TORONTO – The virtual currency Bitcoin has earned a reputation as a plaything for libertarians or a tool used to covertly buy drugs on the Internet.
But more recently the technology underlying the currency — referred to as “blockchain” or “distributed ledger” technology — is being touted as the next big thing poised to transform the financial services industry.
In order to prevent themselves from being blindsided, Canadian banks are jumping on board, exploring ways the technology can help streamline their processes.
“I do think blockchain is a massive opportunity,” Linda Mantia, executive vice-president of digital, payments and cards at Royal Bank (TSX:RY), said during a panel discussion on financial disruption in Toronto late last year.
“The banks are playing a huge role in shaping what’s going to happen with blockchain,” she added.
Blockchain technology works by maintaining a shared ledger containing the details of every transaction and distributed through a network of participating computers.
In essence, it provides a faster, cheaper and more secure way to transfer money by cutting out the middle man.
Although Bitcoin was first perceived as a disruptive threat to the banks, creating the opportunity for customers to transfer money between each other directly, the technology that underpins it now promises to improve the banking experience in a number of areas, including cross-border transactions.
Currently, when a customer wants to wire money to another bank, it’s a tedious, costly and time consuming process that typically requires a visit to a bank branch to fill out a lengthy paper form.
“It’s a huge pain,” says Ryan Connors, chief technical officer of Kitchener, Ont.,-based Green Brick Labs, a cryptocurrency startup.
“I’m a pretty smart guy and I mess up my bank transfers 50 per cent of the time. It is not user friendly whatsoever.”
Connors says adopting blockchain technology could allow banks to transact directly between one another, saving on the fees they pay to companies like SWIFT that verify cross-border transactions. For customers, that could mean faster and cheaper cross-border transactions from the comfort of their homes.
However, that kind of application could be years away.
Blockchain technology is still in its infancy and widespread adoption by the world’s financial services institution would be necessary to replace the status quo, according to Matthew Spoke, strategy and execution lead at Rubix, a blockchain software platform launched by professional services firm Deloitte.
For the time being, banks are studying ways that the technology could help them streamline their own internal processes — something that could reduce headaches for clients and amount to massive cost savings for the institutions.
“Right now there are a lot of manual processes going on in finance; literally a lot of paper and phone calls,” says Anthony Di lorio, founder and CEO of Decentral, a Toronto-based company that is consulting some of the banks on how they can make us of blockchain.
“This technology has the potential to automate a lot of their systems.”
Some Canadian banks are experimenting with how blockchain could be used to administer loyalty programs or internal employee rewards systems in order to test-drive the technology, according to experts.
South of the border, the Nasdaq stock exchange made headlines last year when it used a distributed ledger to transfer shares to a private investor, removing the need for a clearing house.
But the potential applications of blockchain go beyond finance, promising to transform everything from how personal medical records are kept to how government agencies verify your identity.
“We’re looking very closely at the concept of digital identities and creating your persona in a way that you can track attributes of your identity and share those attributes with third-party organizations as you need to,” says Spoke.
“That’s one of the most powerful use cases.”