The New Banking Standard

Martin Hagelstrom is a bitcoin enthusiast, project executive and consultant working on IT projects at IBM.

In this op-ed, Hagelstrom touches on the slow but steady embrace of blockchain by the world's banks.

A few months ago I was writing a research paper centered on this question: Is there a use case for private blockchains?

I'll be honest, I started writing it with my conclusions already on mind. I was totally biased.

My thoughts were basically that private blockchains (and the lack of PoW) couldn't offer more security than a distributed database. And at the same time they were pretty limited and based on a much more immature technology.

So, why on earth a bank or any organization would use a private blockchain instead of a well known and proven technology?

Simple answer: fad.

Nevertheless, I did my homework and research into a variety of areas: private blockchain approaches, alternative consensus mechanisms, the economics behind bitcoin security, financial industry pain points, and the inefficiencies on the actual system. I even made a SWOT analysis to compare blockchains and distributed databases.

And then something happened. You should enjoy this, as you won't hear this often from a guy from Argentina.

I was wrong.

First, I was focusing on the wrong kind of problems a blockchain should solve for banks. The possibility of modifying a past record might not be a bug for a bank but a feature. Sure, it should not be easy, but probably neither completely tamper-proof depending on the circumstances.

If they can have a shared ledger to transact between several institutions without the inefficiencies of intermediaries, manual processing and system integration complexity, they will sign up right away. Even if the system is not completely tamper proof, as long as it can be audited, it might be good enough for their purposes.

But why a blockchain?

But I know what you are thinking. They can also do that with a database without the limitations of a blockchain.

And it's true, but I was missing a huge point in this regard. Limitations might be a good thing.

Imagine to seat 30 banks on the same table with a blank page to design the data model of their shared database. Consider that they would all have to change their actual custom developed, 30 year-old core systems, and that alone would cost millions of dollars, if not more.

So you guessed right – they would all try to propose the less impactful design for their organisation and that discussion would likely last for long periods of time, potentially to the point than an agreement is never struck.

But Blockchain limitations and the threat of bitcoin achieved what felt like an impossible task. Banks are moving to agree on a standard: the blockchain standard.

Of course, there are still lots flavors and types of applications to choose from, but for the first time in a very long time we have most of the banks at the same table with a half-done blueprint in front of them.

It remains to be seen if this will lead to a new kind of banking network, or an "Internet of Banks" as has been proposed.

Will this new network totally disrupt the current financial system? Of course not. But to be fair, we shouldn't expect disruption from the actual market leaders. That's someone else's job. The fintech and bitcoin startup ecosystem needs to work hard to become the Uber of the financial system.

But, in the meantime, if banks can derive some efficiencies from disintermediation, their customers will likely see some benefit as well.

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