Financial firms are jumping on the blockchain bandwagon to speed transaction settlements while also improving security and cutting costs. Blockchain has the potential to change the way financial firms conduct business around the world but as with any technology, privacy and security concerns will need to be addressed.
Blockchain, the technology behind bitcoin, maintains a continuously growing chain of records and ensures every associated transaction is open and verifiable by every participant in the system. By tracking asset ownership with security and transparency, Blockchain has to potential to make transactions faster, lower transactional costs, and reduce the risk of fraud.
Blockchain Benefits
Each transaction is time-stamped and linked to the previous block in the chain, theoretically making transactions more secure and tamper-proof. While few real-world blockchain services are in production today, financial firms expect it to be integral to delivering and securing services, including:
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Instant international payments: Customers will leverage blockchain to send payments like remittances and wire transfers to users in other countries instantly and with an ironclad paper trail.
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Speedy mortgages: Using blockchain to handle mortgage data would provide a secure electronic trail of legal agreements, helping to speed funds disbursement and minimize the time between when contracts are signed and purchases are completed.
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Simplified compliance: Migrating a bank’s compliance reporting to blockchain both serves to streamline the process and make it easier to audit.
Blockchain also has the potential to improve cybersecurity, since its decentralized nature ensures there is no single point of failure for attackers to compromise. More interestingly, its consensus mechanism can be integrated into various control systems and security tools. The advantages of this are more accurate threat monitoring and identification and better network security.
Blockchain Not Bulletproof
Like any new technology designed to improve security, however, blockchain is not bulletproof and banks need to consider the challenges. For example, blockchain transactions may be vulnerable to:
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Malicious or erroneous use by third parties: Since many components of a transaction are automated, poorly thought-out processes or mistakes in coding could lead to lost data or theft.
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Gaps in security: Cryptocurrency coding is new, making it difficult to scan for flaws. In addition, distributed nature of blockchain makes authentication and key management trickier.
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Transaction privacy: With a consolidated audit trail, blockchain has the potential to provide an unprecedented level of transparency to participants. The downfall here is that insider knowledge could be used to gain advantage in market trades or other transactions.
While blockchain offers promise, it’s still in the infancy stages of adoption and enthusiasm must be tempered with an abundance of caution. Rob Galaski, Partner, at Deloitte was quoted as saying, “While there is no doubting the transformative potential of blockchain technology, it is not a blanket cure for inefficiency in financial services. At this stage of evolution, the critical task is knowing where to focus your efforts. Blockchain will have the greatest impact when applied to business problems involving a shared repository of information, multiple writers, minimal trust, the presence of intermediaries and interdependencies between transactions. Without these conditions, blockchain may not be the answer,” said
To be successful, financial firms must vet their blockchain projects using tried-and-true security controls, including third-party validation, comprehensive risk assessments, data protection tools and more.
How do you see the future of blockchain for financial institutions? Join the conversation.