Blockchain for mainstream banking

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This article first appeared in The Edge Financial Daily, on January 3, 2017.


Since the first part of this article was published recently, there have been requests to make this subject even less technical. So, in this second part, I will lay out how important it is for a bank to take blockchain seriously.


Ransomware and Bitcoin

The proof of the concept of blockchain technology has taken on a life of its own with crooks using ransomware to lock up servers and demanding payment via Bitcoin to release such servers. The anonymity of Bitcoin is driving central banks and investigators crazy. I am sure they will eventually find a way to jam up this payment option for unscrupulous and devious crooks on the Internet. Do not be alarmed that local big companies have been victims as well and they have quickly learnt what Bitcoin really is first-hand.


Considerations for using blockchain

For a bank to seriously consider blockchain technology, one has to know, understand and appreciate a number of factors. It is really a challenging idea where the technology is pushing the bank rather than the bank demanding the technology.

With the emergence of new ways of serving customers in the banking industry, financial technology (fintech) is starting to give banks a shiver because of a lack of knowledge in how fintech may impact their business. This is serious stuff and not a fad for a bank to dabble in.

Here are a few points to consider prior to adopting any firm move into blockchain:

  • It has been tested in real situations;
  • Central banks have taken a keen interest in its possibility;
  • Other banks are taking a serious view;
  • There are vendors who are in the market directly you can engage with; and
  • How serious and prepared banks are on this matter.


Bitcoin has come a long way

The generally accepted speculation is that Bitcoin was started in 2009 by an anonymous person or group, and has grown broadly in use. Numerous alternatives have been created over the years to prove different things, but Bitcoin is the household name to date.

We know this technology works well, and we are aware of its pros and cons. Where Bitcoin excels is that it can furnish digital ledgers that work in a peer-to-peer concept and many people trust its transaction functions.

Bitcoin does have some challenges to overcome. Its Proof-of-Work scheme is key to making Bitcoin accepted, yet it furnishes some serious negatives. It continues to implement rules where one can capitalise on the system to take advantage to make a lot of value. Others have introduced Proof-of-Stake in some variations to help enhance the use of blockchain technology.

But more importantly is the integrity and balance of digital ledgers that are kept in check by a community of miners who are mutually distrusting each other. This scheme helps ensure strict accuracy of ledgers and blocks. Any found tampered with is instantly detached from the chain. At the same time, members of the public with their wallets help the integrity by timestamping transactions and adding to the ledgers. These consensus mechanisms have been deployed for many years now and have stood the test of time.


Central banks’ interest

In an Oct 16, 2016 report in The New York Times, US Federal Reserve governor Lael Brainard was noted to have expressed “close attention to distributed ledger technology, or blockchain, recognising this may represent the most significant development in many years in payments, clearing and settlement”.

The same report also noted that the central banks of England and China were keenly discussing the possibility of their national currencies being mapped onto some form of distributed ledgers using blockchain technology and cryptography, so that these consensus mechanisms can provide a way to confirm the transactions that happened at each specific time.

It is indeed strange to note that the arrival of Bitcoin and the likes were to create an independent currency mechanism apart from central bank controls. However, today, central banks are keen to explore how the adoption of blockchain technology can help make the financial system more transparent, fast, efficient, and secure and track every piece of hard currency (such as the British pound and yuan) travelling through the financial system in real time. This is virtually impossible at the moment.

Here in Malaysia, Bank Negara Malaysia (BNM) implemented a fintech regulatory sandbox which took effect in October 2016. BNM recognises the potential of new methods and technology that are emerging so rapidly, and is encouraging local banks to explore and experiment without fear.

With central banks having interests in the blockchain game, we have better confidence in this matter.


Banks showing interest

Malaysian banks tend to be slow in adopting new technology. We are really risk-adverse when it comes to considering bleeding-edge technology and rightly so. However, blockchain technology is no longer bleeding-edge, but more cutting-edge. It was a technology developed to give credibility and confidence in a new technology-based financial system, while attempting to be independent of any central control of any government or bank.

Many leading banks are venturing into blockchain:

  • Japan’s Bank of Tokyo-Mitsubishi UFJ (MUFG) is developing its own digital currency nicknamed “MUFG coins”;
  • South Korea’s KB Kookmin Bank has announced its development of a blockchain solution for international remittances which may eliminate intermediary services of international SWIFT bank transfers;
  • Singapore’s DBS Bank and Standard Chartered have formed a partnership to create a distributed ledger project for trade finance;
  • Japan’s SBI Sumishin Net Bank has announced that it is developing a proof-of-concept aimed at exploring blockchain-based banking services in conjunction with Nomura Research Institute (NRI), the research arm of Nomura Holdings. Under the agreement, Dragonfly Fintech Pte Ltd will provide NRI with its blockchain technology (NEM), a set of practical tools under a framework called the Automated Clearing and Electronic Settlement initiative; and
  • The People’s Bank of China, the country’s central bank, has suggested that it is considering the launch of its own digital currency, which may or may not use blockchain technology.


It is clear that the global push towards serious exploration with the intention to deploy blockchain has begun. Malaysian banks now have an opportunity to join the bandwagon or play catch-up yet again.


Vendors for blockchain technology in Malaysia

For a Malaysian bank to consider moving ahead with plans to explore blockchain technology, there ought to be direct presence of vendors who actually own the technology and have the ability to tweak and customise it for the bank’s requirements.

A quick scan of players in the Malaysian market notes a few big and small players which have made themselves available. Traditional players like IBM and Microsoft are actively bridging their advisory presence from Singapore. So is R3, a start-up with a regional base in Singapore, traversing the region from its regional headquarters. Perhaps the only player that is making some presence directly in Malaysia is Dragonfly Fintech, providing NEM building blocks.

There are not many players with sufficient knowledgeable consultants in town to work closely with the banks. Each vendor has its own strengths and weaknesses, and banks must know them and work around them to push forward the banks’ agenda.

Perhaps it is wise to remain open and work with more than one partner to explore, so that one needs not place its entire aspiration in one vendor.


Banks’ readiness and seriousness

Malaysian banks must be clear that blockchain technology is no longer a hype and a pipe dream. It is not bleeding-edge where a lot of time and investment are required. Blockchain has come of age to be seriously considered as a next-generation solution to complement current technology investments, and a possible replacement of some of the existing banking solutions.

Banks must be clear of their commitments to venture into this area, especially in a climate of market softness and uncertainty in 2017. At a time when expenses are trimmed and the outflow of funds is closely tracked, banks must have a clear mandate from the top to proceed. It will come in the form of some of the following:

  • The chief executive oficer (CEO) or the board’s clear mandate;
  • A sponsor executive reporting to the CEO or the board on progress;
  • A budget or ease of budget approval for this track; and
  • A key team comprising products, marketing, human resources and technology.


It would be most appropriate to provide a sort of high-powered strategic team to look into this matter with the free hand of operating within clear boundaries and the BNM’s fintech regulatory sandbox.

Egagement with selected vendors and Proof-of-Concept trials will require funds and shared responsibilities between both parties.

Finally, a clear definition of what constitutes success in the exploration must be identified and agreed with the CEO and/or the board. Ultimately, this work will have a direct impact on a bank’s ability to be agile, strategic and fast in moving forward to the next generation of banking.

Ng Kien Lock ([email protected]) is an IT industry veteran on the lookout for technology to be leveraged for business pragmatism.