Blockchain has the potential for enhancing the security of financial transactions, but there are also wide ranging issues to be addressed, particularly for regulated institutions like credit unions.
Originally an element of bitcoin, this emerging technology is a distributed, peer-to-peer database that maintains a continuously growing necklace of transaction records, thus creating a solid wall against fraud and abuse.
A blockchain includes two types of records, transactions and “blocks” – transactions include the actual data, such as credit card information stored in the blockchain, and the blocks act as sort of time stamp confirming exactly when and in what sequence transactions have occurred. As new blocks are added like a necklace, the blockchain continues to grow in a linear, chronological fashion, yielding a complete, historically accurate database of all transactions.
Need for More Study
Blockchain is not a perfect technology and these points of imperfection must be studied in depth to determine if they could cause operational disruption for credit unions.
Both CO-OP and TMG see value in blockchain technology and the transparency and security it can offer to the credit union industry. However, it is also the position of the two companies that, given the complexity of the systems and environments in which credit unions operate, the integration architecture of blockchain could be a major stumbling block for wide-scale adoption.
Tim Sloane, Vice President, Payments Innovation at Mercator, wrote in a recent paper that “R3 CEV, a 45-bank consortium formed to implement blockchain solutions, has decided that blockchain technology is not capable of addressing the complex use cases associated with regulated entities. This revelation should cause others to take a large step back from evaluating technology and instead invest time in determining and understanding the business problem to be solved or perhaps the value chain participants the solution is likely to displace.”
“Knowing other industries see value in blockchain, they are likely to forge ahead with developing and implementing systems to support the technology, said Shazia Manus, CEO, TMG, as the two companies announced their co-sponsorship. “Those industries that are successful in developing and implementing systems where data integrity and secure exchange of information remain unbroken will most likely pave a path for the financial services sector.”
The first of the Mercator studies is scheduled to be completed by late summer, in time for credit unions to use during their 2017 budget planning processes. Both CO-OP and TMG will be sharing the resulting white paper with their respective clients.
Some Stumbling Blocks to be Overcome
The technology offers or will offer several use cases that can utilize Blockchain as its foundation, both inside and outside the financial services arena. Still, there are indeed stumbling blocks, as the two companies maintain.
Blockchain is vulnerable to a “51 percent attack,” in which a single entity performs the majority of the mining hash rate (measuring unit of the network’s processing power). The entity, as a result, gains complete control of the network and has the capability to manipulate the Blockchain.
In addition, there are idiosyncrasies in the scalability of blockchain that confront the user with an ongoing “pick two” decision from among processing speed, trust and proof of work.
The normal throughput of a blockchain network is seven transactions per second and each block takes about 10 minutes to process a transaction. However, if a user chooses to speed up the process and trust the veracity of the block data, then the all-important proof of work could be undermined. On the other hand, if the decision is to maintain the sanctity of the proof of work, coupled with process speed, then that could lower the level of trust. And, finally, if the user goes for trust and proof of work, then speed could be diminished.
Use cases for blockchain involve are more than just technology – they involve business rules that are not easy to adapt to the business ecosystem of a credit union, as CO-OP and TMG are advising. The system needs 100 percent uptime, a century of data and trust for a use case of contracts, mortgages, payments, escrows, securities, bonds and so forth and so on. These solutions have to be transitioned into a digital infrastructure at a cost that makes ROI a distant proposition.
At its best, blockchain is about trust and sharing between diverse end-users. With credit unions working together, blockchain may be a solution. But, as Tim Sloane of Mercator indicated earlier, regulatory issues present key questions to be resolved in its usefulness to credit unions.
About the Author
Terrence Griffin is Chief Information Officer of
CO-OP Financial Services, a financial technology provider to credit unions based in Rancho Cucamonga, Calif. He can be reached at email@example.com or (866) 812-2872.