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Blockchain: Is It A Secure Alternative For Financial Institutions?


“The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks.” — (Jan. 3, 2009); The Genesis


As I was scrolling around Medium exploring new niches, I came across this fantastic post by Jimmy Song, on “Why BlockChain Is Hard.”

It compelled me to attempt taking the post forward by exploring the utilization of Blockchain Technology (BT) in the financial sector worldwide.

“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly” - Vitalik Buterin

This post contains two parts; the first one explored the possibilities of employing BT in financial institutions. The second one provides real-time examples of the institutions already working with BT


Part 1: Possibilities of employing BT in financial institutions


Strengths

  • Improved speed of transactions

  • Promotes a broader digital ecosystem

  • Shared ledger improves audit process

  • Allows digitalization of assetsBorderless transactions

Weakness

  • Lack of regulation (local/country/ global)

  • Lack of education/information across end-users

  • Issues with network participant identification

  • Lack of adequate infrastructure


Opportunities

  • Utilize the brand reputation of the institutions to lead changes

  • Increased cooperation to push for legislation

  • Invest in R&D for blockchain platforms

  • Focus on ‘Know Your Customer’ — KYC


Threats

  • No requirement for verification by any central authority

  • Verification from a consensus between (intra) multiple parties enables organized crime

  • Money laundering

 

Part 2: Real-Time examples of Financial Institutions exploring BT


RUSSIA

In 2017, Russia became the first Government to implement BT for document transfer and storage in its largest state-run bank: Sberberg Bank. This step comes after Sberberg becomes a member of the IBMs’ HyperLedger Business Project, in September 2016.

Sberbank is utilizing BT for executing its International Letter of Credit (LOC) transactions. Using BT has also allowed entry of multiple partners into a smart contract without intermediaries. Finally, Russia is taking advantage of BT to verify IPRs’ and online public ledgers, quickly.


UNITED STATES OF AMERICA


The USA has a fascinating take for utilizing BT. It plans on using BT to make it easier and less costly to track home mortgages packaged into securities and, along the way, standardize the data involved in securitized home loans and make it more transparent.

This approach initiated by a big group of financial institutions, Credit Suisse Group, Wells Fargo & Co., and others is a move to avoid another 2008 mortgage bundling crisis, which shrunk the financial industry dramatically.

I mean, think if banks were utilizing BT back in 2008, losses worth 4.1 trillion dollars would not have happened. (International Monetary Fund)


CANADA


Project Jasper is Canada’s answer to Domestic Inter Bank Payment Settlements via DLT.

It is a joint initiative between Major Canadian banks and R3.


Few learnings from Project Jasper:


The use of the private Ethereum platform, one of the two distributed ledger Technology (DLT) being utilized, does reduce but does NOT eliminate the need to back up the on-chain and off-chain data.

Phase 2 of Jasper does question the operational reliability of the project due to the centralized mechanism, which creates a single point of failure for both the platforms, which is Ethereum and Corda.


SINGAPORE

Monetary Authority of Singapore (MAS) and R3, in association with many reputed banks, not limited to Bank of America, Merrill Lynch, Credit Suisse, DBS Bank, etc. created Project Ubin. This project is utilizing “Internet of Value” or what we now know as DLT for inter-bank payments.


 1. Ubin aims to evaluate the implications of having a tokenized form of Singapore Dollar (SGD) on a DL and its potential benefits to Singapore’s financial system.   2. Three different platforms (Corda, Hyperledger Fabric, Quorum) using three different techniques for conducting inter-bank payments  3. Learnings: Phase 1 proved that with BT, fixed income securities trading and settlement cycle became more efficient.


 

Financial Institutions should set a plan to migrate from regular platforms to BT. At the same time, it is crucial to set a budget for:

  • Technology development

  • Contingency plans

  • Research and development to give continuity

When it comes down to answering the issue, this post poses, the only possible conclusion can be this:

Blockchain Technology is secure, but the means of executing blockchain in Financial Institutions are not
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