BBVA, one of the world's top 30 banks, says blockchain brings more opportunities than risks

Bitcoin and the blockchain protocol have completed such a system, allowing two parties who do not know each other to exchange value in a fast and efficient way without the need for an intermediary. Despite its immaturity and many challenges, the financial industry is still optimistic about this technology and believes that new banking services that are more flexible, cheaper and more beneficial to customers are likely to be available to everyone.

Macarena Peña is the Business Development Manager for New Digital Businesses at BBVA, responsible for finding development opportunities related to blockchain. In this interview, Peña explains how the technology works and presents the challenges facing the banking industry. In her opinion, there are only two things that prevent banks from starting to offer Bitcoin services: regulation and real customer demand. BBVA is one of the top banks in Spain (next to Santander) and the second largest financial investment group in Latin America.

What is the difference between blockchain and Bitcoin?

In Satoshi Nakamoto’s original paper, Bitcoin was defined as an application that allows “the pure exchange of electronic money between two parties,” while blockchain is a technical description of the backend operations of the database of that application.

Strictly speaking, blockchain refers to an immutable distributed ledger that contains the history of all transactions performed in the network in the form of timestamps. It is a decentralized network that anyone can access and check at any time to see that the information it contains has been updated and is consistent with other nodes in the network.

Why do banks prefer blockchain to Bitcoin?

The purpose of Bitcoin is to revolutionize the way value is exchanged between users, without the use of financial intermediaries or public institutions to verify the validity of transactions, and without the use of fiat currencies. This is how Bitcoin is used as a unit of exchange. In order to be able to send Bitcoin, first you need to have Bitcoin or exchange fiat currency for Bitcoin.

This explains how businesses that specialize in currency exchange came into being, and in many cases, it is these same businesses that provide you with the wallet to store your Bitcoins.

But not all of these businesses comply with know-your-customer and anti-money laundering laws. In some cases, they are not considered businesses at all under the compliance requirements of these regulations.

Banks and other financial institutions are strictly regulated to prevent these practices. If they are found to have executed these transactions through us, they may even be punished for it. The European Banking Authority has published a series of warnings to users and financial institutions about this.

If there were such Bitcoin regulations that required users and participants to comply with existing regulations and meet the real needs of customers, it would not be a problem for banks to provide Bitcoin services to a wide range of customers.

Transaction numbers continue to increase, but Bitcoin is not widely used by users, who see more obstacles and difficulties than benefits.

Do you think Bitcoin is repeatedly used for illegal purposes?

The total volume of Bitcoin is very small compared to other payment mechanisms (cards, wire transfers, cash, etc.). It is true that it can be traded in a pseudo-anonymous way, and there are indeed cases where Bitcoin is used for illegal purposes.

However, because transactions are fully publicly registered, it is easier for authorities to trace the source and destination of funds with Bitcoin than with more traditional currencies. In fact, some big data startups are already working on this and are conducting continuous monitoring with significant results.

In my opinion, while the Bitcoin network can be used to conduct illegal activities, the appropriate way to conduct regular or large-scale illegal operations is not through Bitcoin.

What does distributed ledger technology mean for banking?

The Bank for International Settlements (DTCC) recently published a study on the impact of distributed ledger technology (blockchain) on the financial industry and concluded that it is very likely to reduce the intermediary role of banks, settlement institutions and central banks.

The technology can reduce the trust required between both parties and provide double cost control. This means that many current banking processes and services, as pure intermediaries, will disappear from part of the value chain. But at the same time, other new products and applications will emerge to serve the majority of customers, which we must consider.

The technology is both an opportunity and a challenge for banks, depending on the strategy they follow and how aware they are of how to exploit this window of opportunity.

In this regard, BBVA is striving to be one of the most innovative banks, developing pilot blockchain concepts and researching the ecosystem through investments (such as Coinbase), protocols (DLG), lectures (2015 Crypto Summit) or competitions (Open Talent Competition or Innovation Challenge).

Can you give an example of what breakthroughs banks could achieve if they used blockchain in their operations?

The first and most direct impact is cost reduction. Today, each bank has a series of deployed servers, and the information contained in them is replicated by many other banks and institutions. To update the information contained in one bank's database with the information of another bank, we use a messaging process. If many banks use a shared distributed ledger containing this replicated information, it can save a lot of money and be flexible and fast, eliminating some of the current verification processes.

If some agencies and supervisors are involved in the execution of some nodes, it may even be possible to improve reporting controls and processes and reduce some background tasks.

Supply can also be improved. Many processes today can be automated and accelerated. Customer needs are more transparent and detailed. New products and services that were too complex to implement can become a reality. In this regard, some applications are being explored in the shared ledger, such as smart contracts, event-oriented code programs that can process information and receive, store and send securities.

What barriers prevent its use in financial services?

First, although the technology is revolutionary and promising, it is still very immature and banks need to ensure that their customers’ operations are secure, robust and scalable.

There is no doubt that 2016 will see huge growth in this technology, thanks to the interest expressed by tech giants such as Cisco, Intel, Microsoft and IBM in building out their sophisticated infrastructure.

Second, regulation. There is currently no legal framework to protect the rights of users of the technology, nor is there any law to monitor whether institutions using the technology are fulfilling their obligations. So far, there is only some regulation in the United States and it is very focused on Bitcoin. Different configurations of the ledger are not differentiated.

What does it mean to join DLG with R3?

DLG is a move by banks in our industry to coordinate research and development on distributed ledger technology. More than 40 global banks sitting at the same table to discuss it is enough to prove its potential. If we want to fully utilize this technology to change some of our processes, there are network effects to be exploited. If we send a message with a fax machine but no one else receives it, then what is the point. And in order to communicate, we need to define these rules to make interoperability easier.

R3 has hired the best technical talent in the industry and is working with other large players to drive this project forward and make it a reality. There should be real actions and projects, not just talk.

Besides banking, what other areas can this technology be applied to?

The technology can be used to register or exchange assets (financial, tangible or intangible). If it can replace many document-based registers, it can also verify the dates and electronic signatures of participants, replacing some notaries’ jobs.

It can also be used to manage intellectual property. Because the technology publishes a system of public and private keys, rights can be allocated in a more controlled and secure way to understand who accesses, consumes or publishes a book, song, etc.

We also have applications for registering jewelry or works of art to avoid theft and improve insurance management.

The development of smart contracts is also one of the factors that contribute to the Internet of Things.

Do you think blockchain is here to stay or is it just a flash in the pan?

Obviously, Bitcoin came first, followed by cryptocurrencies, then blockchain, and now distributed ledger technology. Each concept has attracted a lot of media and has had its own period of glory.

While distributed ledgers may be the only advanced version of distributed databases, they are at least inducing a new way of thinking about micro-industrial processes, frictionless peer-to-peer interactions, and the building blocks of smart contracts.

As the technology becomes more advanced in the coming years, our expectations will eventually be realized and it has great potential to be a seed of hope. In 2016 and beyond, we will see more robustness and reliability in the industry.

Original article: https://info.bbva.com/en/news/economy/technology/bitcoin-blockchain-threats-opportunities-financial-industry/
By Luz Fernández
Translator: yyy
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Editor: printemps
Source (translation): Babbitt Information (http://www.8btc.com/bbva-blockchain)