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Blockchain first leapt into public awareness when it became known as the foundational layer of the Bitcoin crypto-currency. It’s still early days, but already the impact of the globally distributed ledger technology is being likened to that of the internet when it first appeared in the early ‘90s. It’s even being touted as the answer to online fraud. But is it?
Most people in the financial sector are now aware of what blockchain is and even the basics of how distributed ledgers work. But when it comes to security not everyone in the financial industries appears to be on board yet. Let’s take a closer look.
Blockchain technology has been heralded by many as the next step forward for banking security. Is that true?
Blockchain is not primarily about security at all. It doesn’t solve the main challenge in online security – the internet is still fundamentally an “anonymous” system which makes it hard to trust the person who carried out a transaction. This is still an authentication challenge – who is really sitting behind that computer? Blockchain does not solve that problem. It’s not like the fraudsters have been editing transactions up until now. They have simply been able to trick banks into thinking they are the legitimate transacting party.
Blockchain distributes the recording of transaction history, potentially removing the need for a central authority. That’s why it’s being touted as a disruptive technology which could support alternative financial systems. It can help when proof of a transaction chain is useful – such as trade finance, merchant-customer transactions and even VAT payments and refunds. However, it can also be used, as in Bitcoin, to support an anonymous untraceable currency. This actually erodes rather than improves security, because it enables criminals to move the proceeds of crime globally in an untraceable way.
What are the stumbling blocks towards adoption amongst banking and capital markets?
Little clear security benefit has thus far been demonstrated by blockchain. There is a potential systemic cost saving and also a potential for different types of transaction settlements. Proof of transaction trail between a merchant and buyer could also help to eliminate certain types of fraud.
One of the things holding blockchain back in finance is speed. The blockchain stores a history of all previous transactions and this history has to be updated to all the distributed nodes in the computing network. This approach currently doesn’t scale to the volumes and frequency associated with financial transactions. The benefits seem a little less obvious once you realize that the technology can’t currently scale, and that you still have to implement the Anti-Money Laundering (AML) regulations for on-boarding a customer. One of the fundamental benefits of blockchain is that you can’t edit the transaction history. But Bitcoin runs on blockchain and there have been many instances of Bitcoins being stolen. The problem there is anonymity – you can’t prove you own an anonymous currency.
What must change to persuade the finance sector of blockchain’s security benefits?
As with many disruptive technologies, it may need a totally different approach to really make good on the blockchain promise – and it may have less to do with financial transactions. Blockchain’s biggest success stories are currently in solving different problems, such as tracking the supply chain of products, de-centralizing the running of a company, or enabling massive data collaboration whilst maintaining privacy. Given that all banks will need to be technology companies in the future then maybe they have plans which are less about blockchain for financial transactions and more about blockchain for transformative digital technologies.
What must change for blockchain to become highly relevant to financial transactions? Blockchain companies focusing on finance must explain how a complete solution can deal with customer on-boarding regulations and on-going authentication. And how the technology can actually scale to the volume and speed required.