Blockchain Pros and Cons

Blockchain is undoubtedly one of the most talked-about technologies in financial services today. There has been a lot of coverage by technology media recently about it as an emerging solution for a new generation of transactional and archiving applications that establish trust, accountability and transparency, while streamlining business processes. Governments, businesses and banks have all been paying attention and are even allocating resources and investment to better understand and develop what sounds like the data structural holy grail of the future.

The Commonwealth Club of California event held earlier this year, in San Francisco, Federal Reserve chair Janet Yellen discussed a variety of economic issues and nancial solutions expected to lead the US economy in coming years. Among the many topics that were brought up, Yellen emphasised the importance of blockchain and hinted that the Fed may be exploring the potential of the technology.

What is blockchain/distributed ledger technology (dlt)?

Blockchain is a web-based distributed ledger of all transactions/datasets that have ever been executed. It is constantly growing as ‘completed’ blocks are added to the blockchain in a linear, chronological order, with a new set of recordings/entries. It allows participants in a business network to see the system of record.

Distributed ledger technology (DLT) makes it easier to create cost-ef cient business networks where virtually anything of value can be tracked and traded, without requiring a central point of control. A blockchain’s integrity hinges on strong cryptography with emphasis on verifying any new information being added. Once information is added to the distributed ledger, it can no longer be changed – which is why it’s called ‘blockchain’.

This emerging technology is showing great promise across a broad range of business applications, for example, blockchain allows securities to be settled in minutes instead of days. It can also be used to help companies manage the flow of goods and related payments, or enable manufacturers to share production logs with regulators to reduce product recalls.
The blockchain is seen as the main technological innovation of Bitcoin (an evolving cryptocurrency), since it stands as proof of all the transactions on the network.

How could financial institutions use this technology to manage risks?

We are in an era of rapidly evolving technologies where people quickly change their jobs, locations and business services – and criminals, terrorists, money launderers and underworld organisations are constantly on the lookout for new techniques to conceal their identity or source of funds.

Anti-money laundering (AML) and know-your-customer (KYC) processes have become a mandatory requirement for many banks, insurers and other nancial institutions. Unfortunately, the current standard process becomes increasingly costly and complex as technology and regulations evolve – and it’s not even satisfying functional requirements for the business and regulatory authorities.
According to World Bank estimates, the volume of global money laundering is between US$2tn and US$3.5tn annually and only 1% of it is actually detected, according to third-party data. The total annual AML compliance cost borne by the banking sector is around US$18bn, which also includes regulatory penalties of around US$8bn.

Currently, most banks have to independently verify the identity of each customer, sometimes resulting in duplication if the process was undertaken recently by another bank for the same individual. This
is due to the lack of mutualisation between different banks in this process.
Here is where the need arose for a web-based tool that facilitates the implementation of a KYC process which allows participants to efficiently use existing relationships and essential data to create a secure ‘trust network’, without revealing sensitive data – and increasing effciency through automation.

Blockchain technologies can help financial institutions (FIs) in reducing duplication of KYC procedures by providing a secure, distributed and mutually agreed database of client information. This can help to bring down KYC costs dramatically by pooling resources of different financial institutions and reducing the number of manual steps required during the onboarding process for new clients.
The idea is to utilise shared repositories and common processes to offer permitted access to the shared ledger, which not only contains information and identity details about individuals and businesses, but also provides a platform to link transactions, thereby enabling more efficient transaction monitoring, AML investigation, trade surveillance, operational risk and anti-fraud case management.
In theory, blockchain technology enables FIs independent of one another to rely on the same shared, secure and auditable source of information in a way that fits well with a system of widespread digital identity.
The World Economic Forum estimates at least 24 countries are currently investing in blockchain technology, filing more than 2,500 patents and investing US$1.4bn.

It also predicts 80% of global banks will be initiating blockchain projects by the mid of 2018.

Many banks and financial institutions are rapidly adopting blockchain applications, faster than initially expected according to two recent IBM studies. Obviously, from a bank’s perspective, blockchain would be a huge cost-cutter, both in terms of having immediate access to relevant documents in a reliable and easy manner and not having to chase up customers for various bits and pieces during onboarding and customer due diligence remediation. Also, accounts can be opened more quickly, leading to a smoother and faster customer experience and eventually to quicker revenue generation.
So, we know that blockchain is moving forward as a real technology. But how much of this is already realised versus what still needs to be sorted out?
What are the most important benefits and challenges associated With the implementation of blockchain technology?

Disintermediation and trustless exchange

One of the greatest gains of blockchain/DLT stems from its ability to instil trust between two transacting parties without third-party intermediation. Said simply, two parties are able to make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk, which will lead to removing friction and creating efficiency in all types of value exchange.


Due to the decentralised networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks. Distributed ledgers are significantly more durable than today’s centralised systems and better able to withstand anything from malicious network attacks to power outages.
Decentralisation technology paves the way for aggregation and analysis of large pools of data across institutions, as well as verification and validity of data points. That’s what makes blockchain data complete, consistent, timely, accurate and widely available.

Reliability and immutability

A well-distributed blockchain with a high level of redundancy can be considered highly reliable because the failure of any particular node or group of nodes does not compromise the blockchain’s transaction/ data exchange processing capabilities. Put simply, because the data and information contained within a well-distributed blockchain is available for access from hundreds or thousands of nodes, that makes it practically immutable – they cannot be altered or deleted. Changes to blockchains are viewable by all parties allowing for greater transparency. This is crucial for many FIs’ applications enabled by blockchain technology, such as payments protocols, securities settlement networks, AML/CTF investigations and financial intelligence units.

Ecosystem simplification

Blockchain enables asset provenance and full transaction history to be established within a single source of truth; it reduces the clutter and complications of multiple ledgers and systems, which eventually will reduce fraud.
▪️Lower operational costs
As previously elaborated, by eliminating infrastructure investments, third-party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce KYC, AML and transaction-processing costs.

Uncertain regulatory status

Regulators would need to enforce certain standards and rules around blockchain for FIs to follow, such as KYC and AML rules. Eventually, institutions would become responsible for complying with and reporting on a multitude of regulatory requirements. These activities may be executed internally by a functional area within the organisation, or via a third party (offshore). Regulating digital identities and cross-border standards is considered a major challenge in the application of blockchain technology. For example, data sharing restrictions have always been created and regulated by national governments in specific jurisdictions and regulators may need to decide who would get access to the blockchain and manage its maintenance. To sum up, blockchain would face a hurdle in widespread adoption by pre-existing financial institutions if its government regulation status remains uncertain.

Control, security, privacy

While solutions exist, including private or permissioned blockchains and strong encryption, there are still cyber security and verification process concerns that need to be addressed before FIs entrust their customer’s data to a blockchain solution. Institutions will have to perform extensive research to ensure that any blockchain they
implement is at least as resilient as their current infrastructure against attack.

Uncertain transparency

While DLT can help facilitate transparency from a technological perspective, it would not resolve all questions about transparency in all FI types from a policy perspective.
The Financial Industry Regulatory Authority (FINRA), which regulates all securities firms doing business in the US, has highlighted the potential issues surrounding the technology in a recent paper entitled Implications of Blockchain. It suggests the actual desired level of transparency will depend on factors unrelated to the use of DLT, such as the need to safeguard personally identifiable information (PII) and trade strategies.

Integration and culture concerns

Blockchain applications offer solutions that require significant changes to, or complete replacement of, existing tools and systems. In order to make the switch, companies must strategise the transition. Blockchain represents a complete shift to a decentralised network, which requires the buy-in of its users and operators.


Obviously, blockchain offers tremendous savings in operation/transaction costs and time, but the high initial capital costs could be a deterrent. Blockchain/DLT technology has been around since 2008, but some banks have struggled to determine whether blockchain technology could be a cost-cutting solution or a costly distraction.
For example, blockchains could speed up financial transactions, but faster isn’t always more profitable for each bank/FI. Given the high cost of building a blockchain system, any proposed use must have a positive return on invested capital.

According to a recent IBM survey, the main challenges faced by the financial industry are regulatory constraints, immature technology and a lack of clear return on investment. From my perspective, despite there being some disadvantages and gaps requiring closure, I believe the fast-developing blockchain ecosystem is quickly addressing these gaps to drive further blockchain adoption and deployment.
If a shared blockchain was to work like an interoperable industry utility, banks/FIs would need to share the cost of building the infrastructure. So far, 30 of the world’s biggest banks have joined a consortium to build blockchain solutions. The majority of banks are still in the testing phase, figuring out how to apply blockchain to their risk management, products and services, and how to use new types of digital interactions.
This technology has the potential to live-up to the hype and reshape financial services operations and risk management, but requires careful collaboration with other emerging technologies, regulators, incumbents and additional stakeholders to be successful. This early collaboration will allow the industry to “reap the benefits of the technology, while ensuring protection of investors and maintenance of market integrity”, says FINRA.
DLT should not be seen as a panacea; instead it should be viewed as one of many technologies that will form the foundation of next-generation compliance and financial services infrastructure.