Blockchain is certainly the #fintech and digital banking buzzword at the moment, but there are still a lot of people in the industry that don't understand what it is, how it works, or what it could mean for the future of digital and global banking. Well, at iSky Research we thought it was about time to let those people see more.
Blockchain arguably has its origins in the crypto-currency Bitcoin, but the modern incarnations of blockchain are very much removed from the Bitcoin of today. The word Blockchain is itself derived from the the system that Bitcoin uses to track transactions in the currency, which put (very, very) simply is a type of building block structure wherein a transaction can only be built upon those which have preceded it (i.e. if there has not been a transaction to put funds into an account, there cannot be funds available to withdraw). Bitcoin wiki goes into further detail:
"Every block contains a hash of the previous block. This has the effect of creating a chain of blocks from the genesis block to the current block. Each block is guaranteed to come after the previous block chronologically because the previous block's hash would otherwise not be known. Each block is also computationally impractical to modify once it has been in the chain for a while because every block after it would also have to be regenerated. These properties are what make double-spending of bitcoins very difficult. The block chain is the main innovation of Bitcoin". (see https://en.bitcoin.it/wiki/Block_chain)
But lets not get bogged down in technical talk.
The modern, and far more simple notion of what Blockchain is, is that it is a shared ledger - a single accounting book shared across businesses, companies and banks (that have opted-in to a single ledger). To help explain further we have attached below a copy of a YouTube clip from a current shared or distributed ledger provider, Earthport.com . The video explains the current transaction model, and the shared ledger model in simple terms - though we are only providing it for demonstration purposes, not as an endorsement of Earthport's services (however the market suggests they are doing going work, with HSBC, Santander and Standard Chartered all signing up to service - and the announcement of a 78% jump in revenues for the company earlier this year).
https://www.youtube.com/watch?v=NsyPdBIFI-k
But all this is distracting us from the critical question - what does Blockchain and shared ledgers mean for the future of the banking sector?
Well the first point to acknowledge is that banks are taking it very seriously.
R3cev.com is the brainchild of former Wall St veteran David Rutter, and is itself a shared ledger service provider. What makes it different however is that R3 has also received support from banks around the world for its work - far beyond any other current shared ledger developer.
As paymentweek.com first noted in September this year, the support started with nine banks including Commonwealth Bank of Australia, Credit Suisse, Barclays, BBVA, JP Morgan, Royal Bank of Scotland and UBS. This was followed very quickly by a further announcement and the addition of another thirteen banks to the list, this time including Citi, Bank of America, Morgan Stanley, Commerzbank , Societe Generale, SEB, BNY Mellon , Mitsubishi UFJ Financial Group, National Australia Bank, Royal Bank of Canada and Toronto-Dominion Bank, taking the total to 22 banks.
At the same time other banks are making their own shared or singular efforts through a variety of other methods and processes as the Australian Financial Review today noted:
"UBS has been doing mock trades through a blockchain it has built in the Level39 incubator in London, and Goldman Sachs last week filed a patent for a settlement system for stocks and bonds using blockchain technology".
The article goes on to mention that "this week, CBA and the Coalition of Automated Legal Applications (COALA), a group of cryptography academics, are holding a week-long conference in Sydney. COALA will meet in closed sessions on Monday and Tuesday; Thursday and Friday are open to the public. On Wednesday, regulators will meet in private to discuss the concept.
So, where to from here? Well it is important to keep in mind that with the variety and volume of shared ledger options that are currently finding their way to market we may be headed for another HD-DVD vs. Blu-Ray, Beta vs. VHS (for those old enough to remember), or ApplePay vs. The World type scenario; and for this and many other reasons we are probably still years away from any significant or tangible benefit to consumers.
However, if the banks can find common ground sooner than later, there is quite likely a future for digital banking wherein costs of cross-border transfers are significantly reduced whilst at the same time becoming much, much quicker - if not instantaneous - as consequence, or benefit of Blockchain and shared ledgers and that surely means it is destined to become a friend to the banking consumer in years to come.