Written by Clarisse Monahan. Statistics graduate currently completing Masters in Contemporary Art Theory at National College of Art and Design, Dublin. Her background prior to graduate studies was consulting within Institutional Banking specialising in Bayesian statistics.

The Two Generals Problem, a thought experiment illustrating the pitfalls and challenges of attempting to coordinate an action by communicating over an unreliable (unsecure) “link” paints a perfect picture of our current Blockchain situation. The problem of communication, in theory, is that we can never guarantee that the medium of communication is reliable and trusted, however Bitcoin actually works not in theory, but in reality. Lately, when you think of Blockchain, you would be forgiven for envisioning banks and financial institutions rather than Bitcoin, its originator, which has become something of a vestige in that regard. Such is the ferocity at which these corporations have targeted Bitcoin’s underlying technology. So why is everything Blockchain suddenly everything banking and why have the top tier banks brazenly affirmed themselves as leading the foray. As raps on the glass disturb fish Blockchain has disturbed banking. Each time I visit a secure web page, I can’t help but think of the security protocol involved, which at some point involves placing trust in a third party (in this case the certificate issuer, for example VeriSign). Imagine that this trusted, standard TLS protocol was “disrupted” by some new technology, which removed the need for a third party to be involved in the digital interaction between the client and the server, all the while encompassing an incredibly secure backend and offering practical immunity from MITM attacks. That is no longer fantasy; it is a very distinct possibility and many start-ups are seeking to experiment in this area, for example Namecoin comes to mind. Financial institutions are parading themselves to be at the forefront of all that is Blockchain, for no reason other than they have the sheer investment capabilities, lack of accountability, and vast resources that most other industries simply do not have the capacity to support, or good fortune to possess. They are also highly incentivised to be shouting from the rooftops that they are tunneling their resources into such ventures, and that is to earn back the trust of their customers.

There are many skeptics who hold doubts as to reasons why financial institutions have rallied eagerly in their vested interest in this technology and rightly so. On the surface, it appears they are seeking to also improve automation in their back-end custodial systems, which are hopelessly retrograde. Sure, they have tried to automate procedures throughout the years but nothing has really changed in the way they process their back office in the past 40 years. Goldman Sachs has filed a patent application for a Blockchain-based system that would offer “nearly instantaneous execution and settlement” of trades involving assets, including stocks and bonds. The current methods in custodian services definitely need an overhaul. We may be able to transfer money on our phones now instantaneously, but each time a bank processes a trade it goes through various channels of custodial teams to get to the other side; fund accounting, portfolio analytics, unit pricing, corporate actions, settlements to name a few. As much as they don’t like to admit it banks are still radically dependent on people and paper. This high degree of manual processing is costly and slow, and leads to inconsistent results. By reworking their technical architecture and incorporating a Blockchain system, banks can have much smaller operational units run value-adding tasks, including complex processes, such as deal origination, and activities that require human intervention. Blockchain holds potential for a huge rise in productivity, and like any emerging technology of efficiency, unfortunately will consign these back-office teams to the dustbin of obsolescence.

Although the back office has always been a sunk cost for institutions, given the solid growth banks experienced before the recession, most did not have to change their business processes nor were they interested in improving housekeeping. Now, however, the economics of today requires much lower operational costs and Blockchain offers the perfect mélange of compendiousness and profit. Banks are interested in essentially Bitcoin without the Bitcoin. Many view Bitcoin cryptocurrency as a stockmarket-esque venture, highly unpredictable, despite its general stabilisation in value in the past year. However, the underlying structure, the machine grinding in the background, allows the preservation of data integrity within a database, in essence removing the ability of an employee, such as in a bank in this case, to have opportunity to twist the numbers or “cook the books”. The sheer value of this notion is incomprehensible, this is what every transparent organisation strives for, hence no surprise interest in this area has piqued and this is why its impossible to cool Banking’s ardor for Blockchain.

Many Bitcoin advocates believe private Blockchains will have a knock-on effect of a centralised system, the polar opposite of what Bitcoin has stood for – a trust less protocol – yet this seems to be the future for now. Moving away from the previous protagonists of central organizations and institutions being relied upon as trusted authorities, Blockchain allows each peer to trust the next, with peer-to-peer transactions enabling a new era of ‘deep’ and ‘trusted’ computing. Whether permissioned Blockchain applications will not just speculatively, be allowed to run on top of permission-less Blockchains (such as Bitcoin), remains to be seen. The technology is capable but there will always remain one difference between the two – the presence or lack of an access control layer on the client side. Indeed the potential of this soundly secure payment technology is deemed by many to remain largely untapped, and the foreseeable future will unquestionably hold some interesting new developments in areas such as authentication, tokenisation, trading and in trusted third party transactions. It will be interesting to see what evolves from these institutions that are running projects in this area.

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