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How Banks Reducing Fraud With The Help Of Blockchain

The banking industry is one of the most attackable fields. It requires high security and there were invented many solutions striving to solve this problem (for example, Microservices). But maybe we are already witnesses of it? Blockchain can eliminate the threat or the risk of fraud in all areas of banking, and this could equally apply to a trading platform. Furthermore, Blockchain would also address issues such as operational risk and administrative costs as it can be made transparent and immutable. The traceability and the permanent historical record that would exist on Blockchain backing up every asset or item of value that was traded would provide assurance and authenticity all the way through the supply chain. So let’s check out one of the blockchain use cases which proved its reasonability and efficiency.

Traditionally, bank ledgers have been created within a centralized database. This model has been more susceptible to hackers and cyber-attacks as all the information is located in one place — usually secured behind outdated legacy IT systems. Hackers and cyber-criminals are well aware of evolving digital technology and have been able to bypass these security systems to commit data breaches and fraud.

Chris Mager of BNY Mellon Treasury Services acknowledged that “one of the main challenges facing the banking industry today is the growth of fraud and cyber-attacks.”

In contrast, as the Blockchain is decentralized, it is less prone to this type of fraud. By using Blockchain there would not only be real-time execution of payments but also complete transparency which would enable real-time fraud analysis and prevention.

Chris Huls of Rabobank defined Blockchain as “a ledger or database that can store all types of information or value exchange that is publicly available for all participants in a group where they all see exactly the same data.”

Therefore, as Blockchain is checked at every step of a transaction by independent miners, with all data being open and publicly available, there is a real-time analysis and verification of every bit of data and all information during the transaction. The Blockchain ledger can provide a historical record of all documents shared and compliance activities undertaken for each banking customer. Malicious attempts to view or change the data become part of the data itself, making third-party hacks immediately obvious. For example, this record could be used to provide evidence that a bank has acted in accordance with the requirements placed upon it — should regulators ask for such clarification. It would also be of particular use in identifying entities attempting to create fraudulent histories. Subject to the provisions of data protection regulation, the data within it could even be analyzed by the banks to spot irregularities or foul play — directly targeting criminal activity. This would be an advantage over the current banking and payments systems, which are more susceptible to fraud and hacking.

Chris Huls stated, though, that there would need to be collaboration to achieve this in Blockchain. Banks would need to partner with regulators and FinTechs to “develop credible, decentralized ledgers permitting rapid adoption of global real-time payments and settlement.”

On 30 December 2015 Nasdaq announced that it had made its first-ever share trade using Blockchain technology. Nasdaq used its proprietary Linq platform (developed in collaboration with and global design firm IDEO) to sell shares.

As Nasdaq has pointed out, within the multi-step manual process used today in banks and financial institutions there is not only plenty of room for error but also for fraud. By utilizing Blockchain, organizations can reduce risk and administrative burden, as well as saving time and money.

Nevertheless, banks must consider that Blockchain doesn’t yet eliminate all types of fraud. In August 2016, nearly 120,000 units of digital currency Bitcoin worth about the US $72 million was stolen from the exchange platform Bitfinex in Hong Kong. The Bitcoin was stolen from users’ segregated wallets and amounted to about 0.75% of all Bitcoin in circulation at that time. Since the hack, Bitfinex has taken steps to reimburse account holders with “BFX tokens” which are cryptographic tokens on the Omni Blockchain that can be exchanged for $1 beneficial interests in iFinex (Bitfinex’s parent company).

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