Banks Uniting Over Blockchain

Persisting low interest rates are encouraging banks to adopt blockchain, which they see as a way to reduce costs and offset losses. The result is that banks are working together and forging new relationships in efforts to render the database technology underlying bitcoin bank-friendly.

According to Financial Times, banks initially distrusted bitcoin when it first emerged in 2009 as a currency that could elude the control of governments and central banks, but blockchain was thought to have its advantages.

Blockchain was considered safe and unhackable because it is shared among a large number of users. But the large user base is also a cause of concern. Trades are transparent and cannot be reversed, and this transparency conflicts with those bankers who seek privacy and anonymity.

Because banks are looking for efficiency, many hope that blockchain can increase the speed and reduce the cost of transactions through automated back-office functions and shared systems across banks. This mutual goal among banks is spurning new partnerships. According to Richard Lumb, chief executive of financial services at Accenture:

“Pre-2008, the industry would not have lifted a finger to do certain shared things, which may save a hundred million dollars, but now, a hundred million dollars is a lot of money, and people are now prepared to work together to cut costs.”

There are problems, however, with shared banking systems that are also transparent — espionage among rivals, for example. A database system such as blockchain with irreversible trades means that fat-finger trades, where a user might add a zero to a transaction accidentally, have the potential to cause losses. Scaling is also an issue if large volumes of data are shared in a single system across the banking sector because a bloating effect slows transactions down, according to Peter Randall of Setl.

Bank discussion on a possible blockchain database includes limiting the visibility of a trade to counterparties, regulators and other related parties only.

There is also blockchain collaboration among banks in the U.K. According to Business Insider, the Bank of England is seeking a “FinTech transformation” of the financial services industry. Bank of England Governor Mark Carney and Chief Cashier Victoria Cleland highlighted ongoing research into the economic implications of central bank digital currencies (CBDC), such as a reduction in deposit funding by commercial banks because more money would be held in central banks, and the scalability of blockchain technology in creating a CBDC.