Out-Law News 2 min. read

Deutsche Bank backs blockchain technology for revolutionising banking


The technology that underpins systems of virtual currency could be used to speed up the processing of payments and help banks meet regulatory reporting obligations in a more efficient way, Deutsche Bank has said.

Daniel Trinder, Deutsche Bank's global head of regulatory policy, highlighted the benefits the company foresees in using distributed ledgers and blockchain technology in the financial system in a response to the European Securities and Markets Authority's (ESMA) consultation on virtual currencies and distributed ledgers (4-page / 259KB PDF).

"Whilst the technology associated with distributed ledgers is still in its infancy (albeit evolving very quickly) we believe that it presents a potential opportunity to realise a number of important benefits including: more stable and resilient systems, faster processing of transactions and lower costs for bank customers," Trinder said. "There is also scope for this technology to be deployed by banks to make their operational and reporting process flows more efficient and secure and to meet regulatory requirements, including know your customer and anti-money laundering registries and surveillance."

Trinder said that it is important that the risks in the technology are "understood and mitigated where appropriate". He said that regulators and industry must engage in "ongoing dialogue" and that there should be "no precipitous move" to regulate the use of distributed ledger or blockchain technology in financial services. This would "ensure that there is an appropriate balance between allowing for innovation and exploration of the applications of this new technology and managing risks", he said.

"A proportionate approach should be taken to the development of any proposals for future regulation in this area, in order to ensure a level playing field for all participants and to support continued investment in innovation," Trinder said.

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.

Earlier this summer, financial services and technology law expert John Salmon said that blockchain technology "looms as a possible answer" to the problem financial services face in customer identity verification, with the increasing digitisation of services.

"Until now no single digital customer identity and related transaction verification tool has been embraced in a way that would enable customers to deal effectively with financial services organisations without reliance on offline verification processes," Salmon said. "[Blockchain] can be used to provide a publicly verifiable record of transactions, as a blockchain system places trust in the robustness of the technology itself rather than in any third party organisation."

Salmon said, though, that one issue that needs to be considered before blockchain technology can be deployed within the financial services system is about how transactions are validated.

"As the technology requires computation to take place for blocks to be validated and transactions to be recorded on the ledger, someone needs to do the validating," Salmon said. "A centralised validating body could prevent or delay the inclusion of transactions on the ledger in a way that raises similar arguments to those regulators are now having about net neutrality. Is it fair to give a centralised non-governmental body the power to decide which transactions should be validated first or within particular timescales?"

Earlier this month, Standard Chartered chief innovation officer Anju Patwardhan said blockchain technology has the potential to "drastically" cut the costs behind payments and transfers, and make transactions more secure and easily tracked.

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