Few technologies since the web have generated as much noise as blockchain – and in particular its most well-known application, Bitcoin. But is blockchain really as significant as its proponents claim, and can it revolutionise financial services?
Simply put, blockchain is a digital version of an old-fashioned ledger – a place to record the details of transactions. However, unlike conventional ledgers, blockchains are distributed across every user of the network or platform; there is no single point of access, and no central authority with overall control. No one person or organisation can make changes to records on their own; instead, they happen by consensus, with other users of the network authenticating and authorising every addition to the ledger. That decentralisation is one of the most important aspects of the blockchain design – a characteristic that makes it not just completely transparent but also secure.
By nature, blockchain technology is completely neutral. Anything that can be recorded digitally can be stored in a blockchain-based ledger, whether it’s a cryptocurrency such as Bitcoin, or something such as a set of shipping records held by a retailer. Even fiat currencies can be transferred using a blockchain system in order to leverage blockchain’s benefits around speed, cost, transparency and security of transfer. That versatility and adaptability is one of the reasons why more or less every industry is researching or investing in blockchain-based solutions to customer problems.
Blockchain and financial services: Where is the opportunity?
There are a number of principal reasons why blockchain is of such interest to the financial services industry. The first is that it provides a completely transparent and entirely visible account of every event within a network, whether that’s a client verification, the trade of assets, or even an insurance claim. These events are stored in plain view forever; unlike traditional ledgers, a blockchain uses advanced cryptographic algorithms with an aim to ensure that it is not altered or erased. It’s the ultimate tool for transparency, which not only means more open relationships between financial institutions, but also helps verify customers to improve KYC initiatives.
Blockchain’s cryptographic design also makes it very difficult for third parties to manipulate. Due to their centralised nature, most banking systems around the world have a specific point of failure that, when breached, can give hackers access to the entire system. In contrast, there’s no single point of failure within a blockchain network; it’s a self-auditing ecosystem which checks its own integrity every few minutes. Proponents argue that this dramatically improves the security of the system.
Another of blockchain’s landmark benefits is in its ability to execute smart contracts, in which value of some kind is moved around based on previously issued instructions, such as a futures contract, a property deal or even a personal will. Smart contract technology is extremely powerful because it is capable of facilitating high levels of automation, which is desired for efficiencies and accuracy purposes, without surrendering overall control of the system. Smart contracts manage this through carefully monitoring and rejection of anomalies that do not comply with a set of pre-issued instructions of the contract.
Breaking the chain
Sceptics rightly point out that there are still some significant barriers to overcome before blockchain is a genuinely mainstream component of the financial services industry. Perhaps the biggest problem is performance; an inevitable issue as the number of users of any given blockchain grows, thanks to the decentralised design and the way in which changes have to be notified to every node on the network.
This is a particularly problematic in banking, where financial organisations have long since discovered that the Bitcoin network simply can’t support the volume of real-time transactions required for large-scale service offerings. And ultimately the reality of poor performance has a negative impact on customers, whether that’s in scanning a monthly bank statement, making a withdrawal from an ATM, or making an online banking transaction. Smaller private blockchains and alternative cryptocurrencies go some way towards solving these problems, but soon become victims of their own success.
There’s also a big question mark around exactly what role existing payments providers will play in a new blockchain-enabled world. At some point, customers may need to put money into third party platforms such as gaming sites, application stores, or trading networks, and want to be able to take it out again to spend in the real world. And it goes without saying that these third party platforms need to make that process as easy as possible if they’re to attract customers – as easy as the digital wallets and direct debits they already use.
Today’s cryptocurrency exchange processes and apps are often extremely cumbersome, involving considerable technical knowhow and, frequently, a serious leap of faith. Perhaps the biggest benefits that today’s payments processors can bring to the blockchain party are confidence and ease of use; both critical factors in their own success in the fiat world.
Despite some concerns about the sustainability of blockchain-based platforms, they seem sure to be a rapidly expanding force in the financial world and will remain as such for the foreseeable future. While instability in the price of Bitcoin and a general cautiousness around a currency without any underlying assets to support it are causing some observers to question the value of blockchain generally, ICOs are offering good alternatives and promise to reduce the specific set of risks that Bitcoin offers. Whether their concerns will carry any weight remains to be seen; for now, the potential of blockchain has created an unstoppable momentum in the development of the technology, if not yet its broader adoption. But if the pace of evolution in financial services is anything to go by, it really is only a matter of time.