9 Major Banks Form Partnership Embracing Blockchain, the Technology Behind Bitcoin
By Burt Carey
Bitcoin’s besmirched reputation might never allow virtual coinage to replace dollars, Euros, yuan and other currencies around the world, but the technology used to run the cryptocurrency world just grew some serious legs.
It’s called blockchain, and if you haven’t heard of it, you will – soon. Nine major banks have announced a partnership to implement blockchain as a means of recording and tracking financial transactions.
In its simplest form, blockchain is a database, albeit one that records transactions and then stores them in blocks that cannot be changed or tampered with. Blockchain is the software developed to empower and regulate cryptocurrency, or bitcoin. Currently it records bitcoin transactions between users. Once all parties involved in a transaction agree on terms and that payment has been made, a record of the transfer is stored in a “block”; blocks are added as needed and linked chronologically.
Think of it as adding links to a chain, with the chain getting longer and longer as time elapses. The older links are forever locked in place, and in the world of blockchain, their content cannot be changed. The database becomes a virtual ledger that is shared by users.
This is the kind of stuff quantum computation experts and tech nerds drool over at night. And now teams at prestigious banks will be piecing together a prototype system, and developing industry standards and protocols that could change the way banks operate. Eight of the nine banks within the partnership have been identified: Barclays, J.P. Morgan Chase & Co., UBS, Credit Suisse, BBVA, Commonwealth Bank of Australia, State Street Corp., and the Royal Bank of Scotland. Reports earlier this week indicated that Goldman Sachs Group is the ninth bank but its participation could not be confirmed.
The banks have signed with R3, a months-old startup with offices in London and New York. R3’s CEO is David Rutter, a Wall Street veteran and former CEO of ICAP Electronic Brokering. “The lightbulb went off that distributed ledger technology could be to finance what the internet was to media,” Rutter told Business Insider.
While bitcoin may have never graduated beyond the basement steps in the financial world’s eyes, bankers are now betting that blockchain will rewrite and simplify dozens of processes, says Rutter, “everything from issuance, to clearing and settlement and smart contracts, where the code is the contract, and it saves on back-office costs.”
Mike Gault, founder and CEO of Guardtime, says blockchain is “a powerful and widely misunderstood invention that could profoundly affect our relationship with the digital world. For most people, the concept of blockchain is intrinsically tied to the digital currency bitcoin — a fairly complicated and highly controversial system,” Gault said. “But here’s the thing: The blockchain itself is shockingly uncontroversial. Regardless of his or her opinion on the future of bitcoin, nearly everyone agrees that its most fundamental innovation has worked flawlessly. It allows total strangers to hold and exchange digital money in a completely transparent way — without having to trust each other or any central authority.”
Banks aren’t the only institutions looking to score big with blockchain. The NASDAQ stock exchange is reportedly working with Chain, a San Francisco company that builds blockchain programs which allow stock transactions to be settled in milliseconds instead of the traditional three to five business days. Result? Faster transactions equal increased liquidity.
Other companies are developing blockchain for secure online identities, which could become a precursor to voting via smartphone, and as a means for small businesses to record contracts. Experts are predicting that within a year or two blockchain will become a significant part of life in the 21st century.
Photo: BTC Keychain