Pub. 8 2017 Issue 3

www.wvbankers.org 16 West Virginia Banker Blockchain Technology Continues to be a Focus for Financial Institutions By Nicholas P. Mooney II, Spillman Thomas & Battle I n a prior issue, we discussed how blockchain technolo- gy is poised to change the way various industries work. Many have theorized this technology is a game-changer that threatens to usher in a new way of conducting business worldwide. Those industries have continued to invest in blockchain technology at an ever-increasing rate. Banks and other financial institutions have not been left out of this as several have joined large consortiums that aim to study and implement this technology. Before discussing those recent efforts, it is important to review what the term "blockchain" means. Broadly speaking, the concept of blockchain technology came into common knowledge with Bitcoin. In 2008, a person or persons using the name Satoshi Nakamoto published a white paper sug- gesting the creation of a digital currency (Bitcoin) that could be traded among individuals. One of the key features of this currency is that it did not rely on trust in a third party, such as a government or a bank. Rather, it could be used as a means of exchange among individuals without an intermediary (so- called "peer-to-peer"). Instead of using a bank to guarantee the currency a person claims to possess, the paper suggest- ed that a person's currency could be confirmed by a public ledger that is kept on computers worldwide and updated in near real-time. The ledger would keep track of transactions by grouping them into blocks as they are completed. Individ- uals compete to locate the most recent block of transactions. That block then is attached to the most current prior block, eventually creating a chain of transactions. This chain of trans- actions is called the blockchain. Since that time, several other digital coins have arisen, some with their own blockchains with variations on the original functionality. Although commentators have continued to refer to blockchain technology as a potential threat to traditional industries, an interesting thing has happened. The industries that many thought would be damaged or replaced by block- chain technology have embraced it. A recent survey of 1,500 financial services executives from 578 firms worldwide revealed that 91% of those executives believed that blockchain technology and its implementation will be critical to their institution's future. However, those executives admitted that they are confronted with "signifi- cant uncertainty" about how to implement this technology. That uncertainty is not limited to bank executives. The World Economic Forum recently summarized blockchain technolo- gy as "[n]ever have so many people sought so much from a technology understood by so few." The financial executives in the survey confirmed that their institutions are in various stages of addressing and resolving that uncertainty. Ninety percent of those executives disclosed that they have identified or are working to identify process- es that can be automated by this technology. Nearly half of those executives (48%) disclosed that their firms have a strat- egy in place on the use of this technology. Those strategies are aimed at resolving some of the financial industry's most challenging issues. Forty-seven percent of the executives identified "improved data management" as an area where blockchain technology could provide significant improve- ment. Other areas were transparency (46%), risk management (40%), and speed of digitization (39%). So, how are banks planning to use this technology? Bank of America (BoA) gives an example. For several years, it has been active in filing patent applications related to blockchain technology and cryptocurrencies. Since 2014, it has submit- ted 20 such patent applications. Because of the delay in mak- ing public some of the information on patent applications, it is difficult to get an up-to-date picture of the way it intends to use this technology. However, applications filed have shed light on some of its plans recently. One application filed last year shows that BoA is seeking a way to use blockchain technology to track and validate user information. It plans to record information about a user in real-time such as where and when a user banks. That infor- mation then will be timestamped and stored in a blockchain such that it is instantly available across the entire bank