When people think of “blockchain”, they often associate it with cryptocurrency. But in fact, crypto is only one facet of the blockchain, which is designed to provide reliable and fast financial and other transactions. As such, blockchain is increasingly important to banks, according to some knowledgeable professionals.
Blockchain is already affecting the banking industry, according to CSG Law Fellow Sam Newbold. “It has the potential to disrupt consumer, commercial and investment banking, and banks are still embracing the reach of blockchain,” he noted.
To their credit, banks aren’t sitting in the sand, he added. “Instead, financial institutions are investing in R&D around blockchain,” Newbold noted. “One of our clients is a leading provider of blockchain and cryptocurrency services, and the company is experiencing high demand for their expertise.”
While blockchain, which underpins cryptocurrency, has been around since the 1980s, “it only caught on recently,” he added. “But in the next few years, this will have a profound effect on banks and on institutions like the FDIC and other state actors, as blockchain transparency will foster decentralized but relatively secure financial activity. Take the controversy of the 2008 banking crisis, when some institutions were classified as “too big to fail”. But once blockchain and decentralized cryptocurrency are largely affected, no one will be “too big to fail.” It will be like phone booths in New York – the streets were filled with them, until cell phones made them obsolete, and instead the streets are filled with ATMs. But Web 3 and blockchain-enabled cryptocurrency will make ATMs obsolete once everyone stores their currency in a digital wallet.
Jason Juliano is a director at EisnerAmper Digital and serves as the technology manager of the company’s Digital Assets Committee. He gained hands-on experience in building B2B AI-enabled blockchain networks for banks and other organizations, and noted that “blockchain networks enable customers to execute transactions more quickly and inexpensively on all banking platforms. But the changes it brings about, and will continue to bring about, are not only operational. Historically, for example, when banks were looking for new hires, they focused on candidates who had a background in banking and financial services, but now banks are increasingly looking for talent in digital assets and blockchain.
Juliano warned, however, that governance and compliance standards have not caught up with technological advancements. “Federal and other agencies are encouraging banks to adopt blockchain and crypto initiatives, but regulators also want tighter controls and strong governance. Regulations are still evolving, although I would say that right now the New York State Department of Financial Services is probably ahead of most agencies.
Juliano and his team worked with a national bank to implement controls and improve processes around blockchain networks. “Previously, we built a blockchain for a community bank and helped the institution review vendor-partner practices and rules of engagement,” he said. “There are still plenty of regulatory and other changes to come — including, likely, federal Know Your Customer and Anti-Money Laundering guidelines — but overall, blockchain can provide many benefits, including speed and trust, to financial institutions and their customers.”
Blockchain technology offers many benefits to the “banking ecosystem”, observed Senior Vice President and Treasurer of Spencer Savings Bank, Dushiant Abhyankar. He noted that banks traditionally store valuable assets, provide the infrastructure to facilitate payments and remittances, and provide capital and credit services to customers – and “Blockchain technology has the potential to offer a faster way to deliver these services, plus a few other benefits. It verifies and transfers the store of value into a banking ecosystem, has the potential to reduce costs, provide faster processing of financial flows as well as regulatory/compliance transparency.
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Still, “government and regulators have the difficult task of balancing blockchain innovation with consumer and market protection,” Abhyankar warned. “Over the past two years, we have seen government and regulators start to really take a closer look at the burgeoning crypto market and the technology driving its exponential growth across the globe. Due to the secure and anonymous functionality of blockchain technology, governments and regulators want to ensure that bad actors around the world do not take advantage of its use case to perform illicit activities.
The banking industry is still at an early stage of blockchain adoption, he added. “There are regulatory roadblocks. Regulation is needed to provide participants with certainty about the status of crypto assets, rules of engagement, and investor protection. For this reason and at present, Spencer Savings Bank has joined many other financial institutions in choosing to wait with caution and not embrace the use case of blockchain technology. But in the future, as the general demand for this technology increases and some of the obstacles can be overcome, all banks will have no choice but to slowly adopt this modern technology, using it to improve their current products and services, compete with other financial banks. institutions and be on par with the rest of the banking sector.
In the long run, blockchain and other financial innovations will have a big positive impact on the banking industry, according to Steve Yang, associate professor in the School of Business at Stevens Institute of Technology. “Cryptocurrency represents the first use of blockchain technology, but now a growing number of startups are looking for new ways to process payments, and many banks are working on blockchain behind the scenes,” he said.
In 2021, to address the need for research in blockchain and related fields, Stevens Institute of Technology and Rensselaer Polytechnic Institute – with co-sponsorship from the National Science Foundation – established the Center for Research in Advancing Fintech (CRAFT). In addition to his other responsibilities, Yang is director of CRAFT.
“Blockchain is one of the key technologies being researched at CRAFT,” he explained. “It’s a promising technology because it offers privacy, efficiency and transparency in a decentralized environment. Beyond payment capabilities, blockchain also enables developments such as NFTs [non-fungible tokens, which represent fractional ownership of artwork, digital content and other assets]that open up new non-traditional investment opportunities.
In addition to its decentralized financial research, CRAFT is examining innovations such as AI-based finance and quantum finance, which Yang says will “help secure our financial data, create and test fairer trading platforms.” , inform financial regulations and support enhanced market simulation.” and stress testing tools that ensure the stability of the financial system for all.
Despite breakthroughs in U.S. banking and apps like Apple Pay and Google Pay, “Asia, Europe and Africa are leading in blockchain adoption,” Yang noted. “But I think the United States will catch up. The Boston Fed, for example, is working with MIT to develop research on central bank digital currencies (CBDCs). »
In February, Boston Fed Executive Vice President Jim Cunha announced that “this collaboration between MIT and our technologists has created a scalable CBDC research model that allows us to learn more about these technologies and the choices to consider when designing a CBDC”.
Still, resolving trust issues will be important in ensuring widespread adoption of blockchain-related technology, Yang noted. “The blockchain platform is anonymous and involves multiple parties, so developing checks and balances and ensuring trust are central to the continued acceptance and growth of blockchain. This means regulatory agencies will need to get involved, but they need to be careful and take a balanced stance, refraining from over-regulating technology, as this could stifle development. Instead, regulators need to give the tech space room to develop.
Much like cloud computing, blockchain offers speed, efficiency, and the ability to transact across different systems. “But it’s not foolproof,” according to CSG’s Newbold. “Coding errors in the construction of the blockchain infrastructure can create weaknesses in cybersecurity; and users who misplace their private key or email it to someone – which could leave the information vulnerable to hacking and other threats – can lead to vulnerabilities.
Regulation can help, “but it needs to be tailored to how blockchain and cryptocurrency are used; instead of regulating the infrastructure itself,” he says. “It’s like virgin land or undeveloped property. Greenfields themselves are generally unregulated. Instead, regulations focus on what’s built on it. »