Justification of usage of Blockchain by banks

Question

After learning a bit about Bitcoin and Blockchain Technology, I do not understand how any bank is going to use it.

My understanding is that the blockchain is useful in an environment of mistrust. In a closed system, like a bank, different nodes would be wasting computation if they used a blockchain with Proof-of-Work. If they just use the hash of previous blocks to verify the blockchain is never tempered with, without Proof-of-Work, can't any normal database do it much more time efficiently in a closed system (where all nodes belong to bank)?

What are the essential requirements for a problem to justify using the blockchain with and without Proof-of-Work?

Answer 1

Blockchains are best used when there are multiple entities that don't necessarily trust each other. So within one bank, a blockchain really isn't useful. However between bank transfers could use the blockchain. Right now, in order to send between banks, banks use centralized systems (ACH, SWIFT, etc) operated by a third party. With federated blockchains, they can remove most of that third party's involvement and thus save on fees and time. That's really the only good use case for banks using blockchains that I have heard of.

Answer 2

Provenance is very important with OTC transactions. Many banks are comprised of thousands of tiny holding companies. How do you verify ownership? A decentralized Blockchain. Using a Blockchain, you can establish the chain of custody originating from the mining/genesis/issuance of the security.

Also trust (counterparty risk) is very important in OTC transactions. Lehman Brothers failure was directly tied to other banks not believing their solvency. With a decentralized Blockchain, if Lehman Brothers was 100% solvent, they could have signed a message using the private key associated to public addresses where hundreds of billions of securities were tied to.

There was a case where a foreclosed homeowner sued because they claim not to have borrowed money from "MERS" as reported on public deed information. The case had some level of merit since there was proof that MERS had the right to issue a foreclosure. A blockchain assigning these rights to MERS by the originating bank would have resolved such subjective issues in court.

Answer 3

For the bank that I was a part of (Deutsche Bank) the value was in creating a blockchain based bond / securitizied debt product system using smart contracts (more ethereum than bitcoin) particularly because the bond markets are so expensive to be a participant of. The majority of bonds are traded OTC and not through an exchange so there is no way of tracking ownership in secondary markets except through custodians' antiquated main frame systems (built on cobol etc.) The problem being, when a major issuer adjusts a certain bonds coupon rate, it affects the payments and thus the total sale price of the bond through it's entire holder history.

And that's why the banks need an army of accountants to make sure that all of their customers correctly received the coupon distribution, adjustment, etc. from the issuer.

In a blockchain based system, the entire network would have visibility (and ideally maintain some level of anonymity because finance and identity breaches are a massive issue) from the issuer to the current holder and the contract would pay out automatically to that holder without having to travel through all the intermediaries.

Nothing is available externally at this point of course because banks love using open source technology without contributions. That may or may not change in the future.

If you are a blockchain developer, this would be the market to enter. Independent of the outcome of bitcoin itself, the blockchain as a financial system will have plenty of room for development of contract and token systems for years. Just look up all the incubators and companies in Switzerland that have launched in the last 2 years. Also, check out the history of Blythe Masters. Trust me, the finance sector knows how to capitalize on opportunities.

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Answer 4

Indeed, the usage that Andrew Chow mentions is a good potential usage by banks. Especially since there has been a lot of bank wire fraud in the last few years (sometime millions of dollars).

Since transactions can be cryptographically signed, it provides a more secure mechanism to exchange inter-bank transfers (for instance, it can require both the customers signature, as well as a key bank employees signature).

Another potential usage is for home banking and mobile apps. Consider that each bank supports a different offline banking format. Some of them use CSV's, some use formats for Quicken or MS Money, etc.. If you encrypt the data with the customers public key, then the customer can decode the data in whatever app supports the blockchain. So a B2C style ledger could be a good usage.

Proof of work is not necessary if you have a good mechanism for key management and signing. Sadly, this is one of the hardest problems facing blockchains today for it to be usable by the general public.

PoW or PoS are not necessary components to have a blockchain. But they (or some other system) are necessary components in a trustless system to incentivize good behavior and deter bad behavior. Not all blockchains need to be trustless.

Answer 5

Blockchain technology is an attempt to tackle the Byzantine Generals Problem. Proof of Work is just one implementation, there are also Proof of Stake, Proof of Activity, Proof of Burn, Proof of Capacity, Proof of bandwidth, etc. Proof of stake, for example, doesn't require mining as most(if not all) coins are usually "pre-mined".

If a bank chooses to run a private blockchain, using a deferent algorithm such as PoS would be more logical. They can also use public blockchains like Bitcoin and contribute their computing power to keep the ledger secure (since they don't need data center anymore, why not invest the hardware budget on mining?). Unless they are doing really shady businesses and really don't want the public knows how they operate.

Answer 6

For me the question is incomplete to be replied properly.

Why should banks use bitcoin? It is not only banks. In many branches, industry as example, it is already known that blockchain technology is there, it is known that they will adapt and use it. However, industry still can't find proper business models.

Some speak about different implementation and replacement for proof of work. All of them have their reasons, pros and contras. Banks could call their internal system to whatever they want, even to Proof-of-bank which means techincally nothing, definition could be simply a check by a person working for a bank. All that has nothing to do with bitcoin itself.

I would rather suggest to change the question into: "Why and how should a bank use blockchain technology". As for that question, there are not only answers but real life cases. G&S and other banks did work with Ripplecoin.

With that, I am finding it hard to understand what is here actually been asked. Is it in general why should banks use bitcoin and how should they adapt their systems, then you could look at that similar like a blockexplorer.

If that helps you: 2 years ago I did have that approach to implement blockchain technology in some commercial ERP system, it was SAP. Speaking about banks, your requirements would be probably better covered in Oracle world, as far as I know, it is more spreaded across banks worldwide than SAP.

I did try to write all classes and everything bitcoin related directly in ABAP, for the same purpose that you seem to be speaking about. I wanted to use quite more advanced database like HANA which do fit pretty well to blockchain technology.

So yes, every bank and everybody else can use blockchain technology. You could even store your data. It would contradict some basic blockchain philosophy as if any company does store any data in blockchain, there must be some deletion/cleanup policy, as example for bills which would be required by law to be deleted from the DB after some period of time. In case of blockchain it is a major philosophy problem where I would assume that for file storage and other tasks, there are many good solutions which mostly fit much better to companies requirements.

Why should banks use bitcoin: Banks already use bitcoin. Look at Fidor Bank as example (first it was a Blog, turned to a bank). It is out of question what some do or not, it is free market. I would say that most banks who did research agree, it could strengthen their market position and gain additoinal value

How should a bank use bitcoin: If I would be your consultant, I would strongly suggest to use original sources of bitcoin as banks can't provide such amount of development progress of open source projects. But you should have a team to be able to review and stay in contact with original developers.

Can you use other technologies: Yes, many companies do find Hyperledger good for such goals, because hyperledger is designed to enable multichain interaction. For internal usage, I think it is most documented available solution which I would suggest you to read about is hyperledger.

Answer 7

After learning a bit about Bitcoin and Blockchain Technology, I do not understand how any bank is going to use it.

Blockchain and Bitcoin are modern financial pyramide schemes. Point. Why can not banks take part in it?