What Banks Need to Understand About Blockchain

The world around us is in a constant state of change and moving at a pace that has never been seen before. Adaptation is vital to remain relevant in this type of environment. We all know of examples of companies and industries that failed to anticipate and adapt to changing technology and quickly became or are becoming obsolete—Blockbuster, Kodak and the taxi industry to name a few. Whether it was a lack of vision or a lack of belief that change could happen, we certainly do not want to find ourselves on this list.

For the banking and finance industry, blockchain is the newest technology that we must begin to understand and embrace. The first step in this process is gaining an understanding of what blockchain is. It's not an easy topic. A basic definition is that it is a shared database of entries that must be confirmed and encrypted before it can be posted to the ledger. It is believed to be hack-proof due to a high level of encryption and the required approval of each party in the transaction. 

To understand it better, you can compare blockchain to medical records. Each patient visit is recorded on the particular date of his or her appointment. Once the physician and patient have confirmed its authenticity, the time is locked into the system. Only these two individuals have access to the data unless one of them decides to share the information with another physician (e.g., for specialized treatment). Any records stored in the past cannot be modified; otherwise, the diagnosis could be incorrect (which would be an unintended—and damaging outcome).

Bitcoin and Blockchain

You've no doubt heard of Bitcoin. The cryptocurrency was the first version of blockchain. Bitcoin was created to allow for a secure way for two parties to transfer funds. The innovation enables the public movement of financial instruments without going through a third party. Since this first application, many other potential uses have emerged—from securing collateral like diamonds, to recording real estate transactions.

As blockchain continues to evolve, financial professionals should take note of a few ways the technology will change the industry. Some will pose a challenge. Most changes represent opportunity for financial institutions.

Challenges

Currently, banks act as the intermediary in many types of transactions. Blockchain will simplify the process of verifying identities and authorizing transactions, resulting in a decrease in market share for the banking industry.

The public will continue to have a limited understanding of blockchain and its capabilities. It will take time to gain consumer confidence, mainly because many people associate blockchain with Bitcoin, which received early negative publicity. As new products come into the marketplace, wider adoption could reduce skepticism and increase uptake.

Opportunities

Blockchain will make establishing and storing contracts more efficient. This change will benefit the financial sector because many services (like loans) could be processed and stored automatically once verified by both parties.

Regulation will continue to be a challenge—but could lessen. That’s because the structure of blockchain demands a set of rigorous, agreed-upon rules and constant checks that are hard to circumvent.

Bottom line, blockchain is still in its infancy. With unknowns come hesitation and anxiety, especially as new products are introduced and adopted in a market like banking. The HORNE team will continue to monitor developments to blockchain and other new technologies. We'll continue to share our findings and perspectives with you. If you haven't already subscribed to the blog, now's a good time to do it—you'll get valuable insights and actionable information delivered to your inbox.

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