August 16, 2017 Reading Time: 2 minutes

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While blockchain-enabled cryptocurrencies like Bitcoin are creating a new financial landscape where we rely less on intermediaries like banks, banks themselves are starting to look more closely at how they might use the technology. Goldman Sachs is on record saying that blockchain technology “has the potential to redefine transactions.” And in a recent white paper, the U.K.-based FinTech Network, which organizes conferences and provides educational services for financial firms, got specific about what the technology could mean to banks. We’ll cover two of the uses they discuss today, and two more in a follow-up piece coming soon.

Fraud and Hacking Prevention

According to a recent Nilson Report, global credit card fraud generated $21.84 billion in losses during 2016. Retailers spend $6.47 billion annually on fraud-prevention services. Most banking systems are built on centralized databases, giving cybercriminals a single, vulnerable point of attack. Banking systems built on blockchain technology would be less vulnerable, both in offering an unalterable record of past transactions and in distributing the data to multiple points that hackers would have to breach simultaneously. Less vulnerability to fraud could potentially free up funds financial firms could invest in innovation and expansion.

Know Your Customer Regulation

Know Your Customer (KYC) regulations have become increasingly costly to banks as the financial industry and regulators watch with whom the banks are doing business. KYC requires financial institutions to review customers’ information like bank statements or tax returns. A Thomson Reuters Survey concluded that financial institutions spend on average $60 million on KYC, while some banks spend up to $500 million. If banks were to use blockchain technology to track this information, it would reduce operational costs and increase the efficiency of compliance with burdensome regulations. Automated processes within the distributed ledger system would reduce compliance errors, remove the duplication of collected KYC information, and enable encrypted updates to all banks in real time. In addition, the blockchain could provide a historical record of all documents shared and compliance activities undertaken for each client. Software engineers have proposed a full blockchain-based system for KYC regulation that could provide “the opportunity to vastly reduce overheads needed to meet KYC regulations while providing secure and simple systems for customers.”

These blockchain uses could decrease the costly impact of both fraud and government regulation. Stay tuned for part 2 of our look at blockchain and banking, where we’ll examine the technology’s potential to impact trading and payments systems.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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Benjamin Williams

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