and provide greater transparency for the industry.