From Banking and Data Security to Compliance: Blockchain Grows Well Beyond its Cryptocurrency Roots

Cryptocurrency and blockchain came to the forefront of our imaginations as a technological marriage, seen as a revolution, for digital transactions. So vivid was the future for this pairing, at the outset at least, that the terms became linked. In reality, cryptocurrencies and distributed ledger technologies are distinct, the latter supporting the former’s ability to exist. 

Blockchain is the technology, and cryptocurrencies are an application of that technology toward a singular goal. While cryptocurrency has been on a rollercoaster ride in terms of acceptance and mainstream skepticism, blockchain is firmly established in the enterprise roadmap as an enabling technology for organizations across industry from banking to healthcare.

Managed services such as Rockside, Chainstack and Mangrovia let organizations support their own blockchain applications running in the cloud without the need for technical expertise and dedicated infrastructure. Its evolution from open, public ledgers to include permissioned, private blockchains has made it possible to use this technology to transact with data securely and behind the scenes while also preserving transparency and scalability.

In fact, it’s often said that every important player in the enterprise world already has—or is hard at work developing—a viable blockchain strategy. Commercial cloud providers such as AWS, IBM, Microsoft, VMware and Oracle are driving adoption of various services that are pushing blockchain stacks mainstream. Software developers are following suit with decentralized web apps, DevOps tools, user interface applications, and integration with IoT.

Yet, the perception of that blockchain is just another word for crypto persists despite distributed ledger technology moving beyond proof-of-concept and initial pilots into full-fledged implementations. Technological adaptation has reached a tipping point with uses in bank payments and settlement, cybersecurity, trade, supply chain management and tracking, and even process manufacturing. However, blockchain’s amorphous underlying value as an enabling platform rather than a specific business application makes it harder to overcome its well-publicized association with the likes of Bitcoin and Etherium.

Solving the corporate enigma of trust

Blockchain is essentially a collection of different pre-existing design patterns and algorithms that provide a mechanism for proving trust between two or more endpoints, then producing documentation in the form of a distributed ledger. If we think of blockchain as being a compilation of proven and already trusted technologies, including peer-to-peer (P2P) networking and cryptography, it essentially offers a way of combining the two into something that takes the shape of a global immutable database, where trust is the central axis. 

Three things are necessary to restore trust around data usage. It is crucial to see and understand access needs and to share this view among all stakeholders so that everyone knows the truth. There also needs to be a means to cut off access when it is inappropriate or defies policy, and to protect data in a way that reduces or even eliminates the ability to steal it.

From this perspective, the architectural design of blockchain is not limited to supporting digital currencies, nor is it about rethinking every human system. With some adaptation, its core security-related attributes have fortifying potential in data access and access governance, as well as reimagined approaches to data protection itself.

It also has the advantage of being easily integrated with legacy enterprise systems via “oracles” or API calls, which connect blockchain to external data sources. Further, tools such as APIs and database drivers make seamless CI/CD build processes faster for DevOps teams looking to embed blockchain functionality and trust-mechanisms directly into applications. 

Consequently, blockchain is naturally being tapped to improve compliance with privacy mandates. This is possible because distributed ledgers can be used to document and track complex regulatory processes.

The GDPR mandates that each data holder or processor “maintain a record of processing activities under its responsibility” that must be made available to regulators upon request. Similarly, HIPAA requires subject entities to “implement hardware, software, and/or procedural mechanisms that record and examine activity in information systems that contain or use electronic protected health information.” Data security standards for payment cards under PCI require firms that handle payments information to “track and monitor all access to network resources and cardholder data.”

Companies are tackling this challenge with blockchain in a variety of ways. Using the technology, IBM’s Logging for Compliance (LoC) research asset lets users take any log and transform it into a cryptographically immutable record. Logging of data custody and activities in a distributed ledger can also be provided within a blockchain-derived Data Security as a Service solution, easing the process of reporting and auditing. In another notable example, Anti-Money Laundering (AML) software developed by Fiserv can help organizations mitigate risk especially with cross-border financial transactions, or with partners and suppliers in jurisdictions with weak enforcement infrastructure.

Implications for financial services

Clearly, the market has come to see that there is more to blockchain than cryptocurrencies. Each year, the financial services sector has invested $1.7 billion in the technology according to research firm Greenwich Associates. IDC’s most recent five-year forecast, which goes through 2023, indicates that blockchain spending will be led by the banking sector with approximately 30 percent of the worldwide total. 

Banks are using blockchain technology to improve the efficiency of clearing and settlement, as is the case with The Bank of New York Mellon, where backup records of treasury bond settlements are recorded in the BDS360 platform. Other institutions are exploring the potential benefits of using the technology for their payments and financing systems which has the potential to replace the Dickensian paper-based system and enable verification of clientele and counterparties, and facilitate syndicated loans. 

Financial services are also on the cusp of change, where decentralized public networks can bridge legacy financial systems with blockchain technology to help alleviate performance problems and ease capital flow. Where low-latency and high-volume processing is often considered a particular challenge with public blockchains, permissioned blockchain systems have been engineered to facilitate hundreds of thousands of transactions at peak performance.

For example, a consortium consisting of JPMorgan Chase, Royal Bank of Canada, and Australia and New Zealand Banking Group have joined forces to create the cross-border payments service Interbank Information Network (IIN), which is able to efficiently scale in response to compliance and other data-related inquiries that delay payments. 

It is no surprise that some of the building blocks that initially made blockchain so intriguing to the capital markets are finding their way downstream to retail banks and the broader financial services industry.

Digital banking solutions provider Q2 is using ALTR’s blockchain-derived Data Security as a Service technology as a technical enhancement to its multilayered data management and protection system that controls access, provides immutable reporting, and protects data assets where they are stored. Similarly, ING Group, a Dutch multinational banking firm, has tested a Zero-Knowledge Range Proof (ZKRP) solution, developed in-house, to protect confidentiality of customer information.

These organizations have, in part, turned to blockchain because human presence within complex data networks inherently creates privacy and governance vulnerabilities. Javelin Strategy & Research noted in a recent report on cybersecurity trends that “retail banks will increasingly view privacy as more than just a regulatory hurdle.” As a result, providing for safe and compliant storage and accessibility of sensitive information has become even more critical to instilling trust throughout the banking and lending experience.

Blockchain’s technological qualities solve myriad problems, many of which help it function in the context of cryptocurrency, and therefore may or may not translate to other applications. However, the main problem blockchain solves is the ability to take something digital and preserve it by using an uneditable consensus-driven data structure—that essence opens up many other uses where trust is essential.

While some reputational baggage remains, like other technologies before it, blockchain applications across key industries and use cases, including banking and finance, data security and regulatory compliance, has outgrown its early incarnation.