By : Jan Rees
June 16, 2016 12:30 PM
Digital currencies are not a new phenomenon, but they've certainly gained more media attention since the introduction of Bitcoin in 2009. The peer-to-peer payment system is often described as the first decentralized cryptocurrency.
Opinions are divided on whether Bitcoin will be successful in the long term. While it offers fast, anonymous payments outside of traditional banking systems, the currency has also shown wild volatility and links to black market activity. Experts are, therefore, undecided on Bitcoin's future and financial institutions are understandably skeptical.
However, there appears to be wider support for blockchain - the technology that forms the backbone of Bitcoin and other digital currencies. What's more, this interest isn't just coming from FinTech start-ups and fringe players; the likes of Barclays, Goldman Sachs and Citibank are investing heavily in blockchain.
So, how does the technology work and what types of applications are these big-name financial institutions hoping to explore? Let's take a brief look at the mechanisms behind blockchain and examine where the technology could have potential.
What is blockchain?
A blockchain is a digital ledger that is shared among many computers worldwide. There's no central authority and transactions are recorded sequentially on a public 'block' to create a unique 'chain' of code. Cryptography ensures security and authentication, which removes the need for intermediaries and prevents duplicated transactions and manipulation. Keeping part of the blockchain's information public means transactions can be verified, but the data within individual blocks remains secure.
A recent survey from Edgar Dunn & Company said the blockchain network usually approves transactions within ten minutes. Several independently-owned computers - also known as miners - must verify the transfer, making fraudulent behavior difficult. Edgar Dunn's Advanced Payments Report revealed 60 percent of payment industry respondents believe blockchain will disrupt existing financial services by making them more secure, transparent, cost-effective and efficient. Nearly two-thirds said the technology would spur payment product and service innovation.
Where can blockchain provide value?
Many financial institutions are beginning to recognize the potential in blockchain, particularly as demand for real-time transactions increases across consumers and businesses. Edgar & Dunn stated that private blockchains, which are controlled by a group of authorized entities, are especially attractive to financial institutions and other companies.
Regulators may also have more faith in private systems that don't provide a public distributed ledger. But where are banks breaking new ground in blockchain development? Here are some of the key areas that are receiving investment.
Stock exchange: Last month, CoinDesk highlighted ten stocks and commodities exchanges that are exploring blockchain capabilities. Nasdaq has been a notable innovator in the space, becoming the first financial institution to use a live proof-of-concept blockchain platform last year.
Money transfer: Legacy technologies and inefficient processes at many banks can make business-to-business and peer-to-peer payments a slow and expensive undertaking. Clearly, removing intermediaries from the space could have significant advantages for consumers.
Smart contracts: Not all blockchain applications are developing in the financial world. Smart contracts would enable parties to negotiate, predefine and execute terms within an agreement without the need for a third-party agent.
What does the future hold?
As we can see, blockchain has the potential to grow commercially in a way that perhaps Bitcoin can't. The cryptocurrency is seen as volatile and untrustworthy among many in the financial world, but its supporting technology is already being explored across multiple applications in the financial sector and other industries.
Only time will tell how well blockchain will integrate into existing systems and processes. Nevertheless, early forecasts indicate it is likely to shake up a number of established frameworks. How effectively organizations prepare for these changes could therefore have a substantial impact on their competitiveness in the future.