Blockchain, the technology that underpins the bitcoin digital currency and allows a ledger of financial transactions to be shared among a network of computers, is a potentially groundbreaking innovation that could transform the cost structure of the financial services industry.
Financial institutions across Asia are considering more use of blockchain technology for a variety of platforms. For example, Sumitomo Mitsui Banking Corp. partnered with Japan's National Institute of Informatics in December 2015 to conduct joint research on blockchain technology for financial businesses as part of an academic-industrial alliance.
Also in December that year, the U.K.'s Standard Chartered Bank, Singapore's DBS Bank and the Infocomm Development Authority of Singapore announced that they had completed a proof of concept for a distributed ledger technology that could enhance the overall security of trade finance invoicing. South Korea's KB Kookmin Bank, meanwhile, is developing a blockchain solution for international remittances.
In Australia, the Australian Securities Exchange is working with New York-based Digital Asset Holdings to build a blockchain that could potentially replace the clearing and settlement systems it runs through the Clearing House Electronic Subregister System, known as the CHESS platform.
Globally, financial institutions and technology companies are expected to spend more than $1 billion developing blockchain technology. However, if blockchain is to be embraced and implemented widely it must evolve to be more user-friendly for heavily regulated financial services companies.
PRANKSTER PROBLEM In principle, blockchains are "append-only" systems, which means that data can be added but not removed. But pranksters have already underscored the challenge that this will present to financial institutions applying it to their core infrastructure.
Pornography that had been embedded as metadata on the immutable blockchain of one cryptocurrency was discovered in 2013 -- and remains there to this day because the principle of immutability does not allow the code to be changed or the appended material to be deleted.
Then there is the issue of theft. In June, hackers stole more than $60 million of "ether," a digital currency, from a startup fund known as The DAO. The unknown culprit in The DAO case argued through an attorney that the terms of the erroneous code justified the removal of the fund's assets. A surprising number of blockchain purists have agreed, on the grounds that the pristine nature of the blockchain must be preserved.
While this is an acceptable trade-off for decentralized cryptocurrency systems where immutability is the foundation of the trust in and the valuation of the currency, for a private enterprise system absolute immutability limits the usefulness of the technology.
Privacy is another difficult issue. Financial institutions with operations in the U.S. will need to comply with the U.S. Fair Credit Reporting Act and other laws that require personal financial data to be fully expunged from records -- which is not possible through transaction reversals on an immutable ledger. Similarly, financial institutions will need to adhere to the European Union's incoming General Data Protection Regulation, designed to offer consumer data privacy and ownership rights.
The key is to have systems that are capable of amending or editing blockchains under specified circumstances. For users of such systems, the blockchains would remain immutable. However, trusted administrators from multiple institutions or regulators, acting on agreed rules of governance, would be able when necessary to edit, rewrite or remove blocks without breaking the chain.
One way to do this would be to use a "chameleon" hash function, which can recreate algorithms that link two separate blocks through the use of secure private keys. Any edit made to a block in this way would leave an immutable "scar" indicating that the block had been altered by using both a chameleon hash and traditional hash.
This system retains 99.9% of the benefits of standard blockchain technology but allows for the 0.1% of scenarios involving human error, mischief and lawbreaking where records need to be set straight for the systems to keep working.
Asia-Pacific financial institutions are unquestionably considering more use of blockchain systems. But if it is to be widely adopted, blockchain must evolve to enable more efficient, streamlined, secure and cost-effective solutions for the industry.
Richard Lumb is chief executive of Accenture's financial services group.