By Olga Artyushina, Marketing Communications Specialist, Qulix Systems
Constantly growing competition and the need to keep pace with technological trends are forcing banks to maintain an open mind in regard to digital innovation.
That said, the banking industry has always tended to be conservative and extremely cautious with any kind of experimentation. This is certainly true of blockchain.
However it is also true that banks are recognizing that this new technology does have applicability, and that it cannot be ignored completely.
The blockchain revolution
A lot has been said about blockchain, mainly as it relates to the openness of the technology and cryptocurrencies based on it. But blockchain can be also implemented for traditional banking. For example, it can be used to create a transparent system for payments tracking.
In fact, the opportunities to use blockchain technology in the financial industry are enormous. For instance, the blockchain could make it possible to view a customer’s payment history in real time and thus judge eligibility for loans.
The technology is also perfectly suited for investment banks obligated to perform their own “Know Your Customer” checks.
In 2016, according to figures from Statista, 60 percent of surveyed financial companies worldwide were planning to use blockchain for international money transfers.
Nearly one-quarter (23 percent) named security clearing and settlement as intended uses, while 20 percent of respondents saw opportunities to use blockchain in their ‘Know Your Customer’ and anti-money laundering activities.
Blockchain technology use opportunitiesamong financial institutions worldwide in 2016
How does a blockchain work?
Currently, we use a financial intermediary, e.g., a bank, to perform financial transactions. In contrast, blockchain enables consumers and providers to communicate directly with each other, eliminating the need for a third party.
Due to the encryption of data traffic, blockchain provides a decentralized transaction database that is accessible for all network users.
This network represents a chain of computers that have to approve every single transaction before it is confirmed and recognized.
In other words, it is a kind of electronic account book that consists of transactions in the form of data blocks:
Challenges facing blockchain
Despite the great potential of blockchain for the financial industry, the technology is still in its infancy, it lacks a standard platform. Widespread blockchain use requires technical industry standards ensuring compatibility between different blockchain platforms.
The integration of blockchain technology with the existing IT infrastructure represents a further challenge. The Internet of Things will significantly expand the attack surface for the Internet. In fact, IT security plays an essential role in the blockchain world.
In the financial industry, supervisory authorities still prefer a central contact that can be called to account in the event of unexpected problems, such as software bugs or hacker attacks.
Moreover, there are questions to be clarified regarding compliance, fraud detection and prevention (including a legal framework for cryptocurrencies).
Finally, there is a need for clear data privacy regulation and an answer to the question of how to concurrently ensure a transparency across transactions.
In short, there’s a lot of hype surrounding blockchain technology — and some ambiguities concerning the way it can be used most effectively.
Without any doubt, blockchain can help to automate particular features in simple transaction-related application cases.
Nevertheless, there are many issues to be addressed before the technology can be used with tangible benefits.
Qulix Systems is a global IT & consulting company that provides a solution-oriented approach and custom software development to clients across multiple business domains.
This article was originally published on the Qulix blog at www.qulix.com