Go anywhere near the upper echelons of a bank or finance firm right now and there’s one buzzword you’ll hear over and over again — blockchain.
First invented to underpin bitcoin, blockchain technology uses decentralized record keeping and the scrutiny of the “crowd” to allow people to trade bitcoin on a public network without working through a trusted middle man like a bank or clearing house. Complex cryptography keeps the records from being tampered with once they’re signed off on.
The world of finance has worked itself up into a frenzy over how much money this technology could save if adapted to mainstream banking. Banks could trade assets directly with each other instead of waiting for up to two days for a third party to settle the transaction.
But, says itBit CEO Chad Cascarilla, there’s more to blockchain than just budgetary hype. Not only does the technology have the potential to cut costs, it could also solve one of the biggest problems the financial system faced during the 2008 crash.
“One of the big failings that [the crash] exposed was in the books and records system — who owns what when,” says Cascarilla.
Part of the reason credit dried up in the crash was because banks and other financial institutions struggled to say exactly who owned what and as a result it was hard to judge their exact credit-worthiness. Without knowing that, people were reluctant to lend.
Cascarilla says: “In the financial system you don’t actually know because it’s all moving around and there’s many days of settlement risk and it’s very hard to track the actual beneficial ownership of an asset — a stock, a bond, whatever.”
“You can’t tell where the risk lies — that’s really an accounting problem, a databasing problem. We still have the same level of access depth now, nothing’s changed since then. Now the government has just said we can’t allow anyone to fail.”
He adds: “That’s what we saw blockchain potentially solving, because we had come from that area and that’s what led us to create itBit.”
Blockchain digitally records who owns what and can be inspected by everyone who has access to it — both are crucial in allowing bitcoin to function as a digital currency.
If the technology were adapted to, say, securities or gold, a bank could simply query the blockchain to make sure a trading partner owns what it says it does.
Transactions over the blockchain are also much faster than working through existing systems, so counterparty risk — the risk that the person you’re trading with goes bust before you complete a deal — is reduced too. That’s another bonus for financial stability.
New York-based itBit, founded in 2012, runs a bitcoin exchange but has also developed Bankchain, an off-the-shelf blockchain solution for banks and other financial institutions that can be adapted for everything from gold trading to clearing securities.
Cascarilla is currently in conversation with around a dozen banks and financial firms, with several partnerships and proof of concepts under way. “We’ve got to the point where the rubber hits the road,” Cascarilla says. He declined to name the partners itBit is working.
Check back on Sunday to read a full interview with itBit’s Chad Cascarilla on Business Insider.