• Blockchain in Banking A Measured Approach
1XwNE3Rxg
1XwNE3Rxg
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Executive Summary<br />
If market hype is any <strong>in</strong>dication, blockcha<strong>in</strong> — the<br />
underly<strong>in</strong>g technology for cryptocurrencies such<br />
as Bitco<strong>in</strong> — is poised to solve multiple challenges<br />
fac<strong>in</strong>g the bank<strong>in</strong>g <strong>in</strong>dustry by enabl<strong>in</strong>g faster,<br />
secure and more transparent transactions. Yet the<br />
story of blockcha<strong>in</strong> is one of un<strong>in</strong>tended consequences.<br />
<strong>Blockcha<strong>in</strong></strong>, also known as a distributed ledger<br />
technology, 1 was orig<strong>in</strong>ally created as a track<strong>in</strong>g<br />
database for Bitco<strong>in</strong> transactions. It was developed<br />
<strong>in</strong> 2009 to enable <strong>in</strong>dividuals and organizations<br />
to process transactions without the need for a<br />
central bank or other <strong>in</strong>termediary, us<strong>in</strong>g complex<br />
algorithms and consensus to verify transactions.<br />
Fast-forward seven years, and an array of startups<br />
and established technology, bank<strong>in</strong>g and f<strong>in</strong>ance<br />
players today are bett<strong>in</strong>g on blockcha<strong>in</strong> to provide<br />
a reliable alternative to systems that depend<br />
on <strong>in</strong>termediaries and third-party validation of<br />
transactions. Their goal is to leverage blockcha<strong>in</strong>’s<br />
distributed ledger approach to create a system<br />
that decentralizes trust — a radical departure<br />
from exist<strong>in</strong>g transaction process<strong>in</strong>g methods — to<br />
significantly slash all types of transaction fees and<br />
reduce process<strong>in</strong>g times.<br />
The disruptive potential of blockcha<strong>in</strong> is widely<br />
claimed to equal that of the early commercial<br />
Internet. A crucial difference, however, is that<br />
while the Internet enables the exchange of data,<br />
blockcha<strong>in</strong> could enable the exchange of value;<br />
that is, it could enable users to carry out trade and<br />
commerce across the globe without the need for<br />
payment processors, custodians and settlement<br />
and reconciliation entities.<br />
Although blockcha<strong>in</strong> is posited as an open system<br />
for transaction process<strong>in</strong>g across the f<strong>in</strong>ancial<br />
system, banks are look<strong>in</strong>g <strong>in</strong>ward, experiment<strong>in</strong>g<br />
with the distributed ledger approach to create<br />
efficiencies and a s<strong>in</strong>gle version of digital truth.<br />
Their goal is to automate processes, reduce data<br />
storage costs, m<strong>in</strong>imize data duplication and<br />
enhance data security.<br />
Similar to the Internet and e-commerce, an opento-all<br />
blockcha<strong>in</strong> that disrupts the traditional<br />
f<strong>in</strong>ancial market might only result from trial-anderror<br />
deployments with<strong>in</strong> limited parameters,<br />
whether through <strong>in</strong>ternal trials or partnerships<br />
between <strong>in</strong>cumbents and startups. However, to<br />
realize the full potential of blockcha<strong>in</strong> across the<br />
f<strong>in</strong>ancial system, the bank<strong>in</strong>g <strong>in</strong>dustry will need<br />
to come together and set standards that enable<br />
<strong>in</strong>teroperability.<br />
That said, banks plann<strong>in</strong>g to deploy blockcha<strong>in</strong>s<br />
need to answer a series of fundamental questions.<br />
For example, given that exist<strong>in</strong>g systems are built<br />
on reliable legacy solutions, how will they determ<strong>in</strong>e<br />
which process to move to a blockcha<strong>in</strong>? Further,<br />
given blockcha<strong>in</strong>’s fast-chang<strong>in</strong>g landscape, it<br />
is critical to develop a thoughtful, long-term plan of<br />
action (e.g., experiment<strong>in</strong>g, strategically deploy<strong>in</strong>g<br />
and then scal<strong>in</strong>g <strong>in</strong> a logical progression) to ensure<br />
a successful transition from centralized legacy to<br />
fully distributed digital transaction process<strong>in</strong>g.<br />
We believe the key considerations for banks<br />
explor<strong>in</strong>g blockcha<strong>in</strong> <strong>in</strong>clude:<br />
<strong>•</strong> Identify<strong>in</strong>g opportunities for <strong>in</strong>novation.<br />
<strong>•</strong> Determ<strong>in</strong><strong>in</strong>g feasibility and impact on exist<strong>in</strong>g<br />
systems.<br />
<strong>•</strong> Test<strong>in</strong>g proofs of concept.<br />
<strong>•</strong> Understand<strong>in</strong>g the regulatory and data security<br />
implications.<br />
<strong>•</strong> Dissect<strong>in</strong>g the blockcha<strong>in</strong> implementation:<br />
open vs. permissioned.<br />
<strong>•</strong> Plann<strong>in</strong>g for transaction scalability.<br />
<strong>•</strong> Form<strong>in</strong>g partnerships and cross-functional and<br />
cross-<strong>in</strong>dustry collaboration.<br />
<strong>Blockcha<strong>in</strong></strong>’s Promise: Bank<strong>in</strong>g and<br />
Beyond<br />
Ever s<strong>in</strong>ce the first Bitco<strong>in</strong> transaction was<br />
carried out <strong>in</strong> January 2009, the digital cryptocurrency<br />
has been a topic of debate. While banks<br />
and regulators have largely rema<strong>in</strong>ed wary of Bitco<strong>in</strong>,<br />
the underly<strong>in</strong>g technology of blockcha<strong>in</strong> and<br />
distributed ledger began attract<strong>in</strong>g the attention<br />
of banks and startups by the end of 2013.<br />
The lure of blockcha<strong>in</strong> was its method of<br />
verify<strong>in</strong>g and track<strong>in</strong>g transactions. Instead of<br />
a trusted third-party or a central bank, it relies<br />
on consensus among a peer-to-peer network<br />
of computers based on complex algorithms.<br />
Rather than be<strong>in</strong>g stored <strong>in</strong> a s<strong>in</strong>gle database,<br />
blocks of time-stamped transactions are stored<br />
on all systems across a value cha<strong>in</strong> (see Figure 1,<br />
next page). This elim<strong>in</strong>ation of middlemen and<br />
cognizant reports 2