Banks Need To Calm Down About Blockchain

Blockchain, the technology behind Bitcoin’s public ledger, is one of the hottest topics in fintech, and one of the technology’s biggest fans are banks.

“You see these banks that really get excited about blockchain and fintech,” says Zennon Kapron, the founder of Kapronasia, a research and consulting firm that focuses on Asia’s financial industry.

“At some point over the next year, banks are going to wake up and realize that blockchain is a great, sexy technology for a problem that doesn’t exist,” he says.

At TechCrunch Shanghai on Monday, Mr. Kapron and Bobby Lee, the founder of BTCC, one of China’s first bitcoin exchanges, discussed the future of Bitcoin and blockchain technology. According to a report by KPMG and CB Insights,  venture capital investments in Bitcoin and blockchain-related startups rose from $3 million in 2011 to $474 million in 2015. Though blockchain technology was originally developed for Bitcoin, the technology is applicable to other assets as well, from diamonds to stocks.

For banks, blockchain technology has the potential to speed up transaction times, minimize fraud, boost security and transparency, and slash costs. It’s also less risky than adopting a cryptocurrency and betting on the value of Bitcoin. However, so far, blockchain technology has not been widely adopted outside of Bitcoin.

“For there to be a good and suitable blockchain for companies, banks, [and] financial institutions to use, there has to be a very good blockchain that is immutable, global, open source, [and] public,” says Mr. Lee. “Today, there is only one such ledger – it’s called the Bitcoin blockchain.”

One of the core strengths of blockchain technology is the distributed and decentralized nature of its record-keeping. A blockchain is made up of a network of computers or “blocks”, each containing a copy of the whole ledger. Thus, safeguarding against unscrupulous attempts to rewrite or alter parts of the ledger depends on how large and distributed the blockchain is. For banks or startups that want to create smaller or private blockchains, many of the benefits of the technology could be lost.

“A lot of the things that blockchain was designed to solve, those aren’t benefits of these smaller, private blockchains,” says Mr. Kapron. “If you have five banks using one blockchain…how secure is that blockchain? How much do you trust those other players that are there?”

The enthusiasm behind blockchain technology from financial institutions is part of a rising interest in fintech in general, as banks grapple with disruptive fintech startups in mobile payments, P2P lending, and more. Many banks, such as Standard Chartered, have taken the approach of partnering or investing in fintech startups, many of which target financial institutions as their customers and clients, not necessarily their competitors.

However, financial regulations and policies will shape and can make-or-break the future of many fintech applications, such as Bitcoin. At the end of 2013, the Chinese government cracked down on Bitcoin, prohibiting banks and payment companies from dealing with the cryptocurrency. Still, the regulations left room for optimism as individuals were still allowed to sell and and buy Bitcoins. As regulations around blockchain continue to develop, how banks and startups will implement blockchain for their own purposes remains to be seen.