Blockchain seems to be the buzz word everyone is using at the moment when it comes to payment processing, but there are still some individuals experts in the payments industry that are yet to really understand or take note of what Blockchain really is.
To put it into simple terms, Blockchain technology is an information/communication protocol that when used in the banking and payments space, will act as one large distributed accounting platform/ledger for all the banks that choose to tie into it.
The information from the banks that have tied into it will be shared amongst themselves, where when a payment is made from Bank A to a beneficiary at Bank B, the accounts that the payment is dispersed from and received to have their ledgers updated and one is debited and the other is credited almost instantly. This change is reflected across all the banks or financial institutions that share the distributed ledger, and removes the need for a central clearing house. As each of the transactions (both debit and credit) are evaluated and verified against the ledger, If there is a mismatch between the transactions, then the transaction does not take place.
I won't delve into the boring details about the number of "Blocks" required, the data they hold, and that each transaction or transactions held in a "Block" are linked to another block by a "Chain", and that each of these blocks are given an ID that includes a checksum that links them to their preceding "Block", ensuring that there is no mismatch of data. But if you are an IT, networks or programming expert or just a payments enthusiast and you want to understand the nitty gritty of it all, there are a number of sites where you can find that information on the web.
Now you are probably wondering "Why haven't banks thought of this sooner?" and "Why isn't this technology already available?"
In order to answer those questions, you firstly need to understand the history of Blockchain. Blockchain technology was initially implemented in the original source code of Bitcoin that was published back in 2009. At the time, the main purpose of Bitcoin was to remove the need for banks and financial institution intermediaries and give anonymity to its users and their currency transfers. As all the transactions on the blockchain were regulated by its users, there was no overarching ownership of the blockchain technology and hence transactions costed virtually nil to process. As the popularity of Bitcoin grew and other cryptocurrencies entered the market, their legality was decided (in some countries) and only in recent years has the spotlight been taken off the cryptocurrencies, and put onto the technology that operates them.
Of course with any new technology, especially of that in the finance industry, regulation of the blockchain network needs to be in place, and functionality, security, as well as ROI for the implementation and testing needs to be taken into consideration before it can be rolled out.
In some countries, banks have begun implementing the technology with live testing already taking place. In other countries, banks are still in the learning phase of the technology, and finally, there are still some countries and banks working on their own domestic payments platform with Blockchain technology not currently at the front of mind.
The next question I hear you ask is, "Is Blockchain technology secure?"
If financial institutions are looking to implement Blockchain technology as part of their payment processing channels it needs to be secure. Thankfully the use of Blockchain technology in the cryptocurrency space has acted as a live test environment for banks and developers to learn from. Initially thought to be unhackable, there have been attempts over the years, with one recently netting almost $60million, but not to worry, Blockchain can be set up with permission-less access (open to use for everyone) or private access (restricted), and in the case of banks, I'm sure the private path is what is being worked on to ensure that hacking and fraud is kept at bay.
At the World Economic Forum in February this year, Herman Gref the president of Russia's largest bank - Sberbank, stated that "In the world of information technology we have had five revolutions: the invention of computers, the creation of personal computers, the Internet, social networks and blockchain"*.
And that finally brings me to the title of my article. The BCOT (The Blockchain Of Things). We have seen the emergence of the IOT (The Internet Of Things), with physical devices being able to collect and exchange data, but with blockchain technology becoming more and more popular, not only will we see its uses booming in the payments space, but also in the use of moving and storing contracts, titles, deeds and music amongst other things.
Are you ready for the BCOT?
*(Translated from Russian)
Meet the Author
George Solomos is a passionate cards and payments specialist. His experience throughout his career has seen him manage and structure the in-house treasury and payments processes for some of the largest companies in Australia and globally.
Currently working as a private consultant, George assists start-ups and existing businesses with services ranging from establishing and streamlining payments processes, though to the most complex requirements of centralised treasury and cash management procedures.
If you have any cards or payments related queries, you can message George via LinkedIn