“Blockchain will do to the financial system what the Internet did to media.” — Harvard Business Review
“Around 80% of banks are developing their own blockchain technology.” — ValueWalk
“Blockchain will be used by 15% of big banks by 2017.” — Fortune
Google the phrase “blockchain and banks” and you’ll get more than half a million results, many of them headlined with hyperbolic statements like these. While the truly revolutionary nature of this technology gives credence to the first two headlines, the jury is still out on the third.
While banks seem eager to incorporate blockchain into their on-going digital transformation, the nascent nature of the technology raises the question of its immediate value for financial institutions. Is this technology developed enough to be adapted to banking industry use cases? Can banks figure out how to make blockchain work in a highly-regulated environment? Is it better for banks to invest now, getting in on the ground floor, or take a “wait-and-see” approach and let the technology develop more before trying to integrate it into their systems?
“If banks have the desire and wherewithal to be in the lead, then jump into one or more of the initiatives underway. If you want to hedge a bet that’s a few years off, then simply explore and stay aware,” says Tim Sloane, vice president of payments innovation for Mercator Advisory Group. “But their starting point should be to think of appropriate use cases and how they can design the technology for their regulatory environment. They shouldn’t be delving into it just because it’s ‘the next hot thing.’”
Forrester principal analyst Martha Bennett made a similar statement to American Banker. “Blockchain has almost taken on a life of its own in the C-suite where it’s become a bit like a CEO vanity project,” she told AB. “What are we doing on blockchain? Can’t we be in the headlines on blockchain?”
Perhaps most telling about the current status and future in banking is this tidbit from Bank Director’s 2016 Technology Survey: While 24 percent of surveyed bank CIOs and CTOs believe blockchain will affect banks, 57 percent said they either never heard of the technology or don’t understand it well enough to form an opinion.
When the tech guys don’t understand a new technology, you have to question its viability for banks.
Let’s back up a bit and try to explain what blockchain is. The technology evolved from the advent of Bitcoin, the original digital currency, and now tech developers are exploring other uses for it. Essentially, a blockchain is a way to ensure multiple systems are looking at the same data (if that is important). These systems can be within the walls of a bank or company, across banks or companies, actually across any entities connected on a network.
Data in a blockchain network is duplicated thousands (possibly millions) of times across the network of participating computers (aka nodes) and updated every 10 minutes on all the network nodes. Having the exact same information shared and constantly updating across multiple nodes results in more reliable authentication of transactions, greater resistance to hacking and less chance of the data loss you would experience if the information was held in a single, central location. Information shared on the blockchain is up-to-date, verified constantly and accessible to anyone participating in the network.
Many large and medium financial institutions are already dabbling in blockchain for consumer lending, retail payments, and reference data. Yet it’s the transparency and shareability that seems to be most concerning to industry watchers.
“The challenges are great,” Sloane says, “especially when you think about implementing blockchain in a regulated market like banking. Data on a blockchain is supposed to be immediately viewable by anyone participating in the network. What happens when you have proprietary information or consumers’ personal data on the blockchain and it’s seen by someone who’s not supposed to have access to it?”
Typically, current blockchains aren’t able to manage confidentiality and privacy and are not scalable, Jay Wack, president, and CEO of security software maker Tecsec told American Banker.
Sloane and many other industry watchers advise banks to proceed with extreme caution when exploring blockchain. “If banks have money to invest in new technologies, they should be ranking the different initiatives by the maturity of the technology, viability of use-case scenarios and the horizon for full, effective implementation. Blockchain appears to be many years down the road, where other emerging technologies like behavioral biometrics have a closer horizon.”