The 5 ways you are thinking about blockchain wrong.

Financial Institutions have too many misconceptions when it comes to blockchain. The Luddites believe it is voodoo and the early adapters think distributed ledgers will cure cancer. However, a few of the more savvy have figured out that the reality is somewhere in-between and are achieving substantial cost savings and efficiencies as a result of their diligence. It’s time to correct the five biggest misconceptions about this revolutionary technology.

“The blockchain”.

While there may be one Internet, there is not a single ledger that qualifies as “the blockchain”. Distributed ledgers are exactly that — ledgers. One ledger couldn’t possibly serve the needs of the banking industry anymore than a single spreadsheet could serve all the different segments of your bank. In fact, there are different blockchain protocols and platforms with different strengths and weaknesses depending on the domain. They have futuristic sounding names like Ethereum, Hyperledger, Corda and Uplink. These platforms are merely the delivery vehicle for the powerful software that utilizes real-time data and has the potential to integrate smart contracts’ and dramatically improve efficiency throughout your institution. Someday soon there will be a blockchain for every vital pool of shared data. Those many ledgers will look, and operate, differently.

Blockchains put our data at risk.

It may seem like a paradox that by distributing your data, you can actually enhance data security. Blockchains create copies of data and disseminate that data across nodes; All updates to the distributed data are logged in an immutable history that is tamper resistant using mainstream cryptographic protocols. Should one node be compromised, the data can be instantly, and accurately, reconstituted by the additional nodes.

For a real life example of distributed data being more secure, let’s imagine you send a password-encrypted spreadsheet to all your fantasy football friends. Before you can send the password, your computer gets lost, or worse, hacked. There are now dozens of copies of your valuable data, distributed, yet still secure. You could simply ask those friends to send a copy of the spreadsheet back to you. By comparing the responses, you can be assured that, unless everyone was hacked, simultaneously, your data remains uncorrupted. Your league was saved, thanks to distributed, yet still private, data. Blockchains protect encrypted data in the same way.

The whole cryptocurrency market makes blockchain questionable.

Yes, Bitcoin and a myriad of cannabis altcoins run on blockchains. And yes, it is true, many of last year’s ICOs are proving to be scams. That in no way diminishes the significance of distributed ledgers. Bernie Madoff ran his elaborate Ponzi scheme on spreadsheets, yet no one thinks less of Excel as a result. Whether cryptocurrencies ultimately replace fiat currencies in some distant future, or simply prove to be a fad, has nothing to do with the potential of blockchain. Until bankers learn to separate the ‘crypo-conversation’ in their minds, they will fail to see the opportunities that distributed ledgers provide.

A private blockchain is just a glorified shared database.

Bankers can be forgiven for thinking that private blockchains are the same as traditional databases. They are not. The key distinction is automatic data reconciliation. Shared databases (traditional relational or non-relational databases) require constant and expensive data reconciliation. For the banking industry, keeping shared databases in a continuous state of reconciliation has been one of the more painful chapters of the technology revolution.

Distributed ledgers allow financial institutions to maintain a structurally consistent shared database of updates to the ledger, otherwise known as “transactions”.The problem with more traditional databases has been validating that data and creating a permanent, immutable record of changes to the data. The innovation that blockchain brings is that it allows each participating institution to read and make changes to distributed data such that these changes are automatically reconciled with the rest of the network; This automatic reconciliation process results from integrated consensus protocols. Using different types of consensus protocols, private blockchains eliminate the need for miners and unreasonable amounts of energy-use while still ensuring that non-valid transactions aren’t added to the ledger. The result is that private blockchains provide higher levels of error checking and transaction validity than regular shared databases.

You don’t need to partner with your competitors to build a blockchain.

Blockchains allow counterparties to share data and commit to a common set of standards. For competing banks this creates enormous hurdles. Different institutions invariably have different legacy systems and disparate security requirements. The lingering issue is who controls the ledger and who has access. Getting the entire banking industry to agree on standards and security will take considerable time.

While various industry associations and consortia are working hard to overcome these obstacles, management is overlooking the opportunity directly in front of them. Blockchains are being employed to solve a myriad of internal business inefficiencies. These data sharing opportunities do not require the involvement of rival banks, but rather the cooperation of affiliates, subsidiaries, or business partners.

Thinking the right way.

Banks have spent a fortune building legacy systems. The idea of introducing new technology atop those systems can be daunting. However, it is difficult to make a rational decision about the benefits of blockchain technology until management gets past these common misconceptions. Only then can they begin to evaluate the real benefits that this new approach to data sharing. Now that the hype and hyperbole regarding blockchain has started to wane it is time for the hard work of critical review to begin.

Richard is a lawyer and financial services professional. (JD/MBA/LLM) He heads up North American Sales for Adjoint working with enterprise blockchain solutions.