As technology evolves, the opportunities get created to move away from traditional practices as we embrace the new technology. The popularity of the Blockchain technology in the banking industry owing to its potential to revolutionise modern banking is a perfect example in support of this context that is starting to unfold in banking. As Oliver Bussmann, CIO of Swiss Bank prophecies “I believe, and this is my personal view, that blockchain technology will not only change the way we do payments but it will change the whole trading and settlement topic. When somebody with a strong brand and security level establishes it as a reliable service, then the whole industry will follow. That is my personal prediction.”
The Bank of England in a report supported Bussman’s claim when they predicted the technology as one of the most “significant innovation” with the potential to display “far reaching implications”. In order to understand these implications and the benefits that modern banking can leverage from the Blockchain technology, it is important to start with the basics.
Understanding The Technology Behind Blockchain
In very simple words, Blockchain is a sequential recording of data. It is a type of distributed ledger storing data that cannot be edited once published. The blockchaintechnologies.com website defines blockchain as “A blockchain is a type of distributed ledger, comprised of unchangable, digitally recorded data in packages called blocks.” These blocks are digital records of data that are linked or chained to each other in a linear fashion. The etymology of the name Blockchain is therefore clear.
Each digital block of data recording an event or as in the case of banks, a financial transaction is cryptographically hashed. This ensures that extracting the input data from its output data (hash value) is extremely difficult. With this Blockchain ensures an added layer of security for all data stored through Blockchain.
Two types of Blockchain Technologies Are Commonly Prevalent. These include:
1. Unpermissioned Blockchain – This is an open to all decentralised ledger. Anybody can submit a transaction and can participate in network validation. Any user with an internet connectivity will be able to transfer value to any other user located anywhere in the world. It therefore advocates financial independence.
2. Permissioned Blockchain – This is based on access permissions and is a more controlled approach than the unpermissioned category. Only specified users will be able to submit transactions and to validate the network. Permissioned Blockchain is often the preferred option for banks in order to enable KYC and do bank transactions.
Blockchain and Modern Banking
Blockchain is fitted with all the required ammunition to modernize banking in various aspects. A look at some of its technology artillery will help explain the case better.
Permissioned Blockchain Helps Banks Minimize Paper Costs
Permissioned Blockchain can help to minimize or even eliminate the use of paper by banks. As Simon Taylor, the Blockchain and Distributed Ledger Subject Matter Expert of Barclays, published in his article on Blockchain, the technology uses the concept of consensus to establish truth and accuracy in banking. It uses algorithms to record and read the truth. This skips the human aspect of arriving at consensus and carrying a paper format for validations.
Smart Contracts Smarten Bank Contracts
Smart Contracts is yet another technology innovation introduced through blockchain that enables banks to automatically execute terms of contract based on certain conditions. This is achieved with the help of computer programs that validates these conditions against the current scenario. If the situation meets the conditions it processes the contract otherwise not. Payment events are accordingly recorded. Smart Contracts also enables banks to configure recurring and scheduled payments.
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Author: Kishore Kapoor
Kishore Kapoor an industry veteran of 31 years in global banking technology. A Founder & CEO of eKutumb.com – World’s first marketplace for enterprise software delivery and consulting business by creating value for all of industry stakeholders involved (customers, partners, individuals and investors) through a disruptive and trans-formative approach of doing business.