The U.K.-based Fintech Network, which provides educational services for financial firms, recently released a white paper about how banks and financial firms can use emerging blockchain technology. Last week, we discussed the first two uses it proposed: fraud and hacking prevention, and “know your customer” regulation. This week, we’ll look at the remaining two uses and some challenges the new technology poses for these firms.
With blockchain technology, securities could be exchanged independently of costly centralized intermediaries. Imagine if the firms now traded on the New York Stock Exchange instead formed a self-governing body and dispensed with the NYSE’s expensive infrastructure. Fraud and operational errors would also be reduced because of blockchain’s ability to make every security trade transparent, secure, and immutable. There would be a clear “paper trail” of all historical trades, which would provide assurance of the authenticity of all transactions.
The blockchain-based exchange would work by trading digital tokens issued for each company share or other security. The digital token would act as a certificate of authenticity, preventing security forgery, which takes place with paper documents. The technology could have even more of an impact on more-complex derivatives and other securities that are not publicly listed, where back-office paperwork and clearing costs remain very high. In a 2015 report, Santander Bank estimated that blockchain could save the financial industry $20 billion per year in these costs alone.
Since 2008, banks have been under pressure to make interbank transfers more modern, safe, and secure. Blockchain technology can be used for an open-source approach that replaces central banks and other institutions upon which transferring banks currently rely. Payments could be made 24 hours per day, with transparency and real-time fraud analysis at cost savings relative to today’s standards. These savings have been estimated at 33 percent for international payments, for example.
Banks will also face challenges when adopting blockchain technology. The data storage and data-storage needs of a blockchain, where all information is kept in perpetuity and on many separate computers, will pose privacy questions and issues of scalability. Banks will also face new competition in cases where they are currently the central intermediary in consumer or commercial transactions. Given that they cannot avoid this new competition, banks would be wise to pursue ways the technology can make them more efficient.