Blockchain: Simple Explanation for the Non-techy Bank Manager

Bitcoin Digital Banking Connections

Digital banking news in 2017 is predicted to be wrought by more and more banks adopting Blockchain. It has been called the

most game-changing technology advance since the Internet.”

McKinsey & Company even notes it will

“dramatically reshape the capital markets industry”

and significantly impact business. Yet, with all this dramatic hype, many in the industry are not clear about what blockchain does, or even what it is.

What is blockchain?

Blockchain may be best known as the underlying technology behind the Bitcoin, the controversial digital currency. Blockchain, however, is much more than just Bitcoin.

Blockchain is coding. Specifically, it is a way to structure data that consists of concatenated (i.e., linked like a chain) blocks of transactions. Cryptographic validation is what links these transactions together, for security.

For those most accustomed to Excel spreadsheets, it can maybe be better understood as a “spreadsheet that is duplicated thousands of times across a network of computers.” Competitors are then able to share this digital ledger across a network of computers, and no central authority is required for access.

What makes it so special?

In a traditional way of sharing documents through something like bank ledgers, when one person is in the document, all others are locked out. Other document sharing requires one person to finish and then send it on to the next person. In both situations, there is a waiting period. That has been the way databases have worked for a long time.

Products “in the cloud” like Google Docs tapped a way that many people could be in a document and work simultaneously. Sharing one ledger, or one sheet, at the same time became possible.

Blockchain works somewhat like this, but with a number of documents. All of them are able to stay in sync. This happens because the ledger is not managed by one single user, and it is not stored in one master location. Instead, it exists on multiple computers all at the same time. Anyone who wishes to tap in and collaborate may do so without disruption to others.

How can it be secure?

Because the ledger is not located in just one place but is distributed, there isn’t a single location where a fraudster could go in and start his or her dirty work. Instead, there are many different blocks of data. Each one has a batch of transactions that are timestamped and link to a previous block. The whole of the blockchain becomes a link of transactions that cannot be reversed.

As David Treat, managing director of financial services at Accenture, says, it is

“a technology which enables people to confidently and securely share access to data because they are able to prove to themselves mathematically that it hasn’t been tampered with.”

Alex Tapscott, co-author of Blockchain Revolution notes that if a hacker wanted to get in and be successful, he or she would have to tap into many computers accessing that particular ledger and all do it all simultaneously!

The benefits of blockchain technology

Transactions can be made successfully via Bitcoin because the technology of blockchain means not one single entity—like a bank—has to manage the funds. “Monies” can go in and out almost instantly because every transaction is verified through the computer. Yet, the uses and benefits of blockchain technology are many. Remember, Bitcoin is only powered by blockchain.

Experts who claim this technology to be a game changer say that beyond the transfer of currency, contracts and other vital records can be shared because they can be encrypted in a way that allows multiple users access without a breach of privacy. In turn, the benefits of blockchain technology promise:

  • Lower costs
  • Increased transactions
  • Quicker settlements
  • Fewer errors
  • Fewer exceptions
  • New revenue opportunities

With the promise to possibly cut costs as well as reducing the chance of fraud, today, more than 40 top financial institutions are experimenting with this process.

The downside of blockchain technology

Blockchain technology could help eliminate transaction fees and reduce infrastructure costs. While saving money is always seen as a benefit, this could mean there is less of a need for employees who are viewed as overseers or “middlemen” in the process. This could lead to unemployment in the financial and other industries.

Additionally, the technology is still very new and not as foolproof as one would like to believe. In fact, a lot of Bitcoin has been stolen. Double spending, although said to be difficult, also happens with this type of currency and new problems could occur.

Thus, before financial institutions climb on board to use blockchain for currency or other data, the technology must prove itself to be reliable, secure, and meet requirements for audits.

 

If you are in Chicagoland and want to learn more about Blockchain digital banking news, check out the Open Blockchain Community in Chicago.