There is a fresh wind blowing through the world of financial services, through government and through any public and private sector body that needs to handle high volumes of sensitive, transactional data where trust and accuracy is paramount.

The Blockchain distributed ledger is the core of the Bitcoin crypto currency, but its applications stretch far beyond authenticating Bitcoin transactions and currency ownership. It is a ground-breaking digital technology with the potential to change the way we conduct banking and commerce, reduce administration time and cost and improve the level of trust, accuracy and resilience of everything from banking transactions to land sales. It is the most sweeping departure from the longstanding financial bookkeeping practices followed since the codification of the Medicis’ double entry accounting system.

Blockchain takes the form of a distributed database, hardened against tampering, against which anyone can verify the validity of transactions. In the case of Bitcoin, the need to maintain currency stability serves as an incentive to encourage network’s owners (the bitcoin miners) to keep the ledger up-to date. However, the same applies with share trades, bond auctions or any other transaction-based action.

Each transaction produces a 64 character hash which a user combines with a previous hash to build a block. The blocks are added in a linear, chronological order, with each block containing a hash drawing or one-time-use character string referring to the previous block. The system is designed to make transactions tamperproof.

Despite the potential for Blockchain to be a hugely disruptive force in the banking and wider business world, the UK’s Financial Conduct Authority (FCA) has so far backed off proposing any hard and fast legislation. While the notion of new financial technology not being throttled by heavy-handed regulation is a good thing, it leaves questions unanswered over how Blockchain and transactions will be managed at a compliance level in the future.

How it will be accepted and managed is important from a financial industry perspective. Blockchain promises a massive disruption to the world of back office systems and ledgers. As such, it raises the need for new rules or guidelines to be developed for banks and auditors. The financial services sector will need to demonstrate that adequate controls are in place to mitigate risks to the wider financial system from Blockchain misuse.

Blockchain, if implemented industry-wide, could slash as much as $20 billion of costs from financial sector transactions by eliminating complex processes and systems from payments and settlement systems.

However, there is a lack of consensus on which standards and particular revision of blockchain to adopt. There is a split between two approaches; private blockchains such as R3 and DAH – known as permissible ledgers – that exploit trusted networks and open-ended blockchains such as Etherium that are closely aligned to the original design principles of Bitcoin.

The Great and the Good

Blockchain has got the attention of the financial world’s was most palpable. Late last year, 22 of the world’s leading banks including Goldman Sachs, Morgan Stanley and Credit Suisse joined a group to design and apply distributed ledger technologies to global financial markets. Royal Bank of Scotland is also working on a blockchain-based proof-of-concept, made using Ripple technology. Meanwhile, Deloitte is studying blockchain systems for auditing, reconciliation and other functions. It has partnered with an Australian digital currency trade group to develop new accounting guidelines. This proactive step to try and create a blueprint for best practice could prove very important in the future when regulation catches up with the technology.

A recent report by Wedbush Securities estimated that 20 per cent of US GDP, which comes to roughly $3.6 trillion, is generated by industries that could be disrupted by blockchain technology.

Banks are not the only businesses that are looking at blockchain. The technology and its perceived benefits have garnered interest from stock markets. Chain — a start-up funded by Citi Ventures, Visa and Nasdaq — is working on a product that will allow trading of stocks on a new kind of blockchain. It aims to replace paper share certificates, cutting the time which spent administering the certificate and share register process.

Use cases are also developing in markets where unified clearing and settlement infrastructure is inefficient or non-existent. Using blockchain technology to automate debt servicing, insurance, factoring and other time-intensive business processes offers a unique benefit.

The need for a single platform

Rival blockchain technologies potentially undermine the core attribute of system interoperability. This is key to achieving secure, automated trade, payments and settlement reconciliation across networks without a centralised authority.

Despite the clear potential for blockchain, the future remains unclear, rather than uncertain. Until the industry overcomes its “VHS vs Betamax” moment and begins to level support behind a single set of technologies, doubts will remain over adoption.

There is little doubt blockchain is a technology that the financial sector needs for its future growth. However, it needs to be a willing constituent in its development and its ratification. That also means welcoming regulation and oversight into the mix alongside technology development and real-world use case applications.