Zain Jaffer is the founder and president of Zain Venturesa family office that invests in real estate and proptech.
In early October 2024, the electronic banking network of Bank of America (BoA), one of the largest US banks, was briefly disrupted. Depositors reported zero balances in their accounts, but when restored, their balances showed correctly.
Many of our financial systems around the world rely on centralized servers, databases and transaction ledgers. So when financial institutions’ systems collapse, many depositors panic and can do nothing but complain.
The rationale for centralized financial records is understandable because we want our transaction records (e.g., our deposits and withdrawals) to be private. Since a customer opened an account with Bank A, he expects Bank A to keep his records confidential.
This system has worked so well for decades that we can’t imagine any other way to conduct financial transactions. However, I believe there is a better solution and, paradoxically, it is to put the company’s financial records on a public blockchain. I’ve been researching blockchains since I started thinking about them as real-world assets (RWA) for real estate.
The rationale for a public blockchain
There are several justifications for this way of conducting financial transactions.
The first is that with the traditional centralized method of allowing the trusted financial institution to maintain records, if their systems fail, users find themselves in a situation such as the Bank of America outage in October 2024. Records are held by the trusted institution, and if they become corrupted without backup, this could have adverse consequences. Users could lose their money.
Another reason is that when you try to send money across borders or to another bank or financial institution, the sending bank and the receiving bank are likely different. Bank A and Bank B have different systems, different and isolated ledgers and transaction records. Many banks use FedNow or SWIFT for bank-to-bank messaging. This may result in a delay in wiring and fees for any banks through which the transaction goes.
Many people will be surprised to learn that a funds transmission does not always go directly from Bank A to Bank B but often goes through “middleman” banks like BNY Mellon. This may result in additional fees and delays when sending from Main Street Bank A to Side Street Bank B.
This is why fund transfers using cryptocurrencies only take a few minutes or seconds, while traditional finance often takes a day or more. Although next-generation technologies now sometimes use blockchain technologies to accelerate these, blockchains are still almost instantaneous in terms of finality.
Privacy issues
Many people’s main fear is losing their financial privacy if their records are placed on the public blockchain. In reality, this is not the case. The reason is that companies wouldn’t really put something like “Customer A sent $500 to the company in October 2024” as simple, human-readable text on the public blockchain.
What is reflected on the blockchain are hexadecimal alphanumeric values that humans cannot easily read. These can be either transactions or balance changes, depending on the blockchain. A depositor’s account may be “0xAbCd1234” and contain a sequence of letters and numbers that are not readable by humans.
The benefit of having everything on a public blockchain is that both the sender and receiver can quickly transact and update records. Some blockchains are extremely fast global machines that can synchronize their transaction records halfway around the world in less than a second. With traditional financial systems, Wall Street recently migrated in May 2024 to one-day (T+1) settlement, but this is still not instantaneous.
Considering the limitations
Most likely, companies concerned about secrecy might find it difficult to consider connecting to public blockchains. However, with new technologies such as zero-knowledge proofs (ZKP) that use encryption, public blockchains are becoming even more secure.
It remains that if the risks of loss of secret data can be extremely destructive (as in the case of the military), not Connecting your network to the Internet might work better for you.
Businesses must also consider the number of parties involved in a transaction. The advantage of public blockchains is that if a transaction needs to go through multiple parties (e.g. shipping a container through different ports, each with its own database, etc.), this can be done securely. However, if an application depends solely on the user and the company issuing it, traditional Web 2.0 technology may be sufficient.
The global financial system has performed well over the past decades. So it’s like a huge ship that is difficult to change direction. However, I believe that public blockchains are superior to financial transaction infrastructures because of their speed and security. Their dominance could manifest itself in the coming years.
The information provided here does not constitute investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.
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