The distributed ledger technology that underpins cryptocurrency like Bitcoin is rapidly going mainstream. Blockchain is building a tremendous amount of buzz as technology and financial industry heavyweights and startups race to apply the technology in innovative new applications for the banking sector. Their efforts are starting to bear fruit in the area of cross-border payments, as three separate announcements from IBM, J.P. Morgan, and Bank of Canada highlighted this week.
Each company announced their own flavor of payment network solutions built on blockchain technology. Working in conjunction with technology partners Stellar.org and KlickExGroup and over a dozen financial institutions, IBM rolled out a banking product that leverages its IBM Blockchain platform. The project, announced Monday, is designed to clear and settle financial transactions worldwide in near-real-time.
The ultimate goal is to provide a secure, speedy and transparent financial platform between global markets that may have found it difficult to do business with one another due to the bureaucratic pitfalls of legacy international payment networks.
That's a similar goal shared by J.P. Morgan, which together with partners Royal Bank of Canada and Australia and New Zealand Banking Group Limited also Monday launched the Interbank Information Network (IIN). It's a cross-border payment network built upon Quorum, J.P. Morgan's internally developed blockchain technology. According to J.P. Morgan, its first two banking partners are just the start for IIN and other correspondent banks are expected to join soon.
Tuesday, the Bank of Canada, Payments Canada and TMX Group Ltd, operator of the Toronto Stock Exchange, announced that they will get together to test the use of blockchain for automating securities settlement.
J.P. Morgan's commitment to Quorum and blockchain capabilities are interesting considering its CEO Jamie Dimon's well-documented dismissal of Bitcoin as a "stupid" idea. Clearly, his bank isn't one for throwing the baby out with the bathwater.
The developments this week underline that banking executives are increasingly seeing the upside of combining distributed ledgers with solid cryptographic applications for new means of facilitating payments, trades, contracts, and transactions of all stripes.
"The technology is particularly useful when you combine a distributed ledger together with a cryptotoken,” wrote MIT Sloan Assistant Professor Christian Catalini in an explainer piece from MIT earlier this year. “Suddenly you can bootstrap an entire network that can achieve internet-level consensus about the state and authenticity of a block’s contents in a decentralized way. Every node that participates in the network can verify the true state of the ledger and transact on it at a very low cost. This is one step away from a distributed marketplace, and will enable new types of digital platforms.”
For security and risk professionals, blockchain stands as an especially appealing option because it is a technology that's essentially security native; its fundamental design from day one has kept security top of mind.
"Blockchain is designed with security in mind and can help optimize processes," says Bob West, a former banking CISO and current CEO of consultancy Echelon One. Moving beyond announcements like the ones Monday, other examples of optimized processes would be the settlement of stock trades. "The settlement of stock trades could become close to real-time if blockchain were used throughout the trading supply chain."
The trick will be convincing senior executives it can add value to the business, West says, eplaining that he believes it will be three to five years before the financial sector adopts blockchain broadly.
[Bob West will discuss "Creating and Managing User Identities in the Real World" at the upcoming INsecurity Conference, Nov. 29-30 in the D.C. area. See the full agenda at https://insecurity.com.]
Others agree it's going to take time including Brian Conneen, CIO and CTO of Marlette Funding, an online lending company. He says his team is "keeping a close eye on blockchain" as they look for ways to put it to use in their business.
"The biggest challenge today to leveraging blockchain is that many large players have not yet bought into the nascent technology, most likely due to unfamiliarity or in some cases lack of central control," Conneen says. "We are still a few years from reaching critical mass, but once a few major players leverage blockchain in a way that is core to their business, the acceleration to adoption will be exponential."
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