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Blockchain Technology Continues to be a Focus for Financial Institutions
October 17, 2017
In a prior issue, we discussed how blockchain technology is poised to change the way various industries work. Many have theorized this technology is a game-changer that threatens to usher in a new way of conducting business worldwide. Those industries have continued to invest in blockchain technology at an ever-increasing rate. Banks and other financial institutions have not been left out of this as several have joined large consortiums that aim to study and implement this technology.
Before discussing those recent efforts, it is important to review what the term "blockchain" means. Broadly speaking, the concept of blockchain technology came into common knowledge with Bitcoin. In 2008, a person or persons using the name Satoshi Nakamoto published a white paper suggesting the creation of a digital currency (Bitcoin) that could be traded among individuals. One of the key features of this currency is that it did not rely on trust in a third party, such as a government or a bank. Rather, it could be used as a means of exchange among individuals without an intermediary (so-called "peer-to-peer"). Instead of using a bank to guarantee the currency a person claims to possess, the paper suggested that a person's currency could be confirmed by a public ledger that is kept on computers worldwide and updated in near real-time. The ledger would keep track of transactions by grouping them into blocks as they are completed. Individuals compete to locate the most recent block of transactions. That block then is attached to the most current prior block, eventually creating a chain of transactions. This chain of transactions is called the blockchain.
Since that time, several other digital coins have arisen, some with their own blockchains with variations on the original functionality. Although commentators have continued to refer to blockchain technology as potential threat to traditional industries, an interesting thing has happened. The industries that many thought would be damaged or replaced by blockchain technology have embraced it.
A recent survey of 1,500 financial services executives from 578 firms worldwide revealed that 91% of those executives believed that blockchain technology and its implementation will be critical to their institution's future. However, those executives admitted that they are confronted with "significant uncertainty" about how to implement this technology. That uncertainty is not limited to bank executives. The World Economic Forum recently summarized blockchain technology as "[n]ever have so many people sought so much from a technology understood by so few."
The financial executives in the survey confirmed that their institutions are in various stages of addressing and resolving that uncertainty. Ninety percent of those executives disclosed that they have identified or are working to identify processes that can be automated by this technology. Nearly half of those executives (48%) disclosed that their firms have a strategy in place on the use of this technology. Those strategies are aimed at resolving some of the financial industry's most challenging issues. Forty-seven percent of the executives identified "improved data management" as an area where blockchain technology could provide significant improvement. Other areas were transparency (46%), risk management (40%), and speed of digitization (39%).
So, how are banks planning to use this technology? Bank of America (BoA) gives an example. For several years, it has been active in filing patent applications related to blockchain technology and cryptocurrencies. Since 2014, it has submitted 20 such patent applications. Because of the delay in making public some of the information on patent applications, it is difficult to get an up-to-date picture of the way it intends to use this technology. However, applications filed have shed light on some of its plans recently.
One application filed last year shows that BoA is seeking a way to use blockchain technology to track and validate user information. It plans to record information about a user in real-time such as where and when a user banks. That information then will be timestamped and stored in a blockchain such that it is instantly available across the entire bank network. That information then could be used to create updated authentication questions. BoA's patent application also reveals that it is studying ways to use real-time images of users that could be obtained from various objects linked through the Internet of Things and stored on the blockchain. The user's identity then could be confirmed with those real-time images.
BoA is not alone. The U.S. Patent and Trademark Office's database indicates nearly 400 patent applications were submitted from January to July 2017 that appear to relate to this technology. That is almost double the amount submitted during the same time period in 2016.
Another area where financial institutions see great promise in blockchain technology is in the clearing and settlement of stock transactions. Currently, it could take up to three days for a transaction to settle and the money to be available after the transaction is completed. However, if blockchain technology is adopted, the three-day process could be collapsed to be nearly instantaneous. Similarly, blockchain technology could be used in the issuance of stocks. The London Stock Exchange Group and IBM recently announced that they partnered to build a platform to digitally issue private shares in companies listed on the Exchange Group's Italian operations.
The same soon may happen in the U.S. Last month, Delaware Governor John C. Carney, Jr. signed into law a bill that changes Delaware's corporation law. This new law authorizes corporations to use "distributed electronic networks or databases" (blockchain technology) for the creation and maintenance of a corporation's records, including transfer and ownership of the corporation's stock.
This technology offers even more significant promise in other countries. One company, Humaniq, intends to use a blockchain to help bring financial inclusion to unbanked people. Approximately 2 billion people worldwide do not have access to a bank account, but one billion of them have a mobile telephone. With a pilot project starting in West Africa, Humaniq plans to introduce an app that will offer a person the ability to make mobile payments by telephone. It also will include a digital wallet function that will keep track of the money each person has and record the amount, and all transactions, on a blockchain. The goal is to let those people use their mobile telephone as their own bank.
Blockchain technology continues to be a source of inspiration for banks and other companies. Like any other technology, it has its critics. But, it also is receiving significant attention as banks and other companies continue to study ways to implement it in the future.
Nicholas P. Mooney II