Trust in the financial industry has weakened since the worst of the global recession in 2008 and again during the Greek debt crisis. For some experts, the current system is no longer appropriate and there may be a need to explore new technologies like the blockchain when it comes to preventing another meltdown from taking place.
Blockchain is the public ledger of transactions in bitcoin. While the cryptocurrency has hogged the spotlight in the past few years, the underlying technology in updating and storing entries on the blockchain is proving to have several practical applications in various industries such as finance.
Blockchain Technology and Banking
“I think trust issues are a big cost to banks because the system is as secure as the weakest link. So if you see banks in less well regulated jurisdictions, smaller banks, sometimes they have difficulty maintaining a corresponded bank relationship that connects themselves out into the wider world,” said Adam Back, founder and president of Blockstream.
Back is also known for inventing Hashcash back in 1997 when he spearheaded the proof-of-work functionality later integrated in the bitcoin network. He describes blockchain as “a protocol upgrade for the world’s financial networks which is maybe more open than it has been in the past”.
Using blockchain would provide a real-time audit that is transparent to stakeholders. Back in 2008, banks did not disclose how much debt they were holding or how exposed they were to bad mortgages, leading to a credit crunch and ultimately a banking crisis.
“I think you could also make the claim that ultimately regulators should see that this is good for consumers with potentially more lightly regulated financial products and institutions that are blockchain real-time audited,” said Back. In addition, blockchain could be used as a layer of security for those holding investments to prevent banks from spending your funds or misappropriating them.