Sometimes people ask BNY Chief Information Officer Suresh Kumar if blockchain is a friend or foe. “Why would I think of that as a foe?” Kumar told the magazine Fast Company in June. “It’s another piece of technology that could help us and our clients and remove friction from the system.”
Blockchain is the technology underlying bitcoin, the most popular form of cryptocurrency, a digital, encrypted currency that isn’t tied to a central bank. Blockchain is the public ledger for all bitcoin transactions, and each block on the blockchain represents a transaction. These transactions are irreversible.
Organizations, including banks, see potential for blockchain technology to revolutionize many areas of the financial industry and beyond, including securities trading, payments, fraud prevention and regulatory compliance. “We think blockchain can be transformative,” said BNY Mellon CEO Gerald Hassell, in the company’s first quarter 2016 earnings call. “We’re spending a lot of time and energy on it, but I think it’s going to take some time to see it play out in a full, meaningful way. We actually see ourselves as one of the major participants in using the technology to improve the efficiency of our operations and the resiliency of our operations.”
Saket Sharma, BNY Mellon’s chief information officer of treasury services, chairs a virtual team at the bank that includes all lines of the bank’s business. The team meets monthly, with the goal to foster understanding regarding how blockchain could impact each area of the organization. Meanwhile, BNY Mellon’s innovation center actively works with the technology. “We need to constantly be in touch with it, because technology’s evolving so rapidly,” he says.
BNY Mellon created an internal currency, called “BKoins,” to understand how blockchain technology could impact the bank. “We thought it would be good to do something purely internally, and learn about the technology,” says Sharma.
BKoin doesn’t have real value, but by working with it, the technology team now understands how the blockchain is generated, and from there is learning how it could transform different business lines, as well as the organization as a whole. It was widely reported last year that the cryptocurrency would be used as an internal rewards program, where employees could exchange BKoins for gift cards and perks. While the bank doesn’t rule out those possibilities for the future, Sharma says that this isn’t how BKoin is currently used and, aside from that, was never the goal. The goal is to educate BNY Mellon’s technology team and business lines about blockchain’s possibilities, and create a conversation about the technology’s potential for the organization. The approach has resulted in a significant increase in knowledge about blockchain at BNY Mellon in the span of just a few months, he says.
BNY Mellon isn’t the only bank using its own internal cryptocurrency to test blockchain’s potential. Citigroup and Japan’s Bank of Tokyo-Mitsubishi UFJ are also experimenting with proprietary digital currencies.
In addition to internal trials, BNY Mellon is also a member of a consortium of more than 40 global banks, including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp., which is led by the financial innovation firm R3 in New York. Following a smaller test in January, 40 banks, including BNY Mellon, successfully traded fixed income assets in March using blockchains built by IBM, Intel and startup firms Chain, Eris Industries and Ethereum.
How blockchain will impact the banking industry is unclear for now. But the potential benefits are promising: Efficiency gains created through the technology could save the industry $20 billion annually by 2022, according to a joint paper released by Santander Innoventures, the consulting firm Oliver Wyman and London-based advisory firm Anthemis Group.
But the blockchain probably isn’t ready for primetime yet. In June, a hack resulted in the theft of almost 4 million “ether,” a cryptocurrency housed on the Ethereum blockchain, from the Decentralized Autonomous Organization (DAO), a crowdfunded venture capital firm. At the time, the stolen “ether” was valued at $79.6 million. After the discovery, the value of the cryptocurrency plunged precipitously. Bitcoin’s value stumbled as well.
Two days after the DAO incident, Ethereum creator Vitalik Buterin wrote: “There will be further bugs, and we will learn further lessons; there will not be a single magic technology that solves everything.”
Banks are less comfortable with the inevitable failures that come along with experimentation, but BNY Mellon and other global banks will continue to cautiously experiment, combining internal experiments with peer collaboration. “We’re going to have to work together with our industry peers to really drive [blockchain innovation],” says Sharma.