Blockchain Technology is Here to Stay - and It's Poised to Change Everything We Know About Financial Services
By Jesse Rivera, CEO at New Vista Solutions
What is Blockchain Technology?
Blockchain, Bitcoin, cryptocurrency — all are the brainchild of an anonymous person (or persons) using the alias Satoshi Nakamoto. The true identity of this mysterious persona hasn’t yet been confirmed, but many have speculated who it might be.
To understand where blockchain technology came from, we need to go back to 2008 when Bitcoin was invented. Bitcoin emerged as the first currency that could be exchanged globally over the Internet — person to person — without any involvement from a third party (like a bank)…hence the term ‘decentralized’ often used to describe blockchain technology. There is no centralized data storage, no regulatory entity and no fees incurred when transferring this currency.
One more thing about Bitcoin before we get back to the blockchain — there is no physical ‘coin’ or paper involved. Everything is digital. And there are hundreds of variations of Bitcoin, known as altcoins, which are alternative cryptocurrencies that continue to evolve in the wake of Bitcoin’s success.
So how does this digital currency move about the Internet without being hacked or manipulated? That’s the genius of blockchain.
Simply stated, a blockchain is a digital database, often referred to as a digital ledger or spreadsheet, which records transactions across a network of computers around the world. Each transaction is time-stamped and simultaneously hosted by these computers (nodes) and is reconciled every ten minutes.
A blockchain gathers and arranges data into blocks, and then chains the blocks together using cryptography. The data can’t be hacked because it’s not stored in any one location. No centralized version of the data exists for a hacker to corrupt.
How exactly does a blockchain manage all of this data? Well, that’s a topic for another article. The important thing to note is this — even though it was originally designed to support the transfer of digital currency, the tech community is finding other ways to use this powerful tool.
Beyond Cryptocurrency — How Can Blockchain Technology Be Utilized?
In their 2016 book, “Blockchain Revolution”, authors Don & Alex Tapscott write, “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but everything of value.”
Ian Khan, a TEDx speaker and author, says “As revolutionary as it sounds, blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.”
So, what does that mean? Here are just a few of the applications for blockchain technology:
- Smart Contracts — A smart contract is a computer program that defines the rules and penalties of an agreement similar to a traditional contract, but it can automatically enforce those rules by executing the actions required when certain conditions are met. For example, a derivative could be automatically paid out when a financial instrument meets a certain criteria. Ethereum is a blockchain protocol that was built specifically for this purpose. Smart contracts have the potential to simplify and automate routine and repetitive processes that are currently being performed by lawyers, compliance auditors and accounting personnel.
- Record Keeping — Data stored on a blockchain is accessible to the public and can’t be altered or destroyed. Consider property titles for example. In a real estate transaction today, we pay for a title insurance policy to protect us from fraud and human error. Title searches are labor intensive and costly to administer. A title registry on a blockchain would be secure and easily accessed without the high cost of searching through title records.
- Electronic Vote-Counting — Blockchain technology has the ability to account for a voter’s identification and to ensure votes can’t be altered or manipulated. It can create a permanent and public ledger for votes as they are tallied.
How Will Blockchain Technology Impact the Financial Services Industry?
In September, 2017, J.P. Morgan Chase Chairman and CEO, Jamie Dimon, called bitcoin a fraud. On January 9, 2018, he told Fox Business he regretted making that comment. “The blockchain is real,” Dimon said in the interview.
In October, 2017, J.P. Morgan Chase announced the launch of a blockchain-based system that will significantly reduce the number of parties necessary to verify global payments, cutting transaction times from weeks to hours. Chase is partnering with Royal Bank of Canada and Australia and New Zealand Banking Group to form the Interbank Information Network.
Blockchain has the potential to change the way we buy and sell, authenticate personal information and verify the accuracy and reliability of data used to process all financial transactions. It combines the accessibility and openness of the Internet with the security of cryptography to give all of us an added level of trust and privacy.
Blockchain technology has the attention of Wall Street because of its potential to greatly reduce the cost of back-office operations and speed up trade clearing and settlement times. Banks have to set aside funds while transactions are being settled. That means billions of dollars could be freed up for other uses if trade times are reduced to minutes instead of days or weeks.
In Q4, 2017, blockchain’s potential to remake global financial services moved a step closer to reality after Goldman Sachs Group Inc. and J.P. Morgan Chase, along with other banks, completed a successful six-month test in the $2.8 trillion equity swaps market. The program recorded information like amendments and termination dates, stock splits and dividends, and achieved a 100% success rate.
The mortgage industry is anticipating dramatic operational changes from this technology. Loan origination processing — from application to closing — could be reduced to a few days instead of weeks. The time spent on property tax verification, title searches and gathering borrower information could be reduced significantly, all while remaining compliant with regulatory guidelines.
Mortgage servicers are looking to share common data through blockchains to avoid data re-entry and resolving data inconsistency issues during servicing transfers. While addressing the Mortgage Bankers Association’s Servicing Conference in Dallas recently, Sapient Global Markets Director Brian Martin asked, “What if, in the future, all originated loans automatically end up on a blockchain? Payments, taxes, insurance, electronic transfers — with no involvement of people?” He added, “At this point, it is entirely conceivable that the entire servicing industry could be replaced by a blockchain.”
Community banks are exploring the benefits of collaborating with each other to bring blockchain technology to their industry. A good example of the power of collaboration is R3, an enterprise software firm working with over 100 banks, financial institutions and technology companies to build a blockchain platform, called Corda, that’s designed specifically for financial services.
Yes, it’s here to stay. Blockchain is a new frontier and it’s gaining momentum around the globe. The naysayers are diminishing and the world’s business community is embracing a technology platform that is certain to overhaul the way we manage data. A new normal on a global scale.