Banking Blockchain: Making Virtual Currencies a Reality for Your Bank

blockchain-10-17-17.pngBlockchain-based virtual currencies are gaining in popularity and evolving quickly. Blockchain currencies often are described as disruptive, but also have the potential to radically revolutionize the banking industry in a positive manner. The reality is that blockchain currencies may develop into a useful tool for banks. Their acceptance, however, is hindered by their own innovative nature as regulators attempt to keep pace with the technological developments. Potential blockchain currency users struggle to understand their utility. Despite these hurdles, many banks are embracing opportunities to further develop blockchain currencies to make them work for their customers.

What Are Virtual Currencies and Blockchain?
Virtual currencies, also referred to as “digital currencies,” are generally described as a digital, unregulated form of money accepted by a community of users. Currently, blockchain currencies are not centrally regulated in the United States. For example, the federal government’s Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission view blockchain currencies as money, the Commodities Futures Trading Commission sees them as a commodity, and the Internal Revenue Service calls them property. The IRS has attempted to define virtual currency as:

a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value [and] does not have legal tender status in any jurisdiction.

FinCEN, the agency with the most developed guidance regarding virtual currency, regards it in a more practical fashion as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. Whatever the regulatory definition, virtual currencies need more certainty in form and function before their use becomes commonplace.

Blockchain technology brings benefits to payment systems and other transactions that are quite revolutionary. Blockchain technology is essentially a decentralized virtual ledger (aka, distributed ledger), utilizing a comprehensive set of algorithms that records virtual currencies chronologically and publicly.

Some examples of blockchain currencies currently in use are Bitcoin, Dash, Ether, Litecoin and Ripple. These currencies are constantly evolving and are being developed by individuals, technology-based peer groups or financial institutions. In August 2016, a consortium of banks, led by UBS, Deutsche Bank, Santander and BNY Mellon, announced the development of the “utility settlement coin” or USC. The USC is meant to allow banks to transact payments in real time without the use of an intermediary. It is expected to go live in 2018.

Blockchain Currency Opportunities for Banks
Despite their reputation for being tools of illicit trade, blockchain currencies may be useful to banks in a variety of ways and can achieve certain benefits. Blockchain currencies could:

  • actually reduce fraud, including hacking or theft attempts, because the technology makes every step of the blockchain transparent.
  • reduce costs and risks associated with know-your-customer (KYC) programs because blockchain has the ability to store KYC information.
  • allow a financial institution to establish a new trading platform for exchange that eliminates intermediaries.
  • potentially could transform the payments industry. An obvious example is the USC, which permits payments to be made in real time, without the use of intermediaries; and strengthens the confidence in the authenticity of the transaction. Banks that are either able to establish a blockchain currency or adapt a proven technology for their operations will generate operational efficiencies and obtain a significant competitive advantage.

What Are the Regulatory Challenges?
Blockchain currencies currently are not centrally regulated in the United States. As discussed above, the lack of a uniform definition is a fundamental issue. FinCEN has classified any person or entity involved in the transfer of blockchain currencies as a money transmitter under money services business regulations.

As blockchain currencies continue to evolve, however, additional federal laws and regulations must be drafted to address the most substantial areas of risk. Some states are weighing in on the topic as well. For example, the Illinois Department of Financial and Professional Regulation recently issued guidance on the use of virtual currency in which the Department views virtual currency through the lens of the Illinois’ Transmitters of Money Act.

Additionally, the Uniform Law Commission is developing regulations that would, among other things, create a statutory structure (for each state that adopts it) to regulate the use of virtual currency in consumer and business transactions. Regardless whether the federal government or the states enact legislation affecting blockchain currencies, a more uniform regulatory approach would greatly aid their development and utility.

Blockchain currencies, and the laws and regulations governing them, are in a promising state of development. As new technologies emerge and existing technologies continue to evolve, banks are presented with real opportunities for innovation by successfully adapting blockchain for use by their customers. Those that figure it out are poised for real success.

Blockchain Information Series: It’s All About the Block


FinXTech Advisor, Christa Steele, has created a four part series to educate our community about how blockchain is changing the transaction of digital information, its implications and the players who are shaping this technology. Below is Part One of this series.

Part Two
Part Three
Part Four

I started researching blockchain in the fall of 2015 and became intrigued by the new digital currency called bitcoin. My attention quickly turned to how bitcoin was produced and the ways in which its underlying technology, the blockchain, was being explored in the financial sector. Early use cases were focused on international payments, foreign exchange, bond issuances, clearing and settlement processes. My intrigue has since broadened far beyond that of just the financial sector.

By way of background, I am not a programmer or developer. If you ask my friends and family they will tell you that I often struggle to properly use my (supposedly) universal remote control! My view of blockchain is from the practical application standpoint of how this technology can be integrated. Businesses today, whether you are a financial institution, manufacturer or a packaged goods provider, must be data driven and place business intelligence at the center of operations. There is a lot of low hanging fruit that can be picked from the proverbial fruit tree by utilizing blockchain technology—specifically, efficiency gains, cost saves, reduction in errors and redundancies, improved collection and storage of data without compromising good corporate governance.

For example, today in the financial industry, it is not uncommon for a stock trade to take two to three days to settle, or for bank loan trades to take in excess of 20 days to settle. Think about the amount of manual processes, double and triple entries being conducted today by multiple employees. Using blockchain technology, the average trade takes less than 10 minutes while at the same time effectively mitigating settlement, counterparty and systemic risk. Morgan Stanley Research group estimates the cost savings of using blockchain technology for trade settlements could save the industry in excess of $20 billion.

Who started it all?
First, let’s take a trip back in time and think about 1993. Were you a little reluctant to give up your old reliable friend, the fax machine, for e-mail? In addition to e-mail, we all became exposed to the worldwide web, .coms, social media and more sophisticated mobile phones, to name just a few communication advancements.

For the next several years, security and privacy became increasingly important as cybercrime grew to become a serious threat, and also when cryptography began to take center stage.

In 2008, Satoshi Nakamoto created the first peer-to-peer electronic cash system called bitcoin. Initially, it was all about currency and the ability to securely transact by eliminating all middlemen, costs and complexity of transactions. This was done through a shared ledger and network, cryptographically, using mathematical algorithms to confirm transactions and entities.

Though there are many passionate enthusiasts forging ahead with digital currency, it’s important to understand that this development will take time. It is unlikely we will see a conversion of all U.S. currency in our lifetime. Today, this would require the production of 21 billion bitcoin to replace all existing U.S. currency. However, it is realistic to assume some form(s) of digital currency will prevail at some point in the future.

What is it?
A software that enables data sharing across a network of computers.


Today we are centralized. Blockchain offers a decentralized and distributed system through shared software infrastructure and trust. Users agree to a software protocol that describe the rules for the type, quality and transferability of data in addition to the rules for authorization, verification and permutation.

How does it work?

Let’s simplify this very technical description of how blockchain works by remembering that a blockchain can be likened to an assembly line in an auto manufacturing plant in which each block represents a component of the car, or in this case, computers transferring blocks of records in a distributed ledger. The end product, the car, is the bitcoin or token used to record and transfer the asset.

If you want to learn more, Don Tapscott’s book “Blockchain Revolution” is a great and easy read. You can also visit Kahn Academy online for more bitcoin and blockchain tutorials.