Why banks want Blockchain

By Kumar Abhishek Blockchain technology has been dubbed as the most important invention since the internet itself in financial technology circles. It has the potential to completely redefine the way transactions take place. According to Let’s Talk Payments, $ 180 million was invested in Blockchain technology globally in 2015. Banks are one of the leading investors in the technology and their investment is said to reach  $400 million by 2019 from $ 75 million in 2015. R3, a fintech company has brought together 42 leading banks from around the world to form a consortium in order to develop a framework for applying Blockchain technology. But why are banks so enthusiastic about a technology that was developed to form the basis of Bitcoins, a cryptocurrency that is often used to keep money away from such institutions as banks and governments? What is Blockchain? Blockchain is a distributed public ledger that records all transactions in a particular system. The technology was originally devised to keep a record of all Bitcoin transactions, but the distributed consensus model has found applications in a multitude of areas. Bitcoin is a digital cryptocurrency and payment system where users can pay each other directly, without having to rely on a third party. The peer to peer system relies on blockchains to authenticate the validity of the transactions and prevent fraud. Blockchain is a distributed public ledger of all Bitcoin transactions that have ever been executed. The blocks record some or all of the current transactions and once it is completed the block is timestamped and hashed into the permanent database or blockchain. The blocks are linked to each other in a linear, chronological order where each new block contains the hashed details of the previous block. Thus creating a chain of transactional information so that every block that is added protects information in the previous one. There are no centralised databases in Blockchain. Complete or partial Blockchains are stored in nodes where the database is constantly updated. Distribution and de-centralisation ensures that no one individual or party in the system has the power to modify or tamper with the data. It also removes the need for a third party or central authority to authenticate or process peer-peer transactions and increases transparency. Distributed ledgers could be used to authenticate and prove ownership of any digital assets. They also enable fast, secure and convenient exchange of such assets over the internet. Why do banks want Blockchain? For the financial services sector it offers the opportunity to overhaul existing banking infrastructure, speed up settlements, organise assets, and streamline stock exchanges, although regulators want to be assured that it can be done securely. According to Santander, the banking industry could save about $20 billion every year with the implementation of the blockchain processes. According to many evangelists, the possibilities are limitless. Applications range from storing client identities to handling cross-border payments, clearing and settling bond or equity trades to smart contracts that are self-executing, such as a credit derivative that pays out automatically if a company goes bust or a bond that regularly pays interest to the holder. The way in which payment transactions are recorded at present is inefficient. The current system involves many entities and players which leaves greater room for fraud. Every year hundreds of billions of dollars are lost due to fraudulent transactions. The author is CEO, ToneTag