Wealth: Banking Security and the Blockchain Revolution

Rage Review : Although the use of blockchain technology in cross-border payment and securities trading systems can reduce the cost of global banks by $1.5-2 billion per year, there is currently a lack of profitable applications that are worthy of large-scale deployment. Bank of China and HSBC in Hong Kong have announced plans to use blockchain technology to record assets and speed up mortgage applications. Banks must think twice before applying blockchain technology to core activities, and do not take unknown risks in order to save money.

Translation: Nicole

The financial world has spent the past few years wondering what to do with blockchain, the automated ledger that underpins the bitcoin cryptocurrency. Will blockchain be an effective tool for banks to make back-office systems more efficient and cut costs? Or is it just another technological dead end, with a laudable idea but a lack of profitable applications that warrant large-scale deployment?

Banks are now rolling out commercial applications of the technology. Bank of China and HSBC in Hong Kong have announced plans to use blockchain technology to record assets and speed up mortgage applications. They believe this will speed up loan applications.

The ability to keep records of valuations is just the tip of the iceberg of blockchain's advantages. Some believe that blockchain could also revolutionize banks' core payment and transaction systems. The magic of blockchain is that it allows users to bypass middlemen and simplify clearing and settlement by creating an instant and tamper-proof public record of transactions. According to Oliver Wyman, a consulting firm, using blockchain to simplify redundant systems such as cross-border payments and securities trading could reduce costs for global banks by $1.5-2 billion per year.

As bankers are under constant pressure to reduce costs, increased efficiency is very attractive to them. In fact, 50 of the world’s largest banks have begun researching blockchain and hope to launch the first applications within the next 12 months.

Exploring the possibilities of a technology is one thing, but deploying it broadly is another, and that problem, like Bitcoin, has many unanswered questions.

The first is security. Typically, security is inversely proportional to the level of access to a system. The more users with permissions, the easier it is for a corrupt or malicious person to break into the system and wreak havoc. The fully distributed systems that innovators envision could be very common.

Then there is the problem of “bloat.” For example, the amount of data storage required to run these fully distributed capital markets could be so large that the system would be too slow.

Finally, there is the issue of confidentiality. For all encryption methods, the purpose of distributed ledgers is to create visible records, which may allow participants to spy on each other's transactions and undermine the profit model.

Of course, we all have answers to these concerns. The simplest approach is to go back from full decentralization to a centralized ledger, so instead of sharing data for everyone, you create a central hub - or a few central hubs - that hold data on behalf of other participants. The problem is that while this improves security, it also reduces savings. Many banks may not consider this huge and expensive technological upheaval and choose to stick to their own ideas.

There may be other ways to cut ancillary costs, with the HSBC and Bank of China initiatives being one example. Other areas may include compliance procedures such as anti-money laundering (ANL) and know-your-customer (KYC) rules.

Banks must think twice before applying blockchain technology to core activities. Like other systems that rely on public confidence, such as airplanes and suspension bridges, banks should be careful to eliminate redundancies, such as checks that prevent catastrophic failures, and human oversight. Regulators must ensure that banks do not take unknown risks in order to save money.