Used for many years by fintechs, blockchain is now bringing tangible benefits to banks. From increased security and rigorous compliance to reduced costs and improved transaction speeds, blockchain has the potential to transform the banking industry and is making steady progress in doing so.
Some of the most exciting new uses of blockchain involve permissioned and private blockchains, such as Hyperledger Fabric, which enable controlled access, transaction visibility, and simpler and less environmentally costly consensus models.
These private blockchains appropriately balance the issues of control, access, and scalability compared to traditional public blockchains. Banks focus on the right level of access, consensus, and protection while balancing cost while realizing the benefits of using blockchain technology and the immutable ledger so important for compliance. At FICO, we use Hyperledger, but other solutions for finance include R3 Cordia and Ethereum’s Quorum.
Integration
When integrating blockchain technology, banks must first ensure that they quantify the actual transactions that need to be supported by the blockchain instead of blindly expecting every atom of data to be stored there. They can then look at the public/private blockchain and the strength of consensus.
Many transactions are low value and can avoid blockchain altogether with AI and risk-based transaction analysis models. Other transactions may be high value or there may be special applications where every transaction would be on the blockchain because these transactions are of significant importance and the immutability of their existence is essential. Additionally, the design should focus on realistic SLAs for response times. Not all applications have or should have a sensitive transaction processing time. For example, blockchain is used in AI governance and compliance does not need to have millisecond recall latency, but it needs to be accurate and immutable given the criticality of AI governance.
By focusing on integration with existing IT infrastructure and legacy systems, one can enable the implementation of critical blockchain grounding applications through exposed API calls that can easily make information contained in the blockchain accessible to other traditional banking applications, tools, and IT infrastructure.
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Most developers are familiar with accessing these APIs, which allow for developing applications where the blockchain is a differentiated auditable component of an overall solution. Often, the same authentication access control will be used by both private blockchains and supporting applications, making the movement of data through the API seamless.
Ensure data confidentiality and security
Private blockchains with access management and strict approvals on who has access to the content are often used to ensure the security and privacy of data assets. Public blockchain is generally not the right solution here, due to the sensitive nature of the different types of transactions that banks will want to store. This does not mean that the private blockchain is secret, it is permissioned to those who need to access it, such as users, governance teams, regulators. It is a secure asset that ensures accountability and accuracy of what is stored. Indeed, in these solution designs, there must also be a focus on what is stored – for example, there may be references with hashes to assets with sensitive data that are stored elsewhere, but the hashes and encryption are on the blockchain and give users controlled by the appropriate access the keys to the sensitive data contained elsewhere.
Next Steps for Blockchain-Based Banking Services
One of the hottest new use cases for blockchain is supporting the development of AI models and their operational use. By defining responsible AI standards and frameworks, blockchain can be used to codify the absolute requirements that must be demonstrated to meet governance and regulatory standards. In fact, they will control the release of the AI model or system to ensure that responsible AI standards are strictly enforced. This is how FICO manages the development of AI models.
Blockchain is essential in this application because it ensures immutability of history, tracking of roles and actions, and recording of assets supporting development contained in the blockchain. Blockchain can then be used to ensure that no AI is released unless all governance/regulatory requirements and standards are fully met, and it further provides an immutable history of AI development and decisions to be used in the future when the AI is deployed and making decisions in production.
As the use of AI grows in the banking sector, I believe blockchain will prove to be a valuable enabler for banks as well as fintechs and other financial service providers.
Dr. Scott Zoldi is Director of Analytics at FICO
