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The Financial Industry and Governments are Embracing Digital Currencies and Blockchain Technology
January 30, 2016
In last quarter’s issue, we discussed the rise of digital currencies and the blockchain, or distributed ledger, technology that supports them. We now turn our focus to how the financial industry and governments have embraced this technology and are working to adapt it to traditional banking services and applications as far ranging as recording property transfers and safeguarding nuclear missiles.
The Financial Industry Races to Adopt Blockchain Technology
Far from ignoring what is happening in the peer-to-peer financial world, the financial industry is joining the ranks of those implementing blockchain technology to provide better services faster and cheaper.
In August 2016, the World Economic Forum reported that 80% of banks are predicted to initiate blockchain technology projects by 2017. According to another report, banks already have invested more than $1 billion in this technology.
The biggest shared effort among financial institutions to study and implement blockchain technology is the R3 Consortium. On September 15, 2015, R3CEV, LLC, a blockchain technology company, started a consortium with several of the world’s largest banks to study and develop means for using this technology in the financial system. Currently, 70 of the world’s largest financial institutions and other companies take part in the Consortium’s work. As recently as a few months ago, the Consortium reported that it had completed a trial using blockchain technology to facilitate the trading of debt instruments in 40 banks around the world.
In addition to the Consortium, banks here and abroad have been investing in blockchain projects in the delivery of their services. Last month, Commonwealth Bank of Australia and Wells Fargo & Co reported that they had completed their first-ever international trade using blockchain technology. Using that technology to record and facilitate the trade, an Australian cotton trader bought 88 bales of cotton from a United States producer and shipped it to China.
In Asia, South Korea’s fourth largest bank, KB Kookmin, has partnered with a bitcoin wallet provider to develop blockchain infrastructure for use in cross-border payments. Also, HSBC and the Bank of China have announced plans to develop a blockchain-based program that will speed up mortgage applications. The program will keep a register of all property valuations, which the banks anticipate will make the mortgage application process quicker and less expensive.
Elsewhere, several banks in Israel have begun blockchain-based initiatives. The Bank of Russia has announced it is testing blockchain applications based not on the traditional Bitcoin blockchain, but on Ethereum, another digital currency.
At least three banks are investigating the possibility of taking digital currencies one step further. For several months, the Bank of England has been analyzing the propriety of issuing its own digital currency. The Bank already has recognized that the concept of a central bank digital currency has benefits: according to the Bank’s research, issuing such a currency could permanently raise the country’s GDP by as much as 3%. Earlier this year, the People’s Bank of China announced that it too may issue its own digital currency. The Central Bank of Canada likewise has announced that it is developing a digital version of the Canadian dollar.
One of the more surprising uses that banks may put digital currencies to is in the payment of ransom. One report states that recent cyberattacks have left several banks in London recognizing their vulnerability to such attacks. In response, an unnamed group of those banks allegedly has started stockpiling bitcoin in order to have virtually untraceable currency with which to pay a ransom to any future attackers.
Governments Get Involved
Governments also have become focused on adapting the technology for use outside of the traditional banking services.
For example, several countries are working on projects to register citizens’ homes and personal property, such as automobiles, on a blockchain. The purpose is touted as fostering social inclusion and economic development in emerging countries. The Chairman of the Republic of Georgia’s Nation Agency of Public Registry explained that Georgia can use this technology to register property and “show the world that we are a modern, transparent and corruption-free country that can lead the world in changing the way land titling is done and pave the way to additional prosperity for all.” Similarly, according to a recent report, the United Arab Emirates government has been developing the use of blockchain technology to preserve and record wills and trusts.
In the United States, in late September 2016, a bi-partisan Congressional Blockchain Caucus was formed to help educate legislators on digital currencies and raise awareness of issues that might affect future efforts to regulate this area. In similar fashion, the Blockchain Alliance has been working to educate government agencies about the technology and to learn of any concerns they have. At the same time, the U.S. House of Representatives passed House Resolution 835, which memorializes its belief that the United States should adopt a national policy to foster technology that will promote consumers’ ability to engage in commerce online.
This technology also has made its way to America’s embassies. Speaking at a conference last month, U.S. Secretary of State John Kerry confirmed that there are 139 “digital officers” in U.S. embassies in foreign countries. While his comments were vague about the training or roles of those officers, he seemed to confirm that the government plans to train officers around the world on digital currencies and blockchain technology.
Most interesting, the Department of Homeland Security has awarded grants to four projects to implement blockchain technology to develop new solutions for “identity management and privacy protections.” The Department also has awarded a grant to a company to study ways to use the technology to advance security for mobile devices and information technology networks. Likewise, the Defense Advanced Research Projects Agency, part of the U.S. Department of Defense, has requested proposals for projects to develop secure messaging services based on blockchain technology. It recently awarded a $1.8 million contract to a computer security firm to develop and test technology that would create more secure military networks. The goal of this project is to implement blockchain technology in the safeguarding of America’s nuclear missiles.
In sum, the recent past has shown a dramatic increase in the interest in blockchain technology. Although digital currencies still enjoy a healthy following, this technology has taken on a life of its own as the financial industry and governments, among others, work to create new ways to use it. One commentator noted the irony that a technology that was first created as an alternative to the traditional financial industry is quickly being adopted by that industry as a way to better the services it offers.
Consumer Finance Nicholas P. Mooney II