It seems to be stipulated in the banking industry, that blockchain technology is the next innovation for a financial infrastructure. Even the Deutsche Bundesbank claims, that blockchain and crypto currencies like bitcoin will achieve a key role for cashless payments. While Central Banks all around the world just monitoring the phenomenon critically, commercial banks seem to be in a race to use the capabilities of the blockchain technology. It appears that commercial banks have low interest in crypto currencies but in blockchain.
Benefits of Blockchain
Blockchain technology can increase the security for transactions extensively with a remarkable decrease in cost of operation. Furthermore, the blockchain technology enables the transaction confirmation around the globe almost in real-time. It is a huge experiment, but it remains questionable, if the blockchain technology tolerates, that banks work more efficient without making themselves redundant as intermediaries. In addition, it is unclear if the result of the adaptation to transaction banking is still compliant to the original blockchain technique of Bitcoin.
The current infrastructure of banks as well as the respective processes to transfer values with a bank as authorized intermediate is not modified since decenniums. Therefore, blockchain could have the potential to overhaul the legacy infrastructure, to boost the speed of transactions and to optimize stock brokerage. The clearing of transactions und the transfer of values could be reduced from days to minutes.
There are several areas of applications conceivable with the blockchain technology. Blockchain is everywhere imaginable, where transparency and confirmability are required; the type of information is secondary. Every information fitting into 40 byte can be processed. Another benefit of blockchain is, that so-called smart contracts can be applied by the technology. As soon as an occasion - according to a contract - occurs, the correlated action is executed.
Current project status
Nevertheless, the debate about distributed ledgers, private and public blockchains is under way in the banking industry. In this environment, the Start-up R3 gathered some of the leading commercial banks like Wells Fargo, Unicredit and Barclays to create something with blockchain. Also the Swiss bank UBS and its team is experimenting with the technology. Supposedly, CITI Bank is actually working on 40 blockchain projects and the New Yorker Stock Exchange is currently trying to make their equity trading more efficient through blockchain technology. These are only a few samples to give a clue of the current hype with blockchain. What will remain at the end of all this projects is at present completely vague.
The critical point is, that the financial industry insistently ignores that the decentralized protocol of the original blockchain technology is adapted to the crypto currency bitcoin and that bitcoin is the only real stress tested application for the blockchain. It remains to be seen, if banks can make use of the original blockchain technology for their purposes, without integrating the crypto currency. It is also doubtful, if the original blockchain can be practiced without an incentive for miners, who sustain the blockchain with the capacity of their IT processors.
The Australia and New Zealand Banking Group (ANZ) stated therefore, that commercial banks should not try to integrate the blockchain technology, but the bitcoin itself. The USSA, one of the most innovative US banks when it comes to the use of internet and social media, installed a client’s operation to control their bitcoin account through a Coinbase-Account. If this step makes a bank to appear innovative, it shows as well how far banks are away from decisions to integrate bitcoins.
As long as the banking industry refuses to integrate the crypto currency, they will have to select between a private and a public blockchain technology. The tendency shows, that banks will probably not implement the original blockchain. They will supposedly choose a combination between private and public blockchain with a restricted number of active users. With a peer-to-peer mechanism they would achieve a disintermediation. This is neither the intension of banks nor intended by public administration like Central Banks. They intend to keep control over the system. This control cannot be given away in a whole.
And indeed, the above-mentioned Start-up R3 recently presented their distributed ledger platform „Corda“, which records financial transaction among authorized institutions, executes and synchronizes them. The platform uses its benefits of the original blockchain, without taking over the design-decisions which make blockchain unfeasible for the environment of banks.
The future will show where the development of the blockchain experiment leads to for the banking industry.
www.r3cev.com; IT Finanzmagazin March 2016; Deutsche Bundesbank, Press and Speeches 2016, The case for bitcoin, www.bluenotes.anz.com; Distributed Ledger of Blockchain, www.bafin.de; Das Rennen um die Blockchain, www.capital.de, 2015