The Future of Blockchain in Banking

Table of Contents

Blockchain Technology

Blockchain in Banking

Top five factors Accelerating Adoption of Blockchain technology

Top five factors Hindering Adoption of Blockchain technology

Future of Blockchain technology in Banking

References

Abstract

Blockchain technology which has been discovered almost a decade ago is one of the disruptive technology of the decade. Every industry is talking about it. It is the most versatile technology being used in almost every industry like pharma, cloud, retail, insurance, banking and so on. In this paper Blockchain technology has been discussed briefly highlighting its characteristics and features. The second section talks about Blockchain in Banking industry and its role and main benefits to this industry. Proceeding section lists out the banks who have successfully used Blockchain technology in their business. Third and fourth section talks about top five factors accelerating and hindering adoption of Blockchain technology and its impact on banking. Last section discusses the future of Blockchain technology in banking. All the points and aspects and have been carefully weighted and interpretation stated on why currently Blockchain cannot be adopted as mainstream technology.

Keywords: Blockchain technology, Private Blockchain, Ledger, Decentralization, Dynamic Trust Management Method (DTMM), Public Blockchain

Blockchain Technology

Today the technology remains at the peak of inflated expectation and is about to dive down into the trough of disillusionment [11].

Distribution of digital information which cannot be copied is the essence of Blockchain technology. Each group of transactions is referred to as a block. Blockchain has (a) Data: Value of transaction attached to the block which includes From, To and Amount (b) Hash Code: Special code for every transaction (c) Hash of Previous Block. The amazing feature of this technology is that it doesn’t have centralized record keeping as it is hosted by millions of computers at the same time. The data is available to anyone on the internet and beyond the scope of hacking. Due to decentralized nature direct modification of data is not possible. Instead of shared ledger system used by banks, distributed ledger system (DLS) should be used which gets automatically updated with any change on the current available version and the updated version is made available to all in the network. Two users of the same document cannot mess with the same document/record at the same time. That’s how banks transfer money or keep transaction record. The access to the record is briefly locked while the transfer is being made. After the transfer is made, they re-open access and update the document again. Here shared documents analogy is used instead of Blockchain.

Blockchain is like a mesh network where every node is connected to any existing node in that network and the information is available to all that cannot be copied. Any change in transaction gets attached to the existing chain in the network. Now each group of available transactions becomes a block.

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Figure 1: Characteristics of Blockchain suggested by Deloitte [1]

The main characteristics of Blockchain as shown in figure 1, are distributed ledger, Consensus-based, cryptographically sealed, chronological and time-stamped, and digital.

The important features of Blockchain are:

- identical blocks of information are available across the network,
- it cannot be controlled by any single user and
- it has minimum chance of hacking or failure due to immense computational power needed for the same.

Blockchain in Banking

If banks adopt Blockchain technology, any scams would be near to impossible. A Blockchain technology is a continuously growing list of records called blocks, which are linked and secured using cryptography (Wikipedia). Decentralization, Trust and Security are important features of Blockchain along with transparency, privacy and inclusivity. As transactions are heart of banking system and keeping these transactions secure and traceable is vital. Depending on organization to organization the transaction data is either maintained manually or via automated software which are not visible to the client.

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Figure 2: Simple Transaction between two parties A and B using Blockchain (Image adapted from Bing (online pictures))

In the above figure 2, A wants to send money to B and the transaction is represented as a block which is broadcasted to everyone on the network for approval. After approval the block is then added to the chain and is a legitimate record of transaction. The money is then transferred to B.

Public and Private Blockchains can solve banking problems. In case of Public Blockchain networks, users are anonymous and each one of them has a copy of the ledger and participates in confirming transactions independently. This feature can be used by banks to show day to day or weekly transactions to its customers to gain their trust and participation. In case of Private Blockchains user identity is not anonymous. Here users need permissions to have a copy of the ledger and participate in confirming transaction. Private Blockchains can be specifically used in cases of huge amount of transactions where both parties participate and also government to keep a check on transactions done. Thus it can be concluded that banks may use Private Blockchain networks for:

1. Issuing LOU’s
2. Large transactions
3. Providing huge credits
4. Any other sensitive money lending matter.

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