Kevin Mitnick- a world renowned Hacker and currently a Computer Security Consultant once gave a statement that,
“Companies spend millions of dollars on firewalls, encryption and secure access devices, and it’s money wasted; none of these measures address the weakest link in the security chain.”
People in the cyber security business might deny to this statement but the recent events and the history of Data Breaches across the globe clearly support Kevin’s statement. Every few months, the world is stunned with the Biggest Data Breach Breaking News. If we have a look at 2016 and 2017 data breaches so far, first the Yahoo breach, then came the Wannacry Ransomware attack and the most recent breach, the Equifax breach which is believed to be the biggest breach ever.
Equifax was an alarming breach because of the importance of the Data that was leaked. According to the Business Insider report, confidential data like the Social Security Number of more than 143 MILLION people were leaked. Being one of the oldest Credit Reporting Agency of the world, it has put data of 800 million people and approximately 88 million businesses at risk.
One of the major reasons of all these breaches was the centralized database structure of a conventional technology. To hack a system, one only needs to find a gateway to enter the system and can breach the entire security system right from one single point. What if there prevailed a system that is based on de-centralized ledger or a distributed database that cannot be tracked? And each time an information is added to the ledger, it is protected with an encryption code that is impenetrable. The world knows it as the Blockchain Technology.
According to the survey created by Gartner, Blockchain tops the chart of the Hype Cycle of Emerging Technologies of 2016. The world-renowned Cryptocurrency, Bitcoin is also made from this technology. Even IBM forecasts that 66% percent of banks are expected to have blockchain in commercial production and at scale in coming four years.
But, before we determine how Blockchain can aid Banks and other financial institutions, let’s first have some understanding as to what Blockchain is:
Blockchain, Public Blockchain and Private Blockchain:
Blockchain is a distributed database or a shared ledger that can be used as an open database to create and store transaction by anyone who is a participant of the Peer-to-Peer network and has an access key. Blockchain is the list of transactions or records that are stored in the form of a block that cannot be edited once they are validated by the nodes.
Public Blockchain is a Blockchain that is an open source with global access. Transactions made are to be approved by all the peers in the network irrespective of their relevance with the transactions. Also, to participate in the public Blockchain, no permission is needed.
Private Blockchain is a Blockchain that is setup in a closed environment with limited access to the concerned authorities. The authorization of the transaction is also kept between the relevant participants and needs prior authorization from the authorities managing the Blockchain to participate in it.
Blockchain- The feasible security solution for Financial Institutions:
The common perception that people have formed is that the Blockchain is used to make cryptocurrency and smart contracts. But, after understanding the basic nature of the Blockchain technology, it is clear that no matter what process or purpose, where there are multiple parties involved along with some vital information that needs protection, Blockchain can be applied.
There can be ‘n’ number of applications of Blockchain when it comes to Banks or Financial Institutions. Right from account opening to loan syndication to underwriting, Blockchain can be a part of the process. To better understand how Blockchain will impact different processes of bank, here are few examples of application of Blockchain technology in different processes of a Bank:
Trade Finance is one of the most time consuming processes especially in the international trade finance. There are multiple platforms and each has multiple procedures. With Blockchain, a private ledger as a single platform can be formed for all the parties and can reduce the time consumed along with complete elimination of the human errors commonly found in the manual processes.
Letter of Credit (LC) for instance, has six different participants in the chain, the buyer, the seller, buyer’s bank, seller’s bank, shipping company and the custom authorities. During the manual process of LC, buyer and seller have to carry out various procedures and need to submit multiple documents at each level of the process.
With the use of a Private Ledger prepared with Blockchain Technology, all the participants can come on one common platform and share important documents and can create digital contracts regarding the process right from that ledger. This would reduce the duplication of tasks and each party can get clear picture of the process. Also, the process that takes days to be completed, it can be completed in few hours.
The bank or Financial Institution that deals in the Forex Trading would agree that their back-office resources are overwhelmed with the reconciliation that they need to make across multiple systems. Also, similar records are prepared for different participants of the trade like buyer, seller, broker, clearer and third parties.
If a common ledger is prepared where the bank or the financial is the authority who creates the digital records and shares on the ledger with other participants having the authority to only view the records of the trade, a lot of mundane tasks can be eliminated from the process freeing the back-office resources and the ledger also eliminates the possibility of the miscommunication.
Currently, because of the stringent rules set by the Anti Money Laundering (AML) and Know Your Customer (KYC) laws, each and every bank and financial institution needs to follow the KYC process individually. Each bank has to upload the validated information and documents of their customer in digital form along with the unique identity number to the central registry. The cost of generating and maintaining the KYC database has raised some serious cost concern for each and every bank.
If a central registry is formed using the Blockchain technology, the duplication of the efforts can be removed from the process. Vital encrypted information can be uploaded on the ledger and the updated information can be distributed amongst the banks in near real-time. Also, the historical records of all the documents can be kept for each client along with the amendments made overtime. Thus, the possibility of creating fraudulent records of the customer can be completely removed.
Similarly, Blockchain technology has endless applications in almost every process of the Financial Institutions. Processes like Loan Syndication, Bond Trading, Cross-border payment, Cross- Settlement etc. can not only be secured, but can also be freed from the mundane manual tasks improving the overall customer service. If you also have ideas where you think Blockchain can be applied, share your thoughts in the comment section and let’s work together for a Secure and Effective Digital World.