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Companies in today’s ‘digital first’ ecosystem are being forced to continuously innovate in order to stay at the forefront and remain competitive in their industry, particularly in the financial services and financial technology space. Blockchain technology is already starting to reinvent the infrastructure for global finance; anything that facilitates the frictionless flow of money.
Yet blockchain is frequently associated with fraudulent ponzi schemes and trading scams. Blockchain technology sits on a consensus-driven distributed ledger that facilitates and keeps a record of all historic transactions, without the need of a third party – a concept which could revolutionise global trade, and challenge the existence and purpose of intermediaries such as commercial banks and brokers.
Blockchain’s success is underpinned largely on cryptography and security research. Looking back at the history of distributed systems and automation, decentralised internet applications such as BitTorrent and Napster paved the way for Bitcoin to contribute towards a useful application of the Blockchain.
We are now at a stage where combining distribution networks, peer-to-peer consensus, and cryptography to automate smart contracts, trade finance tools, and the sharing of data.
Banks and financial institutions around the world are starting to create standards and protocols around public and private blockchain use cases. The security around integrating a distributed ledger system in financial institutions is priority – as daily operations, smart contracts and the sharing of data is embedded into Blockchain technologies within financial institutions, is key.
As an example, Interpol recently suggested that blockchain has the potential to export malware or other illegal data to all other computers on a network.
What does this mean? Cybersecurity experts at Interpol confirmed that there is a fixed open space on the Blockchain, meaning it could be targeted for malware or storage of illegal data, and difficult to wipe the data. For networks sharing data on the blockchain, a virus could be uploaded onto this fixed open space and infect others on the network, and be difficult to clean up.
Many experts have seen the blockchain as a disruptor in the trade finance space too, but again, there are inherent problems. Trade finance is the umbrella term used for the financing of goods and services overseas. Normally trade financiers stand between the buyer and a seller to confirm a transaction and provide a payment guarantee for the seller, and the blockchain has recently been seen as a potential disruptor to take on trade financiers. However, the anonymity of the blockchain is challenging from a trade finance security aspect – the due diligence and compliance checks will always be required, as trade finance is subject to much fraudulent financial activity.
Furthermore, given the nature of currency fluctuations, trading in multiple jurisdictions and the cumbersome process of shipping documents / confirmations, trade finance fraud is common.
On the contrary, there are some potential applications that utlise blockchain technologies to enhance security and reduce risks. As an example, Guardtime’s security solution, the KSI, which stands for Keyless Signature Infrastructure has the ability to replace RSA digital signatures, and runs on a private blockchain. A Keyless Signature Infrastructure can be run on a private blockchain so that authentications are not tampered with, and are timestamped, and stored in the cloud. By doing this, such as application components, log files and firmware, the system can provide real-time alerts to any compromises (eg: hackers or malware), “allowing organizations to identify and manage breaches in real time”.
It means that issues around two-factor authentication are no longer, and it’s a solution which could be applicable to many areas within trade finance, from confirming the identity of goods in a Letter of Credit, to allowing access to data within the supply chain.The privatisation of Guardtime’s blockchain means authentication can happen within one second, as well as offer massive scalability which RSA verification does not.
Guardtime’s benefit over traditional databases are that records cannot be altered, deleted or changed / updated, which from a regulatory perspective, is much for audit trails and record keeping. The blockchain in this case can prove the integrity of the record, and everything that has happened to it over time.
Then there is MIT’s Enigma. When a reputable educational institution works on huge Blockchain projects, it’s a big deal. Enigma is based on the Bitcoin blockchain, and allows for secure data sharing and code sharing on the blockchain, where users can only access certain parts of the code.
“Data is split between different nodes, and they compute functions together without leaking information to other nodes,” the team wrote in a white paper. “Specifically, no single party ever has access to data in its entirety; instead, every party has a meaningless (i.e., seemingly random) piece of it.” according to the founders.
With this, Enigma can help transform functions such as loan underwriting and automatic execution, allowing complete user privacy as well as accurate decision making.
Global financial services remain challenged by Blockchain, despite the potential for reducing risk, maintenance costs of ‘BAU’, and back-office human processes. It is important to see cybersecurity as a “revenue centre rather than a cost centre”, according to Shadi Razak, member of the founding team for CyNation. It’s important to consider building products with security at the heart of solving the customer’s needs, as opposed to implementation later on, and preventing issues once they’ve occcured.
Blockchain can significantly drive security within the trade finance space, and potentially reduce costs if implemented correctly, but there are still inherent risks and challenges to face before they go mainstream.
Written by James Sinclair, Marketing Manager at Trade Finance Global
Featured image from Shutterstock.