While some banks are at the forefront of the “cryptography” revolution, utilizing shared encrypted databases amongst multiple parties to access a constantly updated unalterable digital ledger, and are fluent in the jargon, many are trying to figure out the meanings behind the new preferred nomenclature.

A blockchain is a growing list of digital records (blocks) linked using cryptography to produce a distributed ledger that records transaction data in near real-time. The blockchain serves as a public ledger of information collected through a network that can document a transfer of money, ownership of property, identities, an agreement between parties, or other transactional details. Each block contains time-stamped information relating to a transaction and links to the previous block in the same transaction. Participants in the chain independently verify information without a centralized authority and the connected blocks form a chronological chain that verifies and records the transaction as it occurs. Blocks store information about a transaction including the date, time, dollar amount, and participants; the transaction information is then verified, and the details of the transaction are confirmed.

Blockchain technology can increase transparency, provide consistent data that is easily accessed by multiple parties, reduce transaction costs due to third-party intermediaries, and provide real-time access to information, reducing risks of fraud and providing expedited settlement of transactions. Such a platform seems almost too good to be true for highly regulated industries that rely on technology to provide their customers, employees, and regulators faster, more transparent transactions. Blockchain provides an opportunity for banks to avoid intermediaries, keep detailed records, verify transaction details, and close transactions in real-time all of which would likely be favorably received by both customers and regulators as well as internal stakeholders.

With this potential for transactional ease develops some potential hurdles. A bank considering a blockchain based option should examine the pros and cons of implementing the new technology and ask does the time and potential cost savings justify the expense of implementing a new system? Who will be using the system internally and as transactional partners? How will customers respond to new programs and platforms? Will a new system overwhelm customers and employees that have just adjusted to a bank’s current payment or reporting systems? What type of standardization can be expected in an environment where many of the early transactions are “one-offs”? What regulatory requirements will exist? Will this technology be common in all lending transactions or will blockchain solutions be limited to large, commercially sophisticated, multiple party transactions? While the new technology may seem ideally suited for a large syndicated loan with an arranging bank, a syndicate, borrowers and their respective agents, will this technology be equally effective for a small consumer loan?

While blockchain technology, which supports cryptocurrencies such as bitcoin, was initially received by the banking industry with some cynicism, it now has become a hot topic in multiple banking areas including clearing and settlement, trade finance, payments, identification and verification, and syndicated lending. These and other banking areas face the possibility of serious transformation and will be worth watching as blockchain technology is implemented by banks in the coming years.

Until recently, blockchain transactions have existed in a legally ambiguous regulatory environment. As more transactions move towards the use of blockchain and more consumers and investors find their capital tied up in a decentralized platform, governments, financial institutions, and courts will develop legislation, regulations, and interpretations of both. As the environment grows and evolves, and new businesses add products and services to the mix, we can expect further establishment of regulatory and legal frameworks. If enough parties employ the new technology and agree on uniform standards and practices, the impact of blockchain in banking could be revolutionary.

For questions regarding blockchain technology, or if you have general questions for our team, please do not hesitate to contact Your Legal Department® at Jellum Law, P.A at Questions@JellumLaw.com.