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Cybersecurity meets blockchains

Blockchain can be solution to many currency and banking challenges—eventually

Jason Leinwand blogs regularly on foreign currency issues and related subjects for Banking Exchange. Jason Leinwand blogs regularly on foreign currency issues and related subjects for Banking Exchange.

As the worlds of online banking and trading, cybercrime, and blockchain intersect, the banking sector needs to heed the warnings about blockchain in its current state.

An open distributed ledger will not be valuable to a bank without security. Most current distributed ledger technologies provide limited security. That is the reason there are multiple levels of verification to trade cryptocurrencies and why large holders of cryptocurrencies hold them on an external hard drive/vault or wallet.

How do we secure ourselves?

Blockchain is still in its infancy from an advanced technology perspective. However, we all know the tech world moves fast, so it won’t be long before we see blockchain-developed solutions across retail, investment banking, and even farming. The ability to share data across a distributed ledger, without the requirement of going through a central repository (a bank) will move all these industries to a whole new level of efficiency.

First, however, we need those ledgers to be secure. There are currently companies out there working on such solutions, from small startups to large tech firms. Before the end of this year we will see them go live with viable market solutions. It is too early to know who will emerge as the leader in the space, but demand is there to drive a solution.

Other factors to consider

As a foreign currency consultant, I continue to explore solutions that could be found in blockchain for the banking sector. These include added operational efficiency for trade settlements and KYC processes (know your customer). Some solutions will address the most basic of retail banking needs, moving cash from one person to another in different currencies.

KYC represents a massive undertaking. This ranges from incorporating all the basic requirements of a customer opening a savings account to institutional clients establishing documents and term sheets for trading, margins criteria, and collateral requirements. Blockchain-based solutions could reduce the time from start to finish from months to weeks—or even days.

Having dealt with these issues personally and from an institutional perspective, I know firsthand the headaches—and the importance of finding solutions.

It is important to realize that over the next few years we will see a complete transformation in the global market, similar to how electronic currency trading tightened spreads, increased the speed of trading, and reduced trade errors.

Why should banks and corporations care?

All banks are under pressure every day to reduce cost and streamline processes. The strain on a bank’s legal and compliance teams that need to focus on new client onboarding documentation can be measured in months, not days. Spending six months working on onboarding a new client may make both parties question the need for the relationship in the first place.

For a bank, the value of a secure environment where standardized documents can be stored and distributed, and where the documents of a client or prospective client can be stored, validated, and distributed, will be invaluable.

A distributed ledger solution will allow for this for financial institutions and for the corporations that do business with them. The ability to reduce the time spent by legal teams will allow them to focus on matters more vital to the running of their businesses.

Beyond security, what else is lacking?

Equally important for a bank is scale and bandwidth. If a bank can only publish a limited number of customer transactions across a ledger per second, then it lacks efficiency and will never be used. Blockchain technology will only be fully utilized when it can run at the speed of the cloud, like Amazon Web Services.

Blockchain technology has to allow for the financial markets to publish and store tens of thousands of pieces of data per second, not 10s. Marry the two and the banking world will be a better place. Add in a layer of security to block out cybercrime and reduce unwanted peering eyes and it will be a marriage made in heaven—or, rather, in the cloud.

Jason Leinwand

Jason Leinwand is the founder and CEO of FirstLine FX, a foreign currency advisory firm. He has nearly 30 years of experience as a trader and global markets strategist in the currency markets. FirstLine FX was founded with the express purpose of providing independent, strategic advice on the foreign exchange markets. Prior to founding FirstLine, Jason held various senior positons in the FX markets including nine years as head of FX for MetLife. He can be reached at [email protected]

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