Blockchain technology and applications are changing how cash is handled and disbursed. Get answers to your questions about blockchain technology for cash management.
By Chris Swanson, Senior Vice President, U.S. Bank
Type the word “blockchain” into a Google search, and you’re inundated with thousands of articles on its potential. Companies across the world are racing to research and test this emerging financial technology, creating an opportunity for disruptive change in several industries.
Enterprise blockchain platforms, like R3’s Corda, enable the workflow and data integrity benefits of public blockchains with the security and privacy of permissioned networks. We used to view ledgers centrally, with one definitive record living at a clearinghouse (like a central bank). That’s changed. Blockchains come in many forms and it’s become a hotly discussed issue among financial and data professionals. Is it time to consider how it might work for you?
How does blockchain work?
Blockchains provide the ability for two or more parties to coordinate complex transactions without the need for a central intermediary and redundant data reconciliation processes. As a result, each party within the blockchain network must agree on the state of facts in a transaction before it takes place. This is defined by the rules, or protocol, users agree to when they join the network. Transactions need not take place in “blocks” as they do on the two largest blockchains, Bitcoin and Ethereum.
For example, the Tangle Network instead uses a cyclical graph process to document transactions, which removes the need for data miners within the chain. It all depends on the rules of the specific network.
Why is there so much interest in blockchain?
Decentralization and time management, for starters. Blockchains can look very compelling to treasury teams that spend countless hours with manual data entry and reconciliation for international payments. Data associated with these transactions on a blockchain would ensure the two parties to the payment – sender and receiver – and their respective banks would all see the same information at the same time. This mitigates counterparty risk, enabling the transaction to be processed faster and, due to elimination of the need for third-party messaging and clearinghouse services, less expensively.
“Blockchains can looking very compelling to treasury teams that spend countless hours with manual data entry and reconciliation for international payments.”
Who’s leading the charge on testing blockchain technology?
Businesses and governments around the world are actively evaluating the potential of blockchain technology. The demand for a decentralized system of data management has also intrigued technology companies like IBM, SAP, Cisco, and Walmart. For them, blockchains can help streamline everything from supply chain data to company device management.
Banks and financial institutions are also testing blockchains for use cases like trade finance, capital markets, syndicated loans, freights logistics and supply chain management, payments, digital assets, compliance and fraud reduction. U.S. Bank is part of a 400+ member consortium run by technology firm R3, the largest blockchain network in the world comprised of banks, regulators, cloud providers, global systems integrators, independent software vendors and tech firms.
Why should you use an enterprise blockchain platform?
In short: For the potential to make payments faster, more reliable and safer. Without the need for manual processing or a centralized clearinghouse, your payments could be processed faster and less expensively. It’s a scenario that carries many tangible benefits for an organization’s bottom line.
In real estate, for example, sellers and buyers could use a specialized blockchain for all transactions related to a property. Rather than paying an intermediary management company, the two parties set up the ledger on agreed terms. These “smart contracts” could bring in data from a variety of connected devices — like environmental sensors, wearable trackers, and industrial robots — and adjust payments if issues aren’t resolved.
Why decide not to adopt blockchain technology?
Blockchains, while brimming with potential, must show they can justify the cost and resources. We’ve been able to prove that the technology performs as intended during tests and foresee low and medium scale application of blockchains in a few years, as more companies test the service.
Any application of blockchain technology would require changes on the regulatory and IT sides, too. While “permissionless” ledgers such as Bitcoin exist for direct peer-to-peer transactions, financial institutions use a “permissioned” approach that require approval for any actor included in the process. You also need to account for IT development and storage costs with ledger data.
The blockchain hype is real, but tenuous
Gartner recently published an updated version of their Hype Cycle for Blockchain Technologies, and blockchain technology may hold promise outside of financial services too. Though expectations for the technology have dimmed somewhat over the last two years, eventually, these technologies will find their place in the evolving transactional marketplace. For now, blockchains are enjoying widespread attention. We should know in a few years if that attention is well deserved.
Chris Swanson is a technology and business strategist currently leading the U.S. Bank blockchain and blockchain and cryptocurrency practice. He manages business line and developer resources in proof of technology and business value testing.