Life After BitCoin: The Future of Banking May Be in the Blockchain

Introduction

In the past 6 months, the US Patents & Trademark Office (USPTO) has published more than 200 patent applications filed by Bank of America, Goldman Sachs, JPMorgan Chase and other top-tier financial institutions for their own proprietary blockchain systems.  Previously the territory of online anarchists and drug dealers, why are banks suddenly so interested in protecting this technology? It’s quite simple: it could save them a lot of money transferring money. A report co-authored by UK-based Santander, the worlds tenth largest bank according to Forbes, estimated that blockchain technology could reduce banks’ infrastructure costs by up to $20 billion dollars per year.  While the blockchain is so much more than a bank’s cost-cutting measure, I endeavored to investigate for this purpose.

What is the Blockchain?

Many technology experts are vaguely aware that the blockchain is the technology underpinning Bitcoin, an open-source (and thus unpatentable) digital currency system which is both complicated and controversial. However, the blockchain itself, the mechanics of which can be personalized (and perhaps patented) is remarkably uncontroversial. A blockchain is essentially a record, or a ledger, of digital events. The information “bundle” which makes up an independent data transfer event is broken down and shared across geographically diverse and computationally isolated nodes (which are user’s computers) which independently confirm the event’s details. The ledger can only be updated by data consensus within the information ledger, making fraudulent transactions functionally impossible. Furthermore, once the information is processed, there is a certain and verifiable record of the transaction which lasts forever. In essence, the blockchain allows complete strangers to exchange digital property (currency included) in a completely transparent way without a central “clearing house” or intermediate organization required to process information or relay the outcome of the transaction.

Use & Potential

The intermediaries: credit card companies, payment processors, and international clearing houses have historically taken 1-3% of every transaction, multiplying as high as 10%+ for overseas transactions.  Blockchain can do each of these data transfer events for fractions of a penny, regardless of location, without intermediary. Beyond cost savings, the blockchain presents significant risk reduction opportunities. The problem with the intermediaries we historically rely on, is that they can be hacked (think Target’s credit card data loss scandal), lie (think of securities fraud) or be plainly incorrect. Case in point, Estonia, which secures much of its banking infrastructure with a blockchain, now boasts the lowest rate of credit card fraud in the Eurozone.

The Future of the Blockchain

Although over 40 of the largest chartered banks, including the above mentioned institutions, have agreed to a create a common, open-source blockchain standard with the startup R3 CEV, finding an agreeable standard will be difficult and many early adopters may not want to share what they have worked for. Whatever your opinion of Bitcoin, the blockchain is here to stay and until a common source standard can be found, the mechanics of in-house blockchains will be a hot topic for IP lawyers.

 

Graham Haynes is a JD Candidate at Osgoode Hall Law School and is currently enrolled in the course “Legal Values: Commercializing IP” (Winter 2016). As part of the course requirements, students are asked to write a blog on a topic of their choice.

 

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