Blockchain – the technology at the heart of the digital currency, bitcoin – may be set to profoundly change the way banks facilitate transactions worldwide.
While we’re in the early days of truly understanding the impact blockchain will have, it holds the potential to vastly improve, or completely replace, current financial services models.
Public ledger inspired by bitcoin
Blockchain is essentially a public ledger that records and verifies transactions through a shared network of computers. It was first conceptualized in 2008 by Satoshi Nakamoto, the alias of the unknown person/persons who designed the concept of bitcoin. As a public ledger – or commonly referred to as distributed ledger – the technology is what makes the uniquely autonomous, peer-to-peer aspect of bitcoin possible.
Yet, bitcoin is just one application. Other areas – such as financial, legal, physical goods, elections and more – can potentially be applied to the technology as well.
Shared across global network
A helpful way to understand how blockchain technology works is to picture a giant worksheet, replicated across a vast network of computers and designed to update regularly across this same network of computers.1 That, in essence, is the central feature behind blockchain and is what distinguishes it from a regular database running on just one computer. Blockchain runs through millions of collaborative “processing nodes” (computers connected to the blockchain) that are able to continually establish a consensus about its contents.
Uniquely transparent and incorruptible
Blockchain is able to reconcile transactions across its network in near real-time (referred to as a “block”) and sends the same series of transactions to the public network (or blockchain as a whole) in a linear, chronological order. This constant state of global consensus and self-auditing ability is also what makes it uniquely transparent and incorruptible. There’s no centralized copy of the information to corrupt, making it virtually impossible to tamper with since others will instantly know about it and correct the data.
Set to revolutionize traditional model
So why is blockchain poised to reshape the financial industry? We normally rely on trusted third parties, such as banks or governments, to process and keep records of our transactions. For instance, in the traditional model a clearing house serves as a centralized ledger to clear transactions, which can be slow and inefficient. Yet, the approval of transactions on a blockchain depends on its network instead, not one specific organization or individual. As a result, we could potentially rely on a trusted blockchain system to facilitate transactions instead.
At first glance blockchain may seem like a threat to current models, yet many banks are seeing it as an opportunity to complement or, conceivably, overhaul outdated banking infrastructure. Among the many possibilities, it holds the potential to speed up settlements, lower operating costs and make financial services more secure and accessible. Leaders in the industry have suggested that it could change banking in the same monumental way the internet changed the music and film industries.
In fact, banks and other financial institutions are adopting the technology “dramatically faster” than once expected. According to a recent IBM report, 15% of the global banks in their study were expected to launch commercial blockchain products in 2017.2
1Is blockchain technology the new internet? blockgeeks.com.
2 Leading the pack in blockchain banking: Trailblazers set the pace, September 2016, IBM Institute for Business Value.
Source: Fast forward: Rethinking enterprises, ecosystems and economies with blockchains, June 2016, IBM Institute for Business Value.