Blockchain can transform financial services
The application of blockchain technology in the financial services realm is shaping up to transform the sector.
Faster and securer transactions are among the expected advantages, while increased automation is likely to impact the need for human involvement in a variety of processes.
And while security is an issue in network-based systems, the blockchain transaction process is viewed as adding additional layers of defence against cybercrime.
These issues were discussed by a panel of experts during the World Alternative Investment Summit Bermuda, held at the Fairmont Southampton.
Blockchain is part of a wave of digital advancement reshaping how businesses interact and move digitised assets of value. It is a ledger of transactions that have been executed and agreed on by a network of ‘nodes’, or databases. Each block in the chain is timestamped and secured from tampering and revision.
The technology is used by cryptocurrencies, such as bitcoin, to validate transactions, but has other applications, including registries, decentralised messaging and voting.
Within financial services, blockchain applications could be used by companies to complete transactions of assets.
Explaining the difference between permissioned and permissionless blockchains, panel speaker Christopher Burniske, of ARK Invest, said: “When we say network, what is supporting that network is computers. In the permissioned realm, or you can think of it as private realm, those computers need permission to join the network.
“In the permissionless realm, or public realm, those computers don’t need permission to become part of the network.”
Stafford Lowe, of R3, another of the speakers, noted that a vast amount of computing power is needed to secure a blockchain network. This is “very costly and a hurdle to widespread adoption”.
A limited network, or permissioned blockchain, such as one created between financial services companies familiar with one another, is harder to scale but easier to secure.
Geoffrey King, of Cisco Systems Canada, said: “We are at a stage in our evolution of business, commerce and technology, where any and everything can be digitised.
“If we can digitise things and have them computer readable, it means that we can move them digitally; not only to the groups that we work with, but to anyone who needs to be a part of that interaction or transaction.
“Blockchain becomes the reporting mechanism for people to own assets, and protect their assets, ownership rights and so on.”
There are privacy issues, said Chris Maiato, of Ernst&Young Ltd. He explained: “The challenge with the financial services is we don’t want to have all details of a specific transaction made 100 per cent public, particularly if it’s a company-to-company transaction that requires some level of privacy.”
He said permissioned and permissionless approaches could survive together, addressing different needs.
“On the private side, you can still validate the transaction without the details of the underlying trade position in a distributed ledger technology, you have that authentication,” he added.
“That’s a key distinguisher between blockchain as a broad-based ledger technology versus the application in the financial services sector.”
Mr Lowe does not see distributed ledger technology as a panacea, and said it would not be the only new technology applied to finance over the next decade.
He said there will be a “stack of different technologies” such as artificial intelligence and big data creating new mechanisms for transacting business.
“But blockchain, this immutable record of transfer of ownership of one asset to another, is the foundation,” he added.
The impact on staffing levels was not directly addressed by the panel, but there were hints.
Mr King said new technologies, including blockchain and AI, would be part of a “mash-up of different things”.
“A human-present process says someone has to be there, with a certain level of expertise or specialty, to do what is needed to move along the chain,” he explained.
“Now we have automation that allow those things to happen with a human not being present. That’s what is happening when we think about blockchain and artificial intelligence.”
Meanwhile, Mr Lowe said a blockchain application does away with the need to have a parallel system of reconciliation.
“You are essentially reaching agreement at the point of trade, and all the reconciliation you would do in the current world order is no longer necessary.”
He gave an example of a smart contract that could be automated.
“Smart contracts are the melding of a legal contract, which says something has to happen, and a simple piece of code which will allow things to be automated by a trigger,” he said.
“There is an application for blockchain technology on flight cancellation insurance. If your flight gets cancelled you, having bought flight cancellation insurance, get paid out at the appropriate amount. All of this can be fully automated.”
Panel moderator Pat Bolland, a former anchor on Canada’s Business Network News, said: “This being a disruptive technology, it could get rid of all sorts of services.”
Mr Maiato said it would take a while to do things such as interbank clearing and automatic trading, adding: “There are going to be a couple of distributor ledger technologies that will really be needed to disrupt the market.”
Mike Majors, of Data Point Capital, raised the issue of security. He said: “In the cybersecurity space we work on the premise that every network has been compromised already.”
Mr Burniske described blockchain as “a new paradigm for cybersecurity”, and pointed to the permissionless network that exists, has a $10 billion market capitalisation, and takes an adversarial approach to the threat of attack.
He said in the permissioned and hybrid realm, blockchain acts as an extra line of defence due to the consensus nature of transactions being agreed.
“Even if a third of the network was compromised it would still function, it really is an extra layer of defence.”
Mr Maiato said the network has vulnerabilities, “but the underlying transaction, based on distributed ledger technology, does have encryption embedded. There are ways to validate, identify and catch an attempt to change a transaction that is not valid”.
The discussion took a twist when Mr Majors, who raised the security question, said his organisation had been looking at securing industrial networks from cyberattacks — and blockchain technology is a possible answer.
He described how some factories, power plants, and nuclear reactors had tried to protect themselves from cyberattacks by operating self-contained digital networks not connected to the public internet. But this “airgap” solution has been breached in other ways, such as through infected USB drives.
Mr Majors said: “We have looked at technologies to address this, and one we are exploring is using blockchain to authenticate transactions between the various elements of control systems that run a power grid, or run a factory.
“It is a way to ensure that any particular transaction, or command, is coming from a trusted source. Blockchain is highly secure, in a perceived away, not from all the possible threats, but much more secure than what is in place right now.”
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