The blockchain has found another supporter in the traditional financial world: the rating agency DBRS.
In a long report entitled “Blockchain in Banking: A Reality Check”, the Canadian institution talks about the potential of the decentralized network behind cryptocurrencies, citing the ability to improve the efficiency of banks in carrying out complex transactions, “while improving the levels of security and transparency.
According to DBRS, the areas in which a paradigm shift is possible and which could benefit most from the revolutionary technology are the legal, commercial and, of course, financial, such as payments, offsets, anti-money laundering activities, identity verification operations, internal accounting analyses, customer due diligence and “know your customer” (KYC) procedures.
Blockchain presents opportunities for banks, but also risks
Like all technological innovations that are still young, blockchain presents opportunities but also risks, especially for the banking sector. “The impact could be significant for banks, competitive markets and consumer protection”.
However, due to a lack of sufficient information and a substantial history, it is difficult today to make reliable estimates of the pros and cons in the banking sector.
Most of the applications are still at an early stage. That said, the potential is out there for all to see and according to the agency “adoption rates are set to increase over the long term”.
Since the technology is defined as “still immature” and poses risks in terms of operations and reputation, the next tests (Proof of Technology and Pilots) will play a fundamental role in verifying the relationship between risk and opportunity.
Why do banks like the distributed ledger technology so much?
The blockchain mania amongst financial institutions and startups of the fintech universe is explained by the fact that it can be applied in many ways and domains. “It can be implemented as a breakthrough technology or as a backbone of the market infrastructure dedicated to digital financial assets“.
The immutable and decentralized ledger can be used as a software platform by a financial company that wants to verify and make transparent all business processes, or even as a tool to improve the management of money transactions.
What attracts the interest of banks for the technology behind Bitcoin and other cryptocurrencies are the features that make it unique: the ability to make secure, effective, fast and transparent operations.
“Unlike traditional databases and ledgers, blockchain technology is based on the combination of different aspects, such as decentralization, encryption and smart contracts, which are able to improve the efficiency and speed of transactions“.
The distributed ledger technology could represent for banks the conquest of the sacred Grail: to obtain reliable information without the need to use intermediaries, shortening and making the whole process more secure.
Risks remain on the regulatory and legal front, as well as from the IT point of view (hacker attacks), and practical (difficulties in integrating with current systems). To take the next step DLTs must find the right balance between security and scalability.
Permissionless networks such as the Bitcoin blockchain are more transparent and safer, but less scalable, although a solution is coming thanks to the Lightning Network. In the case of permissioned blockchains, however, the systems are more customizable, faster but also more opaque.