- The Banking and Finance sector is quite the paradox, incorporating some of the most cutting-edge and archaic systems simultaneously. Still reliant on printed documents, filing cabinets and archives, there is a real need for an upgraded reliable and most important trusted replacement that can withstand the banking process flaws. We have mentioned these in depth when it comes to fraud and retroactive changes, but there also exists the issue of scalability and most importantly security – and that is the core of Blockchain.
- The Blockchain can also solve the core banking issue of banks requiring intermediaries to process international transfers. Even in 2018, it takes 3 – 5 business days to transfer funds across banks, especially in different countries, which is highly impractical. The blockchain would help in doing away with systems like SWIFT and IBAN, replacing these with international trustless addresses in which transfers can be done as fast as the blockchain it is built on, and the fees are considerably less due to less middle-men.
- With the trend moving towards digital currency, whether it’s crypto-based or traditional fiat currency using credit-cards, it is clear that a fast a secure system of transfers is required. As more and more people use digital currency the need for quick scalability is required, whilst also keeping processing fees low – this is what The Blockchain is all about.
Why aren’t banks adopting Blockchain Technology then?
Although there are many positives, the banking and finance industry is heavily regulated and rightly so, and with heavy regulation comes many stumbling blocks and hurdles.
Standards and Adoption
Blockchain technology was created as a system that is not controlled or regulated by any entity, although the Government of Malta has recently passing Laws in the regulation of DLT, Blockchain and Digital Assets (read the document), which created a legal conundrum for Banks. Therefore any innovation to create different systems that are adaptable and used by the masses has proven difficult, mostly due to the fact that current systems cannot be entirely eliminated in favour of a DLT based one as many other processes still rely on the classical way of transferring data. Once more solutions are created covering a wider spectrum of requirements by other departments, built on a legal framework that is accepted internationally, then the mass adoption process can get into full swing. The expectation is that once more governments and legal entities begin to adopt DLT into their processes the adoption process will speed up considerably.
Transactional Privacy
Banking practices are based on the knowledge that funds and transactions are both secure and private, but most blockchains today are based on a publicly viewable transactional model. This in itself is not a bad thing, though a certain level of privacy should exist when it comes to personal funds, purchases and transactions. Therefore, as mentioned before, a move towards private blockchains and DLTs could help pave the way for a more adaptable technology which will be both Private and Secure. This might also help with standards and adoption, as the custom blockchain might fit in better with required processes.
Encryption and Security
We have talked a great deal about Encryption and Security, but it is important to realise that although in theory there is a great deal of security in place on the blockchain, hacking and loss of wallets are a reality that needs to be addressed. A wallet is a program that holds your publicly available addresses which acts as your public bank account number (like IBAN). This is in turn protected by a private key a long hexadecimal number that is the only way of recovering and accessing your account. One major issue with this system is that if a private key is lost, there is absolutely no way to recover that account. This can cause plenty of issues for a bank, but having a way to recover a private key then paves the way for wallets to be hacked. This has been seen in recent years with systems that store private keys, which are then accessed by an unauthorised individual who in turn empties accounts of their cryptocurrencies. As we stated before, no transaction can be reversed on the blockchain unless there is unanimous consensus across the whole network. This means that unless the bank is using a private blockchain, then consensus will be near impossible to reach. Therefore if a blockchain network is used by a banking institution, it would have to be secured with multiple security protocols. Only individuals with accredited permission should be allowed to access the network, similar to the current systems of internet banking and mobile banking for
Dealing with growth
One of the blockchains greatest features is also one of its biggest downfalls if not anticipated correctly, and that is the problem of the exponential growth of the blockchain. As we mentioned in the first part of this guide, the blockchain is made up of a block, which is a record of all transactions that happened in the past and all new transactions. Therefore as more and more transactions are enacted, the size of these blocks increases. As the block grows, the amount of computational power required to attach to that block grows with it, and therefore might slow down the transactional speed of the system. Solutions to this are coming in hard and fast, with Hard Forks of cryptocurrencies happening on a regular basis, increasing on transaction limits per block, and heavier investment in peer-to-peer confirmation speeds, though it would be important for any institution to consider this bottleneck before.
So will banks adopt blockchain?
Most of the large global banking corporations have all begun processes on implementing DLT and blockchain technology into their systems. Whether through accepting cryptocurrencies, or offering their own coins and tokens, to creating private blockchains to handle intrabank transfers, most have understood the potential and the possibility of mass adoption.
With Bank funded companies pooling in more research and technology, it is clear that the future of DLT and Blockchain Technology in the banking industry is a bright one, and although the final implementation might not be exactly like the technology we have nowadays, the birth of a new banking revolution has started… it is simply a matter of time.
Continue Reading about blockchain:
- What is Blockchain?
- Why is Blockchain Important?
- What is a Crypto Currency?
- What is an ICO?
- Are Cryptocurrencies and Tokens the same?
- Can Blockchain be used without a Coin or Token?
- Blockchain in Use (Real Estate)
- Will Blockchain replace banks? (Part 1 – Banking and Finance)
- Will Blockchain replace banks? (Part 2 – Blockchain Adoption)
- What is Distributed Ledger Technology? (Coming Soon)
- What is the future of Blockchain? (Coming Soon)
If you want to learn more about Blockchain Technology, Cryptocurrencies, ICOs, Distributed Ledgers, Smart Contracts or other fields related to the technologies, contact me using the contact page, or leave a comment below.
Thanks for Reading
