4 minutes
Will blockchain, until now known primarily as the technology platform on which cryptocurrencies like bitcoin are traded, turn out be useful for traditional financial institutions? The nation’s biggest banks and a group of savvy CUs think it might and are spending hard dollars to investigate. Others think it’s a fool’s chase.
“There’s plenty of interest, but also plenty of skepticism,” notes Rich Meade, chief operating officer and chief of staff of the Credit Union National Association, Washington, D.C. He’s actively involved in CU Ledger, a cooperative project among CUs to prove whether it will have practical value for them.
Interest in blockchain may be growing, but it’s also shrinking in some quarters. $400 million Nutmeg State Financial Credit Union, Rocky Hill, Conn., joined CU Ledger project initially but then dropped out, reports Jeff Levesque, EVP/chief operations officer. “We believe in centralizing control of our ledgers, and we came to see that blockchain would be a decentralizing step, so we’re now focusing on internal handling of payments and ledger posting. We’re building a modern core with open architecture that is compatible with open APIs (application programming interfaces) that will let us communicate securely outside our firewall with other financial institutions and payments networks.”
Communication beyond the firewall is hindered by the fact that most CUs still operate on vendor-provided closed proprietary platforms, Levesque points out. Nutmeg Financial CU has recently converted to “fully open architecture with a fully relational database supporting a full exchange of data through APIs,” he reports. “We want to start with our members and our secure core and then work outward, rather than start with a public network and work backwards.”
Blockchain became famous for supporting a cryptocurrency that lets untrusted parties transact using decentralized verification without recourse for reversing transactions, explains Jon Ungerland, founding partner of DaLand Solutions, Denver, who trades in bitcoin over blockchain himself. But it cuts against the grain of CU core tech, he argues, and the purpose of a centralized financial institution where the CU owns and protects its own ledger in its core system and validates trusted parties to transactions that could be reversed if they turn out to be incorrectly posted.
“For CUs, blockchain would be a step backward,” he insists. “They’re already pushing online, real-time payments through their core. Blockchain would only create an ancillary ledger, a competing system of record and a dispersed, [a] decentralized one that would only add cost.”
The goal of CU technology architecture for the past 15 to 20 years has been to centralize a ledger or core system of record and drive real-time activity to it, not spinning off separate ledgers that are expensive to adjust (or were designed to not be adjustable, in the case of blockchain) and not real-time, Ungerland says.
“The big banks are behind the curve [with big investments in legacy infrastructure] and have good reason to invest in blockchain,” he observes. Most CUs do not. “Preparing to follow the big banks is a mistake. CU leaders have to focus on the cost of transactions. Just Google ‘cost to run blockchain’ to get an idea of the energy, equipment and infrastructure costs of the server farm it will take to run blockchain!”
Even if blockchain proves useful, it may be useful in only a very small way—not a game-changer and not rewarding enough to justify a big investment. As a vendor of old ledger technology, Jack Henry & Associates, Monett, Mo., might have to embrace blockchain at some point or be replaced by it if it becomes a hit. But that’s not likely, says Jonathan Patrick, strategic and innovation analyst and advisor.
“Blockchain is probably best suited for some specific transactions that will be ancillary and plug into core systems,” he suggests. The closest blockchain has come to mainstream financial transactions so far is an experiment Visa is conducting in Europe for cross-border currency transactions, he points out. “I don’t think they want to build a network that will replace their credit card and debit card businesses,” he observes. “They’re seeing if there’s a better way to handle a very specific type of transaction.”
The CU Ledger project excludes vendors, so, as an executive for a core systems vendor (Symitar, San Diego), Patrick is on the outside looking in, but that’s okay with him. “We’re still in the conversations,” he says. “We’re aware of what’s happening.” If the prospectors should happen to hit gold, that low-key interest could change.
A lot would have to happen before a CU could see any benefit from blockchain, suggests Jim Benlein, owner of KGS Consulting, Silverdale, Wash. Although the technology has been tested and put to practical use for bitcoin processing, the software that could make it work for financial institutions doesn’t exist yet, he says.
“A CU manager can’t go to a conference and watch a demo of a blockchain application performing CU operations. No regulatory guidance covering blockchain transactions has yet been issued for financial institutions.”
Also read “Will Blockchain Help CUs? Part 1”
