Banking industry shows increasing interest in blockchain technology

In a post on LinkedIn, Patwardhan said that the costs behind payments and transfers could be "undercut drastically", while transactions would be more secure and more easily tracked.

Blockchain is best known in relation to bitcoin but it can also be described as a public ledger solution with storage capacity that is secured by cryptography and a system of algorithmic problem-solving.

As Patwardhan describes it, "the blockchain is a decentralised ownership record or distributed public ledger of all transactions, which is mathematically signed to prevent unauthorised tampering".

While bitcoin is "viewed uneasily as an exotic alternative currency", the banking industry "is starting to see the many potential benefits of its underlying technology", Patwardhan said.

Blockchain could be helpful in preventing money laundering, she said.

"With the use of blockchain technology, each leg of the transaction can be recorded and traced, making the ultimate destination and use of the funds clearer. This means combating financial crime such as money laundering also becomes easier," Patwardhan said.

Trade finance could also find benefits from blockchain, she said: "This has traditionally been a paper-intensive process but it is possible to use blockchain technology to digitise and authenticate the records. This can result in trade transactions that are secure with digital records of related data visible to various participants in the trade transaction."

If blockchain does take off in the banking industry, "it is not impossible to imagine a scenario where even the central banks themselves might look at issuing digital currencies. No bank can afford to ignore what it augurs for the ongoing avalanche of digital innovations to come," Patwardhan said.

Patwardhan joins a series of senior banking officials who say that they are looking into the potential of blockchain technology for payment systems and cross-currency transfers.

During a recent webinar for investors and analysts, the Royal Bank of Scotland's chief administrative officer Simon McNamara said he had just returned from the west coast of the United States where " hundreds of millions of dollars being invested into blockchain initiatives. I don’t know what’s going to succeed. What I'm certain of is that we are going to see blockchain solutions, peer to peer solutions emerging in our industry and we want to be close to that development."

Last month, Barclays announced that it is working on a proof of concept with Safello, a start up bitcoin exchange from Barclays own business accelerator scheme, to explore how blockchain technology can be used in financial services. Barclays believes this is the first proof of concept deal signed by a UK high street bank with a bitcoin company.

In April, the Wall Street Journal reported that UBS is opening a blockchain research lab in London. The lab will bring together technology experts from UBS and the wider fintech community, and will experiment with how blockchain can be adapted to process financial transactions more efficiently, the report said.

BNY Mellon chief information officer Suresh Kumar told the Wall Street Journal in April that the bank is experimenting internally with the use of blockchain to make transactions more efficient.

The bank is due to run an event titled 'Digital currencies and the blockchain' on 28 July, according to its Spring 2015 newsletter.

Citigroup has been also looking at distributed ledger technology "for the last few years", Ken Moore, head of Citi Innovation Labs told IB Times earlier this month. The bank has built three blockchains and a test currency called Citicoin to run on them, he said.

"It's in the labs, but it's to make sure we are at the leading edge of this technology and that we can exploit the opportunities within it," Moore told IB Times.

Financial services expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com said: "As can be seen, there is a great amount of interest from banks in how they can use blockchain technology. It does seem to present huge opportunities and provide potential to improve processes to enable customers to transact more efficiently but also to combat fraud and money laundering."

"It will also be important for institutions to open dialogue with the regulators to ensure that the regulators understand the benefits of the technology and can alter their rules where necessary," Salmon said.

"Financial services businesses in particular will be hoping that regulators across the globe take a consistent approach – there is a danger of fragmentation with many regulators currently looking into the issues in isolation," he said.