Since blockchain technology is a relatively emerging technology, we thought it would be good to get a refresher. To do this, we called on some industry experts to dissect what it is, where it’s going and what impact it’s having on the financial industry.
PYMNTS: What is your definition of blockchain technology?
Brody: Blockchain is a digital peer-to-peer asset transaction exchange. The system is a digital ledger of transactions, shared among a distributed network of computers. What makes blockchains special are three inherent traits: 1) All transactions are verified by consensus from other parties on the blockchain; 2) everyone who is participating in the blockchain has a synchronized record of all transactions that have ever occurred; 3) special rules can be built into each transaction to create automatic responses to certain outcomes.
Kumar: Blockchain is a new computing architecture that was initially built to power digital currency transactions and is now emerging as a truly transformative technology in finance. It has three core components that make it incredibly powerful: distributed ledger technology, which, similar to a Google document, allows all parties to see a single view of a transaction in real time; smart contracts that can be coded based on the distributed data; and cross-border digital payment capabilities, allowing for a complete, straight-through process. Blockchain is the underlying infrastructure on which applications like bitcoin have been built, and it is gaining attention for its ability to provide more transparent, streamlined transactions that increase efficiency, minimize cost and address security issues like fraud.
Tirey: Blockchain is a technology that provides an open ledger and authenticates each step of a transaction while sharing that information securely among participants. Like a notary for digital transactions, blockchain stamps approval from “block to block” to ensure proper protocol.
Eaton-Cardone: I think of the blockchain as being similar in concept to a live-updated, collective spreadsheet. It’s like a Google Sheet in many ways — the ledger records the actions of anyone with access to it in real time, providing a positive record against which transactions can be checked at any point.
PYMNTS: How has blockchain technology impacted the financial industry?
Brody: Blockchain came into the world as the technology that underpins the bitcoin virtual cryptocurrency. Bitcoin are a type of blockchain that have been designed especially for the exchange of money. Therefore, bitcoin allow people to transact money securely but without the need for an actual bank. The truth is the bitcoin virtual cryptocurrency simply was the first application of blockchain technology to hit the market.
Kumar: Major financial institutions have dedicated substantial resources toward blockchain research, proof of concepts and pilot initiatives, and a recent survey we conducted showed that 94 percent of financial services firms who responded had their boards bought into blockchain. It is now time for the industry to fully embrace and incorporate blockchain into their innovation and data models and work toward pilot systems that address challenges facing financial institutions today, like trade finance, KYC data, cross-border payments and others. By utilizing a digital, decentralized ledger, blockchain optimizes accuracy, accountability, speed and transparency. This will revolutionize the basic fundamentals of how the financial industry works.
Tirey: Blockchain is huge for financial industries that deal with multi-party transactions. For example, tucked in the corner of finance and FinTech is the $1 trillion industry of equipment financing, quietly handling three-party transactions between small business borrowers, equipment dealers and finance companies every day. Nothing happens unless all three parties are taken care of, and having a tamperproof network in place to authenticate each transaction will have a significant impact on efficiency, not to mention the bottom line.
Eaton-Cardone: When people think of blockchain, bitcoin is usually the first thing that comes to mind. Although other FinTech services have experimented with blockchain, cryptocurrencies have really been the primary focus of the technology’s application thus far. However, I expect blockchain will see much broader utility going forward.
PYMNTS: What direction do you see blockchain technology headed in?
Brody: While blockchains are gathering pace at upending the world of finance, their potential for transformational impact will be focused on government, health care and manufacturing.
In government, it has the potential to help collect taxes, deliver benefits, issue documents, record properties and assure the supply chain of goods and integrity of government records and services.
In health care, there will be a need to coordinate across multiple parties such as hospitals, patients, providers, payers and pharmaceutical companies. Blockchain can provide a line of sight into these transactions and highlight any discrepancies in real time.
With blockchain, as products change hands across the supply chain from manufacturers to sales, the transactions can be documented in a permanent decentralized record — reducing time delays, added costs and human errors.
Kumar: If 2016 was the year of the blockchain proof of concept, 2017 and beyond will be the year of blockchain application. The enormous potential of blockchain extends well beyond digital currencies. Areas like trade finance, KYC, mortgages, insurance applications from claims to reinsurance and a myriad of other applications are seeing active projects across banks and insurance companies that have formed mini-consortiums to address these challenges.
With each wave, new integrations and understanding will create more possibilities for users until, ultimately, blockchain technology matures to the point where large data volumes can be managed and the infrastructure has reached the scalability of transactions managed by exchanges for trading and by clearing networks. These companies are already considering how to integrate blockchain into their business models.
In addition to mini-bank consortiums, we’re also seeing banks enter the blockchain infrastructure equation, with some like JPMorgan building their own technology and Quorum and consortiums like R3 open-sourcing Corda for more bank-driven platforms.
PYMNTS: How would you like to see blockchain technology secure financial data moving forward?
Brody: The real blockchain revolution isn’t one that happens alone in finance but one that happens where operations meet IT and finance. Blockchains will embed finance in every process and business operation. The days of calling around to find out if the invoice has been paid can come to an end. With smart contracts, if the work has been done, it’s been paid for.
Eaton-Cardone: I think that blockchain can really only deliver on the benefits it promises if the technology’s implementation goes hand-in-hand with overarching standardization. However, once there is a solid legal and regulatory framework in place, blockchain will have a huge impact in the banking and eCommerce sectors. That’s especially true in developing markets, where there are millions of consumers without access to banking but who use mobile devices on a daily basis. Implementing blockchain could exponentially cut down on international fraud in both of those sectors.