How Clouds are Creating Blockchain Opportunities for Banks

Marek Moszynski

blockchain-banking

As far as disruptive technologies go, distributed ledger technology is at the top of the list of those that are rocking the financial services sector today and will potentially affect how companies transact in the future. The adoption of distributed ledger has grown immensely since first being introduced simply as crypto-currency via Bitcoin in 2009. Although there are nearly 700 crypto-currencies trading on the market today, distributed ledgers are now being used for smart contracts, proof of ownership, voting system and other decentralized use cases.

To ensure the legitimacy and security of each transaction using distributed ledger technology, a shared public ledger, or transaction record called the “blockchain,” is kept. Blockchain records and verifies all transactions across a public network of distributed participants in a chain that is open and visible to all.

This may sound like a high-risk proposition, not to mention a huge threat to the way financial institutions have always conducted business but Goldman Sachs estimates the potential benefit of the financial services industry streamlining achieved by blockchain technology is worth as much as $12 billion in global cost savings per year. As a result of this growing confidence in blockchain, in Q1 2016 the industry saw a 385% increase in venture funding for cyber-currency startups, including many corporate investors such as Google, Cisco, Goldman Sachs and VISA.

Blockchain’s benefits to financial institutions are many and include:

  • Providing essential financial transaction services more efficiently and securely, and at less cost than current tools.
  • Replacing large numbers of proprietary, centralized databases with a smaller number of secure, decentralized records of transactions (a “distributed ledger”).
  • Transferring money with digital currency without a high risk of falsification, and managing trustworthy identity authentication for individuals and physical assets.
  • Reducing financial transaction settlements from days to minutes. Blockchain enables near real-time settlement models for most types of financial transactions, which could eliminate counterparty risk, free up capital and radically reduce transaction costs.

The last benefit reduces the total cost of clearing and settling trades by an astounding $65 billion to $80 billion per year, according to Oliver Wyman. In fact, UBS (Swiss Bank), along with Deutsche Bank, Santander, BNY Mellon and broker ICAP, is developing a cyber-currency competitor to Bitcoin, the Utility Settlement Coin (USC) for just this purpose. USC is a digital cash equivalent of each of the major currencies backed by central banks, such as the dollar or euro, rather than a decentralized new digital currency such as Bitcoin. Due to launch in early 2018, USC would settle trade transactions in seconds rather than days, reducing risk and operational costs.

The Scalability Hurdle

As brilliant as the founders of Bitcoin were in creating a decentralized cryptocurrency using blockchains, Bitcoin has scalability issues with respect to throughput and cost. In Part 3 of a six-part video series created by TechCrunch called “Trust Disrupted,” industry experts in cryptocurrency and distributed ledger technology examine these issues. Said Nathaniel Popper, narrator of the video series, “As time has gone on, I think it has become clear that if this system [Bitcoin] is going to expand, it can’t be everything to everyone; it has to choose what it wants to be.”

The scalability limits include limitations on the number of transactions per second and the amount of data that can be processed through the system. However, the compute power to validate each transaction progressively costs more in real money. These scalability issues are a showstopper for Bitcoin as a settlement currency for the financial services industry, which is why there are so many other cryptocurrency initiatives jointly underway by financial institutions and cloud service providers (CSPs). Other instantiations of blockchain, such as Ripple, have implemented different methods to overcome the scalability problem in how they approach consensus around whether a transaction is valid, and methods to keep the ledger small. Scalability is one of the biggest reasons why blockchain has resonated more in the world of electronic trading settlement than in the global, noncash, electronic payments market, with approximately 1.06 billion transactions per day, as estimated by CapGemini/RBS.

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In Comes the Cloud

To overcome these scalability hurdles and harness the potential opportunities within the blockchain technology, there are a number of initiatives from both major banks and CSPs to create secure and scalable private blockchain environments. Examples include:

  • R3/Microsoft Azure Partnership – R3 is a consortium of more than 40 banks worldwide working to design and apply distributed ledger technologies to global financial markets. Through the agreement between R3 and Microsoft, the R3 banks will have open access to Microsoft Azure and 45 cloud-based tools on its Azure platform, as well as dedicated Microsoft staff and resources. According to R3 CEO David Rutter, “The partnership between Microsoft and R3 will scale the use of distributed ledger technology in a way that will change the entire financial services industry.”
  • Hyperledger/IBM – In early 2016, IBM launched an open-source blockchain (Hyperledger Project) with the support of the Linux Foundation and financial incumbents, including JP Morgan, the London Stock Exchange and Wells Fargo, as well as technology companies, including Cisco and Intel. IBM has made its code available to the Hyperledger Project to help developers easily build secure and scalable distributed blockchain ledgers that can be used to exchange almost anything of value, making blockchain-based services faster, more scalable and easier to use. This past August, IBM announced its framework for securely operating a blockchain network, as well as new services on its cloud platform as a service, Bluemix. IBM’s code submission to the Hyperledger Project is also available on Docker Hub, a cloud-based registry service for building and shipping application or service containers.
  • Digital Currency Group/AWS – Amazon Web Services (AWS) is partnering with investment firm Digital Currency Group (DCG) to offer a cloud-based blockchain experimentation environment for enterprises. New York City-based DCG is one of the biggest investors in blockchain firms to provide such a service so its portfolio of more than 70 blockchain providers across more than 20 countries can work in a secure and scalable cloud environment.

How an Interconnected Financial Services and Cloud Ecosystem Can Help

Global financial services companies and CSPs require an open and secure colocation and interconnection platform upon which cloud-based blockchain services can be developed, tested and deployed. The platform needs to include a secure and scalable Interconnection Oriented Architecture™ that enables direct and private access to multiple cloud providers (such as AWS, Azure and IBM SoftLayer), a choice of peering networks and a growing ecosystem of financial institutions.

By reading “The Home of the Interconnected Cloud: Where Service Providers and Enterprises Meet to Grow and Innovate Together,” you can learn more about how secure and scalable interconnected cloud services can help financial institutions and other enterprises turn potential business threats into real growth opportunities.

Marek Moszynski
Marek Moszynski Principal Global Solutions Architect at Equinix