Blockchain: Is It A Secure Alternative For Financial Institutions?

“The Times 03/Jan/2009 Chancellor on 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”.
This compelled me to make an attempt at 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 the financial institutions

Strengths

• Improved speed of transactions
• Promotes a broader digital ecosystem
• Shared ledger improves audit process
• Allows digitalization of assets
• Borderless 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 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 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. Utilizing BT has also allowed entry of multiple partners into a smart contract without intermediaries. Finally, Russia is taking the advantage of BT to verify IPRs’ and online public ledgers, quickly.

UNITED STATES OF AMERICA

Global Financial Crisis: 2008

The USA has a very interesting 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, just 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

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 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

Project Ubin

Led by Monetary Authority of Singapore (MAS) and Association of Banks in Singapore (ABS) including banks such as Bank of America, Merrill Lynch, Credit Suisse, DBS Bank, The Hongkong And Shanghai Banking Corporation Limited, J.P. Morgan in association with R3, Project Ubin is being utilized for inter-bank payments using the “Internet of Value” or what we now know as DLT.
1. The aim of Ubin is 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 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 important 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 is not