Blockchain Technology Assignment: Considerations For Banking Sector

Question

Task:

1. What is Blockchain and How does Blockchain work? 
2. Introduction to Sector
3. Connecting Blockchain to the sector
4. Emerging issues 
5. Challenges and obstacles
6. Conclusion and evaluation

Answer

Abstract
In today’s time where business world is going modern and due to which the business complexities are increasing day by day, it is necessary for an organization to keep up with the technological advancements going around the world. One of the classic examples of such technological evolution discussed in this blockchain technology assignment is the introduction of blockchain technology that showed its first appearance in 2009 and since then it has been adopted by various companies at global level. However, the implementation of block chain technology is still at its infancy stage and due to which it is facing few challenges in the business world. A blockchain is nothing but a public ledger which can be accessed by everyone without any central authorization. It promotes reliable, secure and trustworthy data transmission over the internet. Crypto currencies like Bitcoin, Litecoin and others are the key examples of Blockchain Technology. The said technology examined in the segments of blockchain technology assignment is considered as a revolutionary technology as it has a potential to transform the way businesses are operated on online platform. The application of blockchain technology could be seen in almost all the sectors of an economy be it educational sector or medical industry or banking and finance industry etc. However, for banking and finance industry blockchain technology proves to be a promising innovation as has the potential to provide it an infrastructure which is not easily affordable for any individual unit and is necessary for the efficient functioning.

Keywords:
Blockchain, Technology, Decentralized, Cryptography, Ledger, Immutability

1. What is blockchain technology and how does Blockchain work?
The report on blockchain technology assignment illustrates that the blockchain often termed as Distributed Ledger Technology (DLT) is a recent evolution in the era of technological advancement and digital world. It is one among the revolutionary technologies that not only avoids risk and frauds but also promotes transparency through the use of decentralized platform and cryptographic hashing function. In the simple language, blockchain can be defined as the time-stamped series of data records which is immutable in nature and is managed by a group of computers not in the ownership of a single entity. Thus, it can be stated herein blockchain technology assignment that there is no central authority of blockchain network (Crosby, Pattanayak, Verma & Kalyanaraman, 2016). All the data blocks are bound to one another in a chain using certain cryptographic principles. Each block on the chain is verified by millions or thousands of computers across the network and hence blockchain is considered as a simplified yet ingenious approach of information sharing from one person to another in a secure and fully automated manner. According to Don & Alex Tapscott, authors Blockchain Revolution (2016) blockchain is typically a digital ledger in incorruptible form that records economic transactions. The said technology examined in the context of blockchain technology assignment could be programmed to make a record of not only financial transactions but also everything that has monetary value on a virtual platform (Rosic, 2016).

The major three attributes of blockchain technology are that the digital assets herein are merely distributed not being copied or transferred, assets herein are decentralized and hence allows real-time access and lastly the changes in any asset or document are preserved by way of ledgers in the transparent manner and hence it creates trust in the digital assets.

Blockchain majorly comprise of three key concepts discussed in the blockchain technology assignment are as follows:

Blocks: Each chain has multiple numbers of blocks and each individual block has 3 basic elements:

Data: data that is contained in the block

Nonce: It is a whole number with 32 bit. It is generated when there is a creation of a block in the chain thereby generating a block header hash.

Hash: It is a 256-bit number that is wedded to the nonce. It starts with large number of zeros hence it is quite small.

It is discussed in this blockchain technology assignment that whenever the first block in the chain is created, a cryptographic hash is generated by nonce and thereafter the data containing in the block is considered as signed and tied to the nonce and hash forever until it is mined.

Miner: Through the use of miners, new blocks are created on the chain using the process called mining. Each block in the blockchain has its own hash as well as nonce. Miners are the software that is specially designed to solve complex problem of finding nonce that can generate an accepted hash. The functioning is complex because nonce is merely 32 bit number and hash is 256 bit number, so there are huge number of non-hash combinations that are to be mined before to find the right combination. When the right combination is hit, golden nonce is said to have found and at that particular point a new block is created on the chain (Rosic, 2016).

Blockchain has an important feature called it’s immutably because it is extremely difficult to make changes to the data in the block. Making any change to any previous block in the chain needs re-mining not merely the block to be changed but all the blocks that are after it. Therefore, manipulating a block chain is not an easy task.

Node: Another key feature of blockchain technology mentioned in the blockchain technology assignment is decentralization. No organization or a computer can own individually the entire blockchain. Rather, it is maintained by peer-to-peer network. The nodes are connected to the chain via which distributed ledger functions. Nodes could be any electronic device which could maintain the copies of blockchain and keeps the functioning of network on by obtaining an input and performing function on the same to produce an output (Zheng, Xie, Dai, Chen & Wang, 2017).

Typically, all the nodes in the chain has their own copy of blockchain and each newly mined block in the chain requires proper algorithmic approval of network for blockchain to be updated and verified. This feature promotes another important aspect of blockchain technology called transparency. Due to transparency factor each and every action taken on the ledger can easily be traced and each participant in the blockchain is provided with a unique identification number which is alphanumeric in nature which helps in locating their transactions on the network. All the participants are equally privileged for its access and hence the workload of the entire blockchain is also distributed among all the participants.

The use of blockchain technology has become quite common across all the industries. The said technology could be applied to stamp fraud in finance sector, it can also help in secure transfer of medical data records between the professionals of healthcare industry. Also, it can be used to track the intellectual properties of one’s business, online funds transfer and so on (Fernández-Caramés & Fraga-Lamas, 2018). Considering the broad range implications of the said technology companies from almost all the sectors are looking forward to the ways of applying it to their businesses to reap out its benefits. The system of blockchain will allow all authorized users an access to the data and to maintain a log of activities made there under.

2. Introduction to banking sector
In banking sector, the use of blockchain technology has become quite common on account of its key attributes as discussed above in this blockchain technology assignment. Banking sector is an important aspect of an economy of any nation and it has significant role in the economic growth development of such country. Banking industry majorly deals in cash, credit and various other financial transactions. A stable as well efficient banking sector is prerequisite to increase the level of economy of a nation. Primarily, three functions are generally performed in the banking industry of almost all the nations. They are payment operation system, savings mobilization and allocation of customer’s savings to optimum investment products. Bank is a financial institution which generally accepts deposits from people and extends financial loans to the people who need funds for their household or commercial purpose. However, banking business is not confined to the limits of acceptance of deposits and borrowing of fund. Rather, banking business covers a huge scope as it covers activities like receiving money on savings or deposits account, payment or collection of cheques, proving locker facilities, demat account, Anytime Money ATM services etc. Since, banks are involved in the financial transactions related to the funds of general public, each country’s regulators forms certain laws and regulations to control and monitor the banking sector in the best interest of general public. As the banks holds finance of the general public, it is very important for the banking industry to maintain an adequate system of safe financial transactions to avoid any discrepancies. Banks are the most secure medium to make financial savings in return of certain returns for the amounts invested. In banking sector there is always a huge risk of data loss, unauthorized access to data and data leakage which could almost destroy the entire functioning of the banking institutions as funds are transferred in this industry on the digital platform and besides funds the key sensitive information regarding the customers of banks are also maintained in such sectors and the loss of such information can cause business termination to the concerned banking company. The research conducted on blockchain technology assignment claims that more than 40% of financial institutions and intermediaries which deals in fund transfer services and the stock exchanges are more found to be encountered with the economic losses because of financial crimes. Also, banks have to maintain KYC records to comply with the anti-money laundering laws and regulations and for maintenance of such records, banks have to bear huge costs ranging from $60 million to $500 million on per annum basis.

3. Connecting blockchain technology with banking sector
In today’s world were security and transparency are becoming key issues because of increasing cyber-attacks at the global business level, blockchain holds good potential to transform the ways business is carried so as to bring economic growth. One of the most prosperous industries for blockchain technology is banking and finance industry which could be transformed drastically by the adoption of said technology. Considering the banking sector in particular, thousands and millions of funds are transferred between the banks accounts on the regular basis, it can be said that the financial system of not only a particular economy but of the entire globe could be strengthened by the deployment of such a promising technology called blockchain. Further, as the traditional banking systems are working on dependent manual networks they are more vulnerable to the risk of frauds and errors which could lead to crippled banking system.

According to the recent report generated by PwC, 24% of the world’s financial executives are quite familiar with the concept of blockchain technology (Pratap, 2018).

Banks are always keen to gain an opportunity where they have to incur less transaction costs and also the reduced amount of paper used by them for their processes. Therefore, the study examined in the blockchain technology assignment illustrates that in such places implementation of blockchain technology would prove to be wise step as it will ultimately increase the profitability of the business. Currently, almost all the major banks are looking forward to adopt blockchain technology for its key business functions like fund transfer, record keeping and various other bank end activities. The application of blockchain technology would reduce the paper cost and the intensive use of paper as it will take the financial processes on the digital and decentralized platform which allows all the participant banks the access to a single information source. It also enables them to check and view all the documents and validate the asset ownership on digital platform from an non-alterable ledger. Use of blockchain technology in the banking sector can be demonstrated as follows:

• For reducing the frauds: Blockchain being a technology with main pillars of decentralization, transparency and immutability is recently recognized as the technology that will result in reduction of fraud to a considerable level as the traditional banking system are based on centralized platform and hence they are more prone to the risk of cyber-attacks as it is easy for the attackers to target a single system. However, the use of blockchain technology would reduce such crimes using the decentralized system of banking whereby it will get difficult to attack the data of entire banking industry of the nation. Also, the immutable nature of records contained in the blocks of the chain will not easily allow the attackers to gain unauthorized access due to cryptography hashing of data (CBIINSIGHTS, 2018).
• Know your customers: Banking and other financial institutions mentioned in the blockchain technology assignment have to spend huge sums per year to gather the information of their customers and to comply with the related regulations. These regulations are intended to prevent money laundering and other financial crimes. The adoption of blockchain will enable a banking organization to gain access to its customer identity verification details from another banking organization where the respective customer is already registered. This would avoid the repetition of KYC process thereby reducing the administrative costs.
• Clearing and settlement: Traditional methods at banks for clearing and settlement transactions had relied upon the third person (middlemen) for the facilitation of security and trust. However, by way of blockchain and the distributed ledger facility trust and security can be achieved without the need of having reliance over the middleman.
• Payments: lockchain technology will provide high security in the payment processes along with reduced payment processing costs among the banks themselves or between the banking institutions and their clients by getting rid of intermediaries in such payment systems (NPCI, 2019).

 Most of the banks are at the initial stage of adoption of blockchain technology. If blockchain technology is adopted in full, it will result in fast processing of payments at banks and also with high accuracy. Also, it will reduce the transaction processing costs to a significant level and widen the scope of bank’s products and services which in turn will contribute to more revenue generation in banking sector of the adopting economy. However, it is important to note to maximize the benefits of the said technology banks will have to build required infrastructure so as to create and operate in the global network. The main key to turn the potential of blockchain into today’s reality is the collaboration among banks in respect of efforts to create required network for the global banking business (Accenture, 2019). As per the Global Fintech Report as released in 2017, around 77% of the fintech organizations are expected to have adopted blockchain technology by the end of 2020 (Pratap, 2018). Also as per the claim recorded in Harvard Business Review, block chain will offer the banks what internet has offered media till now. Multinational companies like JP Morgan Chase have put faith in the emerging blockchain technology. Further, the multinational bank of America which is headquartered in New York has set up a new division known as Quorum which is a distributed ledger as well as the platform for smart contract for the entities which facilitate speedy transactions and the challenges associated with throughput addressing in banking and finance industry. Apart from this Bank of America has also filed a patent official paper which is regarding the implementation of blockchain that has been permissioned for securing the necessary business records. 

4. Emerging issues in Blockchain in Banking Sector:
The blockchain technology was first taken into the business world in 2009 and since then the world has experienced remarkable transformation on account of this technology. Some of the emerging trends of blockchain technology are as follows:

• Anticipated rise of federated blockchain: Federated blockchain is one among the best blockchains in the industry in the recent times. It is an upgraded version of basic blockchain model. The use of such blockchains is going to rise as it is going to provide private blockchain with some other added features.
• Coins stability to dominate crypto space: Currently, the stable coins are at their initial phase and by the end of 2019 they are expected to achieve their peak and hence they are the second most common emerging trend of the blockchain technology. However, they will suffer from certain limitations such as instability, trust issues, regulatory issues and the centralization feature.
• Use of blockchain at Amazon and Microsoft: The third emerging trend in the area of Blockchain technology is the evolving BaaS i.e. Blockchain as a Service. It is a cloud based service that allows its users to create their own products of digital nature such as smart contracts or applications. The companies that have adopted BaaS are Amazon and Microsoft.
• Expected transformation of social networking: The adoption of blockchain will certainly resolve the problems like notorious scandals, data control loss, content irrelevance, privacy violations etc. The blend of blockchain in the social media is yet another emerging trend.
• Interoperability among Networks of blockchain: Interoperability is the capability of any network to share data across multiple blockchain networks (Browne, 2018). The interoperability of the blockchain technology is now increasing and the two common vendors of it are Blocknet and Wanchain.
• More secure Content Streaming: Content streaming discussed in the blockchain technology assignment is again the most common emerging trend in the areas of blockchain technology. It will probably occur in 2020. Movie steaming operators such as Netflix or Hulu are soon going to incorporate the said technology
• Hybrid blockchains: Hybrid blockchain could be defined as that network that uses most apt part of both public as well as private blockchain (Lichtigstein, 2018).

5. What are the challenges and obstacles of blockchain technology outlined in the context of blockchain technology assignment?
In the recent era where blockchain has become the buzzword because of its important pillars, it is carrying with itself certain set of challenges which have contributed to its slow adoption. The challenges range from lack of developers supply, standardization, scalability, restricted interoperability, intense energy requirements to absence of proper regulatory framework and so on.

• Lack of awareness and understanding: It is one of the major challenges in front of blockchain technology in almost all the industries other than banking and finance sector. Due to the lack of knowledge, the investment and exploration of ideas in such technology are being hampered (Zainuddin, 2019).
• Change in overall culture: Adoption of blockchain system requires companies to switch totally to a new system from those traditional ways on which they are working from long. It works on decentralized platform and for most of the companies, the loss of control could be seen as extremely unsettling and hence they resist bringing a change to their traditional work culture.
• Scalability: As per the research on blockchain technology assignment, legacy transaction process networks are commonly recognized for their processing speed because they process 1000 transactions per second (Sreeperambudur, 2019) However, on the other side blockchain networks are found to be comparatively slower with respect of processing transactions per second. Most of the blockchain lack the ability to support huge number of users making its transaction throughput to be quite longer.
• Standardization: the studies undertaken to prepare this blockchain technology assignment signifies that due to the presence of huge variety of networks existing in the world, there is no existence of standards for the application of blockchain technology. The lack of standardization takes away the consistency making it almost impossible for its adoption at mass level.
• Limited developer supply: As the blockchain technology is at its infancy, it suffers from certain issues like sheer shortage of the skilled developers as the developer community also needs time to adapt it.
• Privacy: The argument raised on the blockchain technology assignment states that blockchain and privacy do not go hand in hand. It is difficult for the companies to operate without having privacy. In blockchain the information is all recorded on the public ledgers and hence it is difficult for those companies which maintain the data regarding the sensitive information of their customers to adopt such technology as it against the customer’s trust and confidence (Anwar, 2018).
• Regulations: As it is well known that Blockchain is at its initial stage, the regulators have not come up with required set of regulations and laws regarding the use of this technology and in the absence of such regulations it is difficult to keep the organizations away from the criminal affairs. No one is following any specific rules in context of blockchain (Deloitte, n.d.).
• Security: It is yet another concern of blockchain. Attackers to the blockchain network can some or the other how mine the blocks and change the information contained in the blocks or probably they may alter the transaction processes in such a manner that it restricts other entities to create the blocks on the chains.

6. Conclusion and Evaluation
From the above discussion on the study examined in the blockchain technology assignment, it can now be concluded that introduction of blockchain technology is a blessing to the world as it is going to promote businesses to the level of more accuracy and efficiency by providing secured and reliable way of data transmission over the internet with minimum cost. Also, since it operates on decentralized platform, the cost of its maintaining its infrastructure will also be also. The said technology has the potential to benefit almost all the industries functioning in an economy. However, since banking and finance industry involves transfer of huge funds and payment process across the globe, blockchain technology proves to be a promising advancement in this particular industry as data security is of utmost importance for the customers in this particular sector. Blockchain has a bright future as distributed ledgers because of real time, reliable and trusted and open source platform which helps in transmitting the data in the secured manner (NPCI, 2019). Due to these factors, the said technology will not only improve the payment processing of the bank or reduce the transaction costs, rather it will also open up the scope for new products and services in banking industry that will certainly enhance the revenue streams of banking sector of the nation. Therefore, the findings obtained in the blockchain technology assignment signify that the banks need to look into the broader picture and hence make a collaborative effort to define and create the backbone for the adoption of blockchain technology. Though, by now it has been identified that blockchain has the capability of transforming any business by improving its efficiency but at the same time the said technology suffers from certain limitations being at its infancy stage such as lack of understanding and awareness among people regarding its operations and benefits, lack of standardization, scalability and interoperability, absence of necessary regulations, limited developer supply and so on. All these limitations discussed in the context of blockchain technology assignment have contributed to the slow-moving adoption of the blockchain technology. Also, the security and privacy are also the major concerns associated with the said technology as the data is kept on the public ledgers because of decentralized platform.

References:
Accenture. (2019). blockchain technology assignment How banks are building a real-time global payment network. Retrieved from: https://www.accenture.com/in-en/insight-blockchain-technology-how-banks-building-real-time

Anwar, H. (2018). Top 10 Blockchain Adoption Challenges. Retrieved from: https://101blockchains.com/blockchain-adoption-challenges/

Browne, R. (2018). Five things that must happen for blockchain to see widespread adoption, according to Deloitte. Retrieved from: https://www.cnbc.com/2018/10/01/five-crucial-challenges-for-blockchain-to-overcome-deloitte.html

CBIINSIGHTS. (2018). How Blockchain Could Disrupt Banking. Retrieved from: https://www.cbinsights.com/research/blockchain-disrupting-banking/

Crosby, M., Pattanayak, P., Verma, S., & Kalyanaraman, V. (2016). blockchain technology assignment Blockchain technology: Beyond bitcoin. Applied Innovation, 2(6-10), 71.

Deloitte. (n.d.) Blockchain: Key challenges. Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/Innovation/deloitte-uk-blockchain-key-challenges.pdf

Fernández-Caramés, T. M., & Fraga-Lamas, P. (2018). A Review on the Use of Blockchain for the Internet of Things. IEEE Access, 6, 32979-33001.

Lichtigstein, A. (2018). Top 7 Blockchain Technology Trends to Watch in 2019. blockchain technology assignment Retrieved from: https://medium.com/datadriveninvestor/challenges-involved-in-implementing-the-blockchain-technology-in-financial-industry-c87e5e9c9d9e

NPCI. (2019). The rising significance of blockchain in the banking sector. blockchain technology assignment Retrieved from: https://www.npci.org.in/rising-significance-blockchain-banking-sector

Pratap, M. (2018). How is Blockchain Revolutionizing Banking and Financial Markets. Retrieved from: https://hackernoon.com/how-is-blockchain-revolutionizing-banking-and-financial-markets-9241df07c18b

Rosic, A. (2016). What is Blockchain Technology? A Step-by-Step Guide For Beginners. Retrieved from: https://blockgeeks.com/guides/what-is-blockchain-technology/#The_Three_Pillars_of_Blockchain_Technology

Sreeperambudur, S. (2019). blockchain technology assignment The Challenges involved in implementing the Blockchain Technology in Financial Industry. Retrieved from: https://medium.com/datadriveninvestor/challenges-involved-in-implementing-the-blockchain-technology-in-financial-industry-c87e5e9c9d9e

Zainuddin, A. (2019). Challenges in Blockchain Technology Today. Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/Innovation/deloitte-uk-blockchain-key-challenges.pdf

Zheng, Z., Xie, S., Dai, H., Chen, X., & Wang, H. (2017, June). An overview of blockchain technology: Architecture, consensus, and future trends. blockchain technology assignment In 2017 IEEE International Congress on Big Data (BigData Congress) (pp. 557-564). IEEE.