Financial Services Industry Tests the Waters of Blockchain Technology

Bitcoin  •  Digital Currency  •  Money Transmission  •  Payment Processing  •  Virtual Currency

Many of the world’s leading financial services providers have started developing their own blockchains, either to facilitate the potential for creating their own cryptocurrency, to add an additional layer of security to encrypted transactions in fiat currency, or to provide their customers services more cost-effectively than ever before. Companies that have publically announced their intentions include Visa, Goldman Sachs, Citi, BBVA, and New York Life, among many others – demonstrating the diversity of adopters within the industry.

First, what exactly is a blockchain? A blockchain is simply a collection of “blocks,” with blocks being a collection of verified transactions. A “transaction” is broadly defined as the execution of any party-to-party agreement (typically backed by a digital signature). In turn, these blocks are chained together by “hashes,” which are cryptographically-secure functions – i.e., Block B is linked to its previous Block A because it includes the output of Block A’s hash function, but Block A’s function cannot be reverse-engineered by existing technology (largely based on the difficulty of the computation, for which there is no discovered mathematical solution and which can take even the most powerful computers centuries to solve). The most well-known blockchain is bitcoin, the digital currency.

Further, a blockchain need not be a public ledger, as in the case of bitcoin – the privacy level and ability to share certain information with counterparties are both elements of the blockchain that can fall along a sliding scale, allowing the creators of a blockchain significant customization.

Great, but how does any of this apply to the financial services industry? The secure and customizable nature of the blockchain allows financial services providers to create their own cryptocurrencies. But it can also facilitate the secure storage and transfer of personally-identifiable information, facilitate secure money transfers, eliminate  redundancies and errors in recording transactions; and provide recordkeeping services at potentially lower cost. Given the benefits of setting up a blockchain, it’s not surprising that the major financial services providers are not only experimenting with their own blockchain solutions, but are also convening to discuss how they could utilize a shared blockchain framework that would allow them not only to maintain each of their own clients’ privacy, but also to provide their collective client base faster, more secure, and potentially lower-cost services for day-to-day transactions. Several major financial services providers have also developed, and are currently running internal tests, of their own virtual currencies.  These banks span the globe, from Citibank to Bank of Tokyo-Mitsubishi (Japan’s largest bank).

Whatever the outcome of these experiments, the permeation of digital currency into some of the largest global financial institutions suggests that the future of financial services may seek to add services and increase efficiency through the blockchain.

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