Australian banks and the blockchain bonanza
A technology developed for Bitcoin, described by some as equally ground-breaking as the internet itself, is expected to turn the financial world on its head.
In this age of permanent connection, of digital technology and of instant gratification, it is absurd that it takes three days for funds from the sale of shares to be cleared into a bank account. And the fact that a bank transfer made on a Friday doesn’t appear in another person’s account until the next Monday or Tuesday is purely medieval. There must be a better way.
Since 2009 users of Bitcoin have known there is a better way, but Bitcoin has had a brand problem. Famous as the currency of choice for drug dealers and terrorists thanks to its relatively anonymous and decentralised nature, the digital asset also took a big hit when major Bitcoin exchange Mt Gox filed for bankruptcy protection.
But blockchain, the technology behind the cryptocurrency, has earned only respect since the very beginning. Now in a more mature and well tested phase of its existence, blockchain is attracting the attention of major banks (including CBA, Westpac and ANZ), stock exchanges (including the ASX) and governments around the globe.
What is blockchain?
A process that allows currency to change hands without the need for an intermediary, blockchain is a revolutionary system that exploits the power of many.
In order to ensure there is no potential for duplication, banks and clearing houses act as intermediaries. Hence the time-consuming wait between a transfer leaving one account and entering another. Blockchain does away with that middle man by putting all transactions onto a globally distributed and completely transparent digital ledger.
Individual transactions are placed into time-stamped ‘blocks’ of data, and all blocks are connected to each other in the chronological order in which they were created. Therefore the blocks are connected in a ‘blockchain’.
Every ‘node’ (each individual computer connected to the decentralised, peer-to-peer blockchain network is known as a node) contains a full copy of the blockchain’s entire and ever-growing database. Any new transaction is immediately compared against the records on numerous individual nodes before it is allowed to go ahead. So the decentralised system takes the place of the bank, and it does its job automatically in seconds rather than days.
As a technology it is considered inherently secure. In order to compromise the system, a criminal would need to take control of tens of thousands of individual computers, all in different locations and many completely anonymous, all at once.
Many believe blockchain will create a more secure internet. After all, a system that verifies its own data across tens of thousands of sites and constantly updates an unalterable ledger in a decentralised environment is a very difficult system to crack.
What’s attracting the banks?
Why would Australian banks be interested in a technology that could make them redundant? Because it offers a solution to some of their most cumbersome processes, and saves them an enormous amount of effort and money at the same time. Morgan Stanley says cost savings in global money markets, thanks to blockchain, will likely be US$15 to US$20 billion.
While the system is currently designed to work ‘permissionless’, meaning anybody can join the network, new technologies are being developed to allow private groups to have their own blockchain. So a global and interconnected coalition of banks could move money around openly, freely and immediately, without the current ledger synchronisation issues, even across borders. Private systems also mean greater trust between members.
Corruption, human error, crime and other issues are also more difficult in the blockchain environment, thanks to the fact that there is no longer a middle man. The bank is simply the manager of the technology and the keeper of the brand representing trust, reliability and strength.
Blockchain boasts endless application, from digital music royalty systems to smart contracts that allow for digital repossessions; a recent Sydney Morning Herald story used the example of a car being shut down electronically and automatically if loan repayments are not made.
It is obvious why the banks are interested in making this technology work for, rather than against, themselves. Their blockchain-driven developments over the next several years should create great efficiencies for customers and business alike.