Blockchain Technology and Modern Banking Systems
The blockchain’s ability to tokenise assets, ie creating digital representations of physical and financial assets, promises enhanced transparency, increased liquidity and operational efficiencies.
The shift towards a blockchain-centric financial industry is accelerating, with the tokenised market capitalisation expected to reach around US$2bn by 2030. Notable adopters, like JPMorgan and BlackRock, leverage blockchain for applications ranging from digital identity verification to trade finance, signalling a robust future for blockchain in banking.
BlackRock CEO, Larry Fink, said earlier this year: “We believe the next step going forward will be the tokenisation of financial assets, and that means every stock, every bond […] will be on one general ledger.”
According to a recent McKinsey & Company report. ‘Tokenised financial assets: Moving from pilot to scale’, tokenisation has reached a tipping point, setting the stage for at-scale implementations that promise enhanced liquidity, operational efficiencies and new avenues for revenue generation.
What blockchain platform or technology do banks utilise, and why?
Dr. Scott Zoldi, Chief Analytics Officer at FICO, says: “Some of the most exciting new uses of blockchain are utilising permissioned and private blockchains, such as Hyperledger Fabric, which allows for controlled access, transaction visibility and simpler consensus models.
“These private blockchains balance control, access and scalability concerns compared to traditional public blockchains. Banks focus on the right level of access, consensus and protections while balancing the costs and benefits of using blockchain technology,” Zoldi adds.
Nick Jones, Founder and CEO of Zumo, observes the varied adoption of blockchain platforms among banks. “Different banks are using different platforms for a growing range of use cases as their interest in the technology grows,” he notes.
HSBC has also implemented a blockchain-based trade finance platform to digitise and streamline operations, specifically using the R3 blockchain platform. The R3 Corda platform, designed for the financial services industry, facilitates the secure sharing of trade documents like letters of credit and invoices.
“Other banks are now focusing on how they can leverage blockchain technology to help their customers safely explore the possibilities that crypto opens up,” Jones adds.
Barry O'Sullivan, Head of Banking and Infrastructure at Openpayd, points to the discreet yet growing interest in blockchain within the banking sector.
“We know that banks are partnering with providers like Ripple to speed up cross-border transactions via blockchain tech and we know the likes of JP Morgan have created their own (Onyx) for tokenising assets,” he says.
“But behind closed doors, there is less discussion about the specific blockchain technology/platform than the approach. Some will build, some will buy, some will partner.”
There is a broad potential for blockchain technology within banks, noting that its applications extend far beyond payments, involving multiple departments in discussions.
The R3 and Hyperledger platforms are favoured in the financial sector due to their alignment with security, interoperability and regulatory needs.
However, these permissioned architectures also face criticism for compromising some inherent blockchain benefits, such as censorship resistance and resilience under pressure. In response to these challenges, IBM (Hyperledger's owner), has collaborated with The BSV Association for years to develop a scalable public blockchain.
How can the integration of blockchain technology impact the bank's transaction processing times and costs?
Nick, believes firmly in the transformative potential of blockchain technology in banking.
"Blockchain’s capacity to enable real-time processing and maintain immutable transaction records helps banks to shorten transaction turnaround times whilst also reducing the manpower – and therefore costs – required," he asserts.
A recent study by Juniper Research estimates that financial institutions making cross-border payments could save $10 by 2030 thanks to blockchain settlements. Similarly, a recent study by Uniswap suggests that cross-border and FX payment fees could be reduced by up to 80% when traded on-chain.
Kurt Wuckert Jr, Chief Bitcoin Historian at CoinGeek highlights the efficiency gains offered by blockchain technology: “Blockchain can significantly streamline transaction processing times and reduce costs by eliminating intermediaries and enhancing transparency. Traditional banking transactions often involve multiple intermediaries, resulting in delays and high costs.
“Blockchain’s distributed ledger allows for real-time settlement of transactions, reducing processing time from days to seconds. Additionally, the reduction in intermediary involvement translates to lower transaction fees. However, the existing financial infrastructure remains deeply entrenched.”
Integrating blockchain technology will help banks to slash processing times and costs. Moving money via traditional rails can take three to five days.
Dr Scott Zoldi says: “Transaction charges are typically high compared to blockchain approaches.
“More than that, the cost of getting a transaction wrong on traditional rails is extremely high – there are major problems with traceability. Once the misplaced transaction has been traced, banks face multiple FX charges and correspondent banking fees to recover it.
“In contrast, if banks are moving value via a digital asset, it’s instant and the costs are significantly lower, not least because there is no correspondent banking infrastructure to navigate.”
The advantages of blockchain, from cost savings to operational efficiency, are becoming increasingly clear to financial institutions.
What measures can be implemented to ensure the security and privacy of data on a blockchain network?
Ensuring the security and privacy of data on blockchain networks remains a top priority for financial institutions. All data stored on a blockchain is encrypted, making it secure and protected from unauthorised access.
"Only those who have the appropriate permissions – or keys – can access the data. Whilst the data is encrypted, the transactions themselves are transparent and immutable," explains Nick.
Dr Scott Zoldi, notes that private blockchains with stringent access management protocols are often used to safeguard data assets. "Public blockchain is often not the right solution due to the sensitive nature of different types of transactions that banks will want to persist. There needs to be a focus on what is persisted.
“Regular audits of smart contracts are also essential for maintaining network integrity. These audits help identify and rectify vulnerabilities, and there is a growing trend towards using ISO certification in apps and contracts, although its application remains limited. Multi-signature authentication, requiring multiple keys for transaction authorisation, prevents single points of failure, adding an extra layer of protection against unauthorised transactions.”
The BSV Association is exploring innovative solutions like Network Access Rules (NAR). This involves a non-profit association sharing a legal contract with nodes on the network, providing a clear framework for addressing crimes such as theft or accidental asset burning, like when a user accidentally "burns" their private keys.
Barry emphasises the importance of these measures in banking. "Ensuring security and privacy on a blockchain network is paramount, especially in banking. Encryption and cryptographic algorithms are essential to protect data from unauthorised access and tampering.
“Banks can implement multi-signature transactions, requiring multiple parties to approve a transaction before it is executed, adding an extra layer of security. Additionally, zero-knowledge proofs allow banks to validate transactions and identities without revealing sensitive information.
“Lastly, implementing zero-knowledge proofs can significantly enhance privacy. This technique allows for transaction verification without revealing sensitive data, ensuring that the integrity of transactions is maintained without compromising user privacy.”
How does blockchain technology integrate with existing IT infrastructure and legacy systems?
“Zumo's innovative approach to integrating digital assets into traditional banking systems leverages APIs to simplify the process.” As Nick Jones explains, its Crypto Invest solution offers a digital asset custody and exchange service that can be seamlessly incorporated into a bank's existing IT infrastructure.
“This provides consumer-facing retail banks with a compliance-focused route to offer their customers the option to invest in digital assets,” says Nick. By doing so, banks can generate new revenue streams, enabling customers to buy, hold and sell crypto within the familiar confines of their own banking platform.
Recognising the regulatory and operational challenges faced by banks, Nick Jones believes in developing a sustainable and long-term approach, with a focus on delivering the necessary infrastructure. For banks to confidently integrate digital asset propositions into their business models, they must address the financial, operational and environmental sustainability of the project.
Similarly, Kurt Wuckert highlights the feasibility of a hybrid approach for banks, where blockchain solutions are introduced gradually alongside existing systems. APIs can facilitate communication between blockchain platforms and legacy systems, allowing for data exchange and process automation without necessitating a complete system overhaul.
Kurt Wuckert notes that middleware solutions can serve as intermediaries, bridging the gap between new blockchain applications and traditional IT frameworks. However, seamless integration demands thorough testing, employee training and an openness to adopting new workflows. This phased approach ensures that banks can modernise their operations while maintaining stability and compliance.
Can you describe any pilot projects or use cases within a bank that highlight the successful application of blockchain technology?
Nick Jones highlights the significant impact of blockchain technology in the sustainability sector: "Our recent research with the Crypto Carbon Ratings Institute (CCRI) revealed that, as of March 2024, the annualised carbon footprint of all physically-backed Bitcoin fund products stood at 4487.93 kilotonnes of carbon dioxide (ktCO2).
"The annualised carbon footprint of the US Exchange-Traded Fund (ETF) cohort that went live in January 2024, following approval by the US Securities and Exchange Commission (SEC), was 2056.86 ktCO2. This new cohort captured nearly half (45.8%) of the market share for physically-backed Bitcoin funds within just a few months."
With the acceptance of crypto fund products by the London Stock Exchange (LSE) and the Hong Kong Securities and Futures Commission (SFC), Jones anticipates rapid growth in this sector.
Jones emphasises the importance of addressing environmental responsibilities: “Banks must address this issue in line with growing investor sentiment and new regulations, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which requires companies to report Scope 3 emissions. It can’t simply be ignored."
Dr. Scott Zoldi identifies another critical application of blockchain technology in supporting AI model development and operational use. “By defining responsible AI standards and framework, blockchain can codify the absolute requirements needed to meet regulatory standards and release the AI model/system.
“This ensures that no AI is released unless all requirements and regulatory standards are satisfactorily met, providing an immutable history of AI development and decisions for future use in production."
Kurt highlights notable pilot projects demonstrating blockchain's potential in financial services.
"JPMorgan's Interbank Information Network (IIN), built on Quorum, an enterprise-focused version of Ethereum, aims to address interbank information sharing challenges by providing a secure, efficient platform for cross-border payments, he says. “Over 300 banks have joined the network, highlighting its potential to revolutionise interbank transactions by reducing delays and operational costs.
"Santander's use of Ripple's blockchain technology for international payments is another example. Santander's One Pay FX platform leverages Ripple’s blockchain to provide same-day international transfers with enhanced transparency and lower fees compared to traditional methods."
These case studies underscore the substantial promise of blockchain technology in transforming financial services, enhancing efficiency and reducing costs, despite the broader blockchain economy's speculative and volatile nature.
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