Bitcoin first hit the market in 2009 as open-source software, introducing consumers everywhere to the concept of a digital currency that transcends borders and government entities, and is regulated only by its own complex system of technological checks and balances.
While Bitcoin itself has since struggled to gain acceptance from consumers and financial institutions alike, the technology underpinning Bitcoin transactions may just be the next big thing in the world of transaction processing and recording.
“As a virtual currency, Bitcoin has no regulating agency or bank behind it,” said Lois Hansen, vice president, product development, for CO-OP Financial Services. “However, underlying the Bitcoin application is a highly sophisticated protocol called blockchain, and this technology has the financial world taking note.”
How Blockchain Works
Hansen describes blockchain as a public, distributed ledger of all bitcoin transactions ever executed. “It includes two types of records, transactions and blocks,” she said. “Transactions include the actual data stored in the blockchain, and blocks confirm exactly when and in what sequence transactions have occurred.”
And, as new blocks are added, Hansen notes that the blockchain continues to grow in a linear, chronological fashion, yielding a complete, historically accurate database of all transactions within its ecosystem.
According to Brian Bodell, CEO of Finivation Software (a CO-OP business partner), what is truly unique about blockchain technology is its ability to distribute both processing power and the verification of transactions across a broad, decentralized audience. Plus, its advanced cryptography increases the security of transactions.
“To date, the term blockchain has been closely associated with Bitcoin,” he said. “But Bitcoin is simply one application for distributed ledger technology.”
For credit unions and other financial institutions, Bodell notes that blockchain technology could prove instrumental in reducing the operational costs of many core processes, from payments and settlement to record keeping and reporting.
“Where blockchain really shines is in its ability to track ownership,” he said. “It excels at tracking transactions between dealers and traders, investors and borrowers, and could be used to seamlessly track everything from individual debt and stock transfers to cross-currency payments and real estate transactions.”
He adds that blockchain technology has the potential to streamline a myriad of non-financial transactions as well. “It could transform processes such as tallying votes in a national election or determining music rankings,” he said. “It could also aid in tracking devices across the emerging Internet of Things.”
Betting on Blockchain – From Wall Street to Silicon Valley
All of which has investors and tech giants pouring resources into the technology. Algonomic.com reports that venture capitalists invested approximately $1 billion into Bitcoin and blockchain ventures in 2015. Consider also that the World Economic Forum has identified blockchain as one of six megatrends, and that Microsoft’s Azure public cloud platform is offering Blockchain-as-a-Service, providing developers with integrated tools to help them build, test and deploy their own blockchain applications.
And, according to blockchain startup R3, 42 of the world’s largest banks have now joined the company’s distributed ledger initiative to extend the technology’s reach to the broader financial services community.
Which is why Hansen advises credit unions to watch this technology closely, noting that CO-OP will be publishing white papers and other educational materials on blockchain in 2016.
“Credit unions by their very charter are a cautious group, but this is also a reason for their success because they stay clear of potentially high risk environments,” she said. “The fact is that a lack of governance, oversight and controls has impacted Bitcoin in the marketplace to date.”
She continued, “However, when it comes to product development, benefits are frequently spawned by failure. And the potential benefits of blockchain technology are starting to reveal themselves. In fact, technologists across the globe are working diligently to apply and monetize this truly disruptive innovation, and many out there are calling it the evolution of Big Data.”
More insights on transactions technology can be found at the CO-OP payments resource center here.