The revolution that Blockchain brought to the financial system
Many banks have seen the potential and are testing this blockchain “magic” in their research laboratories and development areas.
A few years ago, in my last year of high school, I remember in Accounting class, we spent most of the last quarter doing the final paper that consisted in recording the accounting entries in the “ledger.” That involved working in a very organized way, because every time we finished a book sheet, we needed to “transfer” the balances to the next page and if any mistakes were made on previous pages, it was replicated on all subsequent pages. The only way to solve it was to erase and rewrite all balances from the error page to the end.
It has been a while since Bitcoin appeared on the cover of the newspapers as one of the agents of change of the global financial system. But it took some time before the discussion about what was behind Bitcoin and how it represents a far greater revolution; this revolution impacts not only the financial system but also any field that can benefit from the decentralized and secure management of information. We are talking about Blockchain, which has the potential to generate a new revolution in the information age.
One minor but important detail I have not mentioned before about that final accounting paper is since we all had to translate exactly the same accounting entries, the teacher perfectly knew the balances that should be in the “ledger.” They were the same both for mine and my classmate’s books. They all should have the exact same information. Then let’s imagine a hypothetical situation.
What if all our books magically acted as one? What if we divided the accounting entries among the class so each person wrote only the entries they got? How about if every time a classmate finished writing an entry it was automatically replicated in the rest of the books thanks to the same magic? What if these “magic” books had the ability to prevent any modification of the previously written entries? How about if one of the books was accidentally burned and this was irrelevant, since the remainder contain the exact same information?
This collaborative way of doing the final paper by writing in the books in a distributed way (which work as only one book) would have been much more efficient, saving time and effort.
Blockchain is the technology that actually makes this “magic” come true. By definition, a Blockchain (or a chain of blocks) is a distributed and decentralized database, a set of nodes or databases (ledgers) that store the information in blocks, replicating them, and functioning as a single source. One of its main features is that the stored information cannot be changed. Therefore, one can rely on the content of any of the nodes. But how does this “magic” happen? Thanks to a set of encryption processes and mathematical models that ensures the inviolability of information, the blocks are “chained,” encrypted in a way that if someone tries to corrupt the blocks, the entire chain is invalid and replaced by the previous valid chain. This is because the Blockchain has a series of rules that generates consensus among the nodes to validate the information. However, the most relevant aspect of this revolution is that the need to have a unique, decentralized database that is unmistakably managed by some institution, body, or company, disappears.
Back to the revolution from blockchain, I was always fascinated by the concept shown in the book “Blockchain: la revolución industrial de internet (Blockchain: the industrial revolution of the internet”) by Alexander Preukschat (Coordinator): “The eruption of the internet of information has radically changed our lives. […] Other things may happen with the Internet of Value, an expression that defines the next step in the natural evolution of the network and that was only possible after the discovery of blockchain technology. Thanks to it, this new internet concept allows to share value (such as titles, records, certifications, files or music) in a digital and decentralized way, without the need for a central trust entity imposing their criteria on participants. This capability is what transforms blockchain technology into something so passionate and that could revolutionize the way we understand the world. So much that, those industries and business that do not adapt to the changes will end up collapsing.”
It may sound like fiction, but there are many banks that have seen the potential and are testing this “magic” in their research laboratories and development areas. In fact, some pioneers have real cases of success using this technology. An example is BBVA, who ran a pilot project last year to make international transfers between accounts in Spain and in Mexico, and also started granting loans this year using Blockchain. Santander Bank, launched its One Pay FX service to carry out immediate international transfers between accounts in Spain, the UK, the US and Brazil, and last March also tested Blockchain to record the votes of its annual shareholders’ meeting and recently launched the We.Trade platform to boost business between companies. Another case is the HSBC Bank that recently used Blockchain for an international trade operation. In Spain, Tarjeta Naranja also announced last month they will start granting credits under the Blockchain platform.
Partnerships have been established between companies (including different industries), which are working together because they understand that in the future the transformation will be in the interconnection. This is the case of Alastria, a Spanish consortium initially founded by companies with the same importance as Santander, BBVA, Telefónica, Repsol, Endesa and everis, which today has almost 170 members in the network.
Not surprising is the BCRA (Central Bank of Argentina) has posted on their blog a note exclusively dedicated to Blockchain and openly mentioned the formation, within the Innovation Bureau, of a working group dedicated to this technology. The BCRA is also proving to be one of the transformation drivers within the sector, by introducing regulations aimed at increasing bankarization and financial inclusion. Some of the most relevant initiatives that are worth mentioning are associated with the development of Fintechs, the payment with QR codes, the growth of digital accounts, the granting of licenses to open digital banks and recently, the creation of the UVC (uniform virtual code), which will allow transfers between banks and fintechs. In addition, the Ministry of Labor recently opened the door to the possibility of paying salaries through a virtual platform instead of a bank account.
With these new possibilities coupled with the potential of Blockchain, it is exciting to imagine the possibility of a decentralized network between banks, small, medium and large companies, public agencies and fintechs, which allows sharing and exchanging value in a consensual and secure way. You just need to dream of doing operations through a Blockchain network in which all the nodes are agreeing, for example, if the operation was performed or not. Each entity will have its copy of the “ledger” and you can trust the information therein contained. This would lead to a reduction of execution and validation time, and error reprocessing, consolidation, and compensation costs.
In the near future, customers and end users will not know that behind the web and mobile channels there is a Blockchain platform. They will not be able to see or touch it, but what they will certainly experience is a different user experience with fewer delays and mistakes.
This is just the beginning; the potential is huge and the possibilities are countless. The digital transformation does not stop, it accelerates. Evidence of this is that Hashgraph is being discussed as an evolution of Blockchain.
