Financial services and banking are probably the most attractive industries for hackers. The prospect of financial gain means those with malicious intent have the potential to cause significant damage to companies and consumers within the industry. There have always been solutions to solve the problem but one of the most mentioned in the last decade has been Blockchain. It is thought that the distributed ledger technology could eradicate the risk of fraud and cybersecurity threats in banking and trading.
In this article, we will look briefly at what Blockchain is and how it can be deployed within banking.
What is Blockchain?
One of the best and most concise definitions of Blockchain comes from Richard Bradley via the Deloitte website. He explains the technology as:
“You (a “node”) have a file of transactions on your computer (a “ledger”). Two government accountants (let’s call them “miners”) have the same file on theirs (so it’s “distributed”). As you make a transaction, your computer sends an e-mail to each accountant to inform them.
Each accountant rushes to be the first to check whether you can afford it (and be paid their salary “Bitcoins”). The first to check and validate hits “REPLY ALL”, attaching their logic for verifying the transaction (“Proof of Work”). If the other accountant agrees, everyone updates their file…
This concept is enabled by “Blockchain” technology.
In terms of banking, where conventional transactions are facilitated by centralized institutions, Blockchain is a decentralized system that adds encrypted transactions into a ledger which is shared by multiple parties. For example, a transaction will be encrypted and added to the distributed ledger. The various parties with access will then verify the details without compromising the identity of those involved. The transactions are added as permanent once verified and are then irrevocable as part of the shared ledger. A completed transaction is stored on the Blockchain.
There are several benefits that the banking industry could attain from deploying Blockchain technology.
One of the key features of Blockchain is that it moves assets such as money by using simple ledger entries. Instead of transactions having to take anywhere between 1 and 3 days, verification can theoretically be done in real-time as the technology matures.
Much of this is achieved through there is no need to reconcile accounts, given a centralized network of events. Start-ups such as Ripple are being set up to specifically help banks achieve this and instantly move money across the globe.
Banks have been looking to invest in Blockchain to reduce fraud for a few years now. There are a few ways that the shared ledger network offers a way to combat such security problems. Following on from transactions being faster, in a roundabout way, this also ensures they are more secure. A quicker process means there is less time for anyone to intervene with payments or misuse transactional information.
Within some Blockchain models, each transaction has two security keys, a public, and a private key. The public key is available to every user and the private key is only shared by parties who are privy to that transaction. For example, a public key might tell you the account balance of a user, but it wouldn’t tell you their identity or allow any changes to be made to the records. A private key is linked to the account number but can only be used once, for an individual transaction, securing historic or future information.
After a ledger entry has been entered and verified, it cannot be modified or changed. The only way to do so would be to access the account of every user at the exact same moment and complete the same change which, with added security, won’t happen.
Like any technology, Blockchain will only be as good as the data that is fed into it. Given that records cannot be edited or deleted, high data quality is of the utmost importance. In financial services today, data is held by different institutions, all of whom have the ability to update it when needed, creating incomplete accounts or inaccuracies.
Blockchain operates with what is known as “smart contracts.” Those are predefined rules that exist amongst the network that only allow changes if they have been met. For example, in a loan agreement, the rules might state that the transaction is verified once a certain payment has been made on a specific date. If the conditions are met, the Blockchain automatically verifies it.
A common data network such as Blockchain can solve any likely quality issues.
According to Deltec Bank & Trust, Bahamas- “Blockchain technology can help banks become more efficient and productive, reducing operating costs considerably in terms of resource requirements and transaction charges.” Early reports suggested that banks could reduce costs through the improved infrastructure by up to $20 billion in 2022.
Smart contracts will reduce the number of necessary interactions and party negotiations whilst there wouldn’t need to be intermediaries intervening in those.
Know Your Customer
Know Your Customer (KYC) requests have been known to cause delays of anywhere up to 50 days in transactions to achieve a satisfactory level. This is due to them requiring duplication of effort between banks and third parties.
With Blockchain, KYC statements can be stored. Once it exists, the information can be used by other parties, negating the need for continually carrying out lengthy authentication processes. As part of that process, each document that has been checked can be verified on the ledger instead of having to request new ones each time.
SWIFT has created a KYC Registry with 1,125 member banks for the purpose of improving transaction processes.
Blockchain technology has the potential to revolutionize the banking industry. Although it has been hyped for several years now with limited progress, enhanced computing power and connectivity like quantum technology and 5G are bringing Blockchain closer to reality.
Exploring Blockchain further and experimenting with it is a natural next step for banking in the digital era. There is still a lot of work to be done in terms of infrastructure development but Blockchain will ultimately become a key part of financial futures.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.