Blockchain: the end of banking as we know it?


Blockchain has the potential to create upheavals in the way many processes and daily transactions are handled – and banking is one of them.

For example, blockchain – defined as a "single version of truth" made possible by an immutable and secure ledger, whose copies are held by multiple parties, could provide people with access to funds without the need banks.

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Although it is too early to say whether the blockchain will revolutionize the banking sector, it will surely have an impact.

Blockchain's impact on the banking sector

Experts say the blockchain will have a transformational impact on the banking sector. "I see banks that adopt blockchain technology to improve efficiency, affordability and security across the full spectrum of financial services," said Param Vir Singh, associate professor of business technology at Tepper Carnegie Mellon University School of Business. 19659007] Banks have already started moving to this space, Singh said. "Some of them have already started forming consortia where they are testing the use of blockchain for interbank transfers," he says. "I think key applications are in the space of payments, fraud reduction, customer knowledge and loan processing: banks realize that there are huge incentives to optimize and automate their processes through smart contracts. "

The PNC bank is collaborating with Carnegie Mellon through the PNC's Financial Services Innovation Center to understand what solutions a bank could provide on a blockchain – through CMU's Coin initiative, a test for cryptocurrencies at the CMU – and also what internal processes of a bank can be improved with blockchain technology.

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For many, however, blockchain efforts are suspended. The banking sector is heavily regulated, Singh noted, and as a result banks are playing a waiting game to bring out the regulations before they make a big move.

For mainstream adoption in the sector and for blockchain to be a scalable solution for banks "must be built with a critical mass of ecosystem operators", said Kapil Bansal, managing director of banking and capital markets of Deloitte Consulting. "It is not clear what benefits the blockchain offers [can] in a single banking environment." The nature of blockchain technology lends itself to being exploited for solutions that are multiparty platforms. "

Therefore, it is critical that several market participants also agree on common standards before a blockchain solution can be implemented, Bansal said.

A substitute for banks?

Although the impact of the blockchain on banking could be significant, experts do not expect it to replace traditional banking for loan transactions anytime soon – if ever.

"Blockchain technology still has many limitations due to compromises between scalability and security," Singh said. "Technology must evolve significantly before it starts to make a serious impact." On the other hand, there is a lot of uncertainty about the regulation concerning the blockchain technology.

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"The regulation on blockchain technology, particularly in financial services," We have to emerge before seeing the large-scale adoption by banks, "Singh said.

It is too early to say whether blockchain will replace banking issues, said Rajesh Kandaswamy, director of research at Gartner Inc.

"Technology has potential, but the rate of adoption is so small all over the world," he said. "The obstacles are that current systems – institutions, processes, culture and technologies – have huge network effects and may not have the incentive for a radical change. "

Access for funds

The original hope of blockchain technology was that it would reduced transaction costs and made micropayment possible, and as a result brought individuals into the undercut or unbanked into the system,

"However, since we started to understand blockchain technology better, we are still he came to realize that this would not happen, "Singh said. "A blockchain is made secure through a consensus mechanism: while the computing power required to contribute to the consent mechanism increases, the blockchain becomes increasingly secure – unless the computational power required is so high as to lead to centralization, in in which case the blockchain would fail. "

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To compensate banks for dedicating high levels of computing power, the blockchain must reward them with high transaction fees. "As a result, you'll notice that commissions on bitcoin transactions are not trivial," said Singh. "For low-value transactions, bitcoin would be very expensive, but it would be quite profitable for high-value transactions.I see blockchain technology give a huge boost to transactions of great value but potentially does not help a lot of small-value transactions."

Improving Integrity

Can the blockchain prevent people from lying about their income on mortgage applications?

"An automated blockchain-based system that tracks all revenue and other financial information, yes," said Kandaswamy. "But it could also be done with other technologies."

In an ideal world, blockchain could prevent people from providing false information, Singh said. "If employees and employers were part of a blockchain and even the lender is part of the same blockchain, it could certainly prevent people from lying about their income on mortgage applications," he said.


Another question that must be asked is if a bank decides to change the register, who can stop it?

"There is no answer to this," said Kandaswamy. "It depends on the context of use of the blockchain: if it is an industrial consortium, it may not be able to do so unless it is validated by others."

A blockchain is a decentralized system, said Singh. "The technology works because there is no need to trust any single node in the network," he said. "If a bank had a decentralized ledger and kept the rights with itself in making changes in the ledger, I would not say it's a decentralized system."

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In the end, a blockchain provides its code in public. "We trust in a blockchain because we trust the code, which has all the weights and balances to ensure trust," said Singh. "If a bank launches a blockchain in which it holds all the power needed to update the general ledger, I do not see the people who adopt it, but in the end the regulators must create clear guidelines for banks to use blockchain technology. . "

Blockchain vs. block lattice

Is the lattice block – a technique used by Nano digital cryptocurrency aimed at providing a platform for instant transactions at no additional cost – better than blockchain?

It's still an open question, Singh said. "The lattice block has yet to be tested in terms of safety," he said. "Block latex is more scalable than a bitcoin largely because it uses a consensus-based mechanism of proof of stake, but there are also blockchains that use the proof-of-stake consent mechanism and are scalable."

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The other key difference between a blockchain and a lattice block is that in the block lattice, each user account has the his blockchain and exchange for interactions through blockchain, Singh said. "This is an interesting concept," he said. "We will see how it behaves once it is rigorously tested in the open like a bitcoin."

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