What financial executives need to know about the blockchain
by John Callahan, Chief Technology Officer, Veridium
Bitcoin (and, subsequently, blockchain) has infamously been associated with nefarious actions — early stereotypes were that it was the preferred currency of criminals.
So how did it suddenly become one of the most talked-about technologies across all industries — not just the financial industry? This emerging technology has even been compared to the disruptive rise of the internet over the past few decades.
At its core, blockchain is a decentralized, global notary ledger. Information recorded on the blockchain can later be retrieved, verified, exchanged, transferred, decrypted, or used as a proof of possession, nonrepudiation, or for attestation depending on the use case and context.
However, in the financial industry, many executives have expressed concern that in bitcoin's decentralized, immutable and anonymous form, banks couldn't function — for example, a bank obviously would not loan money to an anonymous source.
Though the arguments persist, blockchain continues to take on greater mindshare among fintech executives. The naysayers' position is starting to soften, and the viability of blockchain as a means to exchange information between untrusted parties has begun to dispel initial negative perceptions.
Why financial executives should pay attention to blockchain
Whether or not they associate the technology with the criminal stereotypes, it's important for financial executives understand blockchain.
Why? First and foremost because blockchain offers benefits — including real-time transparency and security — that are critical to financial institutions worldwide.
Trillions of dollars move throughout the global financial system constantly. Millions of data sets — for everything from lending to settlement of transactions — are handled on a daily basis.
However, despite the vast numbers of dollars at stake, and data and individuals involved, the financial industry is antiquated. For example, many accounting departments are still stuck in their old ways, tracking and entering data manually.
Departments can be slow to adopt new technology and, in some cases, the only time a full financial report is seen is when it's requested by the CEO (which might only occur on a quarterly basis).
With blockchain, anyone in the C-suite or the accounting department itself has access to records showing exactly what payments have been made. They can see each and every cent that moves through the company as the transaction occurs.
Blockchain technology holds the unique ability to make transactions between strangers completely transparent.
Chief financial officers who implement blockchain technology also have the benefit of a scalable and secure ledger with unlimited account creation capacity and programmable, traceable transactions.
No individual can alter the ledger because it exists across a distributed network. This level of transparency means that fraud can be traced immediately, thus eliminating the risk of employee theft.
The successful implementation of blockchain requires widespread adoption — blockchain can only exist through a peer-to-peer network. Public blockchains and private MDLs require a critical mass of peer-to-peer nodes if they are to be effective, available, and redundant to the degree that they can survive network partitions, node failures and shutdowns, and other shocks.
To succeed, blockchains must:
- serve a wide range of applications, not just a single industry vertical;
- offer open toolkits, SDKs, test chains, and currencies that allow broad implementation of new applications;
- accommodate open identity standards such as decentralized identity, DID Documents, and verifiable claims; and
- acknowledge problems early and transparently, using a hard form if necessary (e.g., the Ethereum ETH and ETC fork in early 2016).
The stewards of each chain or MDL must open participation to many players who will become dependent on the chain's success and will contribute their energies toward its future.
The future of blockchain
Blockchain is starting to receive recognition from large banking institutions, but implementation across the entire financial industry will take some time.
The technology is just in its beginning stages. As adoption slowly begins to increase, it's important for financial executives to participate in a discussion about open identity standards.
These standards will encourage interoperability of claims across chains. This, in turn, will allow users to take maximum advantage of all blockchain services, SMEs to innovate quickly, and existing institutions to migrate their services easily across chains (both public and permissioned).
Financial executives can create onramps to blockchain adoption by immediately helping to promote open and interoperable identity standards. Services and other revenue opportunities will follow in the near future as users look for new ways to leverage their digital identities in the blockchain markets.
John Callahan is chief technology officer at Veridium, specialists in biometric ID solutions. www.veridiumid.com.