Ways the Blockchain Will Augment Banking Security

Originally posted by Yevhenii Ostroverkh on https://diceus.com/ways-the-blockchain-will-augment-banking-security/

Did you know that financial businesses are 300 times more likely to become targets of cyberattacks than other companies? Even if you weren’t aware, it’s clear that banks, as well as similar corporations, work with two priceless types of data: financial transactions and sensitive customer information. Evidently, hackers and frauds try their best to get this data. And they’re pretty successful, to be honest.

In the late 2010s, we’ve seen thousands of attacks on digital banking services or storages. From dreadful hacking teams like Carbanak aka Fin7 that perform billion-dollar attacks on hundreds of banks around the globe to relatively small but innovative groups that focus on SWIFT transfers, banking-related cybercrimes are highly diverse. At Diceus, we realize the importance of security for financial companies, so always pay attention to this segment.

While the majority of banks prefer traditional protection, we also know that some clients opt for innovations. If you’re ready for changes, this guide is for you. Further, we will talk about blockchain technology in banking security and ways to benefit from it.

Blockchain Banking Security in a Nutshell

To understand how blockchain can help banks, it’s essential to grasp this concept in general. Actually, it’s simple, even despite dozens of definitions and explanations. Blockchain is a type of distributed ledger consisting of blocks that are united in one continuous chain. Exact copies of this chain with all data recorded are stored on local devices of the system’s participants – nodes. Thus, blockchain is an extensive database with several storages instead of one server.

The uniqueness of this structure hides in three concepts:

1. Immutability. Blockchain prevents changes in already confirmed transactions. It means that nobody can backdate operations or modify recorded data.
2. Consensus. As long as blockchain consists of equal nodes, participants have to reach an agreement to make the system fair and validate transactions.
3. Cryptography. Blockchain also relies on protocols that encrypt data. This approach protects records – it’s just impossible to steal data like from servers.

While cryptocurrencies are the most famous examples of blockchain usage, technology can help in other cases, too. For instance, leveraging blockchain technology for bank security relies on removing a single point of failure (a server) and switching to crypto-protected distributed data organization. Below, you will find a more detailed explanation of this and other benefits.

To read more about the discussed ideas, check out our recent guide: Blockchain Technology in Retail Banking.

Primary Examples of Blockchain Technology in Banking

As we’ve mentioned, the best thing about blockchain is that it’s nearly 100% protected from traditional hacks and frauds. Any data modification or man-in-the-middle attack is impossible. DDoS attacks require insane resources and can’t compromise blockchain-recorded data, so they’re practically impossible, too.

1. Data Integrity and Digital KYC/AML

Many financial companies use outdated technologies to store and process data. They protect databases with weak passwords or even handle paper-based accounting. Blockchain ends this trend. All the data records are encrypted and stored in an immutable, transparent system. This approach protects any transaction from tampering. Moreover, blockchain records help to reduce costs of maintenance, making banks more efficient.

Apart from general data protection, decentralized databases enable next-gen KYC policies. Because information can’t be modified or altered, banks can quickly check their customers using in-system data validated by the entire chain. This boosts verification processes, improves transaction security, and reduces redundant data exchanges between banks. As well, blockchain reduces the importance of passwords switching to advanced authentication.

2. Protected Internal Communications + Metadata

Intra-bank communications are not as secure as they should be now. Regularly, frauds use phishing schemes to get employee credentials and enter the system without even hacking it. Data leaks are popular, too. Blockchain platforms prevent such attacks by using pairs of public and private keys that add the next defense layer. Simply put, it’s impossible to enter any account by knowing only its password.

Metadata plays a pivotal role, too. In general, this term covers data about data. This information isn’t protected enough with traditional encryption. However, being stored inside the chain, metadata is distributed between nodes, so it becomes impossible to steal it at one point. As a result, blockchain ideas help to protect both external connections and internal systems, reducing risks significantly, and optimizing processing costs.

3. Smart Contracts with Secure Agreements

The last point dedicated to the uses of blockchain technology in banking is a bit more advanced. There’s a unique type of protocol called smart contracts. These are traditional agreements between parties but digitized and automated. To create such a protocol, you should agree on all the factors, terms, and rules, record them digitally, and seal the agreement. The smart contract then will execute relevant decisions upon meeting the requirements.

Smart contracts are wonderful as they reduce the level of trust needed to partner with other banks or clients. You can rely on the unbiased nature of blockchain instead of fickle humans. It works for all levels of complexity, from simple user-to-user money transactions to global strategic partnerships with the exchange of sensitive data. Still, smart contracts remain pretty complicated to develop, so they are costlier than traditional transactions.

Other Industry-Specific Use Cases

Well, blockchain banking security looks reliable. But what about other cases? Can distributed ledgers help financial companies to optimize more processes? Sure, they can/ Look at these examples below:

• Deliver new lending products. The latest industry, called decentralized finance, makes it possible to create reliable peer-to-peer lending schemes. Secured by blockchain features, such models allow people to exchange money quickly.
• Increase transaction speed. Especially, this is important for cross-border transactions. If a traditional bank requires several days to send the money, blockchain systems can do this in a matter of seconds.
• Remove the middlemen. Because direct links equally connect all network participants, they don’t require payment processors or other intermediaries. As a result, we see faster and cheaper operations.
• Streamlined banking processes. All operations, from money transfers to customer verification, become more straightforward and more reliable when performed through blockchain. Thus, banks can save a lot of time and resources.

Note that blockchain is a pretty complicated field when it comes to development. That’s why Chris Huls from Rabobank suggests banks collaborate with experienced partners to create “credible decentralized ledgers” customized to current and future needs. If you’re looking for such a partner, you’re in the right place. Diceus experts can help with the development, integration, and support of blockchain applications. But you should know the stakes.

Why Blockchain Isn’t the Ultimate Solution

If everything with blockchain banking security is as perfect as we picture, so why not all financial corporations use it? Good question. Overall, there are two significant issues. Let’s quickly cover them.

Firstly, blockchain systems only begin their development. They are still expensive because experts who build them are rare, components are complex, and potential issues are costly. As a result, an average blockchain system is more complicated, more expensive, and less scalable than the same centralized platform. As for now, of course.

The second issue is fully socio-cultural. Because of too much hype around blockchain, we think that it can solve any problem. This promising technology became a buzzword that is used to answer any question even if it’s not capable of solving it. Respectively, this situation, coupled with several fails and scandals, led to the rise in skepticism.

You can read a comprehensive article from one of the most reputable Bitcoin/blockchain authors and developers – Jimmy Song. He explains why blockchain isn’t a magic wand for all industries and why we should implement it carefully.

Blockchain in Banking Security Today and Tomorrow

As you see, blockchain is fantastic when treated correctly. It’s not a miracle that solves everything at once. It’s a technology, just like smartphones, the Internet, and VR helmets. This technology has its own limitations, for instance, in scalability, so not all industries can benefit from it. Banking is among the ones that can implement blockchain and become stronger.

In our company, we have both blockchain enthusiasts and people who think it’s too early to say about mass adoption. What’s more important, we have rich experience in banking software – ask large corporations from Europe, the USA, and the Middle East. Hence, if you want to boost your company’s security with blockchain, just let us know!