Many financial institutions, credit unions in particular, are looking to blockchain to solve many of the problems consumers face day-to-day in financial services. While this technology, also known as distributed ledger technology, has been around for several years, many in our industry are struggling to create practical applications for blockchain in banking and credit union operations.
Solving the security problem
There are a number of use-cases that blockchain can solve for the banking industry, but first and foremost is the nature in which distributed ledger technology – or, the backbone of blockchain – functions. Currently, the financial system is made up of a centralized network, which creates “honey pots” of data. Since the data is stored in one place, all of this sensitive information is both extremely vulnerable and attractive to hackers. This is where distributed ledger technology comes in. Instead of being stored in one place, data becomes decentralized and encrypted across a network of nodes, located in various places around the world. Identical copies of records are shared across the network, and any changes made to the ledger are updated at each node almost instantly. The encryption and lack of a central “honey pot” makes the notion of being hacked virtually impossible when using distributed ledger.
Lending and Payments
Only after addressing the issue of data security should financial institutions consider implementing blockchain functionalities, such as lending or payments platforms. It is important to note that blockchain cannot exist without distributed ledger technology, but distributed ledger does not have to develop into a blockchain. Blockchain is simply a protocol or functionality of distributed ledger.
Based in Trust
The financial services industry relies on trust with consumers. If something happens that negatively impacts the trust level between an institution and its customers or members, it can be costly, or even impossible, for the organization to recover. Wells Fargo’s misconduct allegations are a perfect example of how an organization can face extensive reputational risk when it loses trust with consumers. It has been two years since the Consumer Financial Protection Bureau (CFPB) revealed the misconduct allegations against the bank, and Wells Fargo is still working hard to regain lost trust.
According to a recent Identity Theft Resource Center report, there have been over 660 data breaches in 2018 alone. The financial industry must take a proactive, as opposed to a reactive, approach to data security as they cannot take that type of reputational risk. The level of protection that distributed ledger technology provides is no longer a futuristic dream, but is here – and the industry needs to adopt quickly in efforts to protect consumer trust.
Blockchain is not just for Bitcoin
While the industry often associates blockchain with cryptocurrency, but this technology has the potential for far more benefits to the industry outside that particular use case. Self-sovereign identity, or SSI, is possibly the most important use case for financial institutions to understand and adopt.
There is a strong need within the industry for secure digital identity. Every interaction a customer or member has with their financial institution starts by identifying who they are. Historically, this identification process consisted of finding out very personal information, such as the last four digits of a social security number or verifying an address.
CULedger has developed a network of digital exchange for credit unions and CUSOs to leverage distributed ledger technology. This network enables organizations to deploy immutable, incorruptible capabilities such as MyCUID, the first global digital identity ecosystem for credit unions and their members. MyCUID addresses the problem of having siloed digital identities by using distributed ledger technology to provide a secure SSI. It aims to reduce member friction by enabling the identity to be used at a branch, on the phone or logging into online accounts. It relies on biometrics and smartphone technology that already exists, improving cybersecurity while reducing identity theft and fraud. There are numerous other ways that distributed ledger technology will provide immense value to the industry, such as streamlined settlements and faster cross-border payments, and we will continue to see new use cases as the technology develops.