Hu Yoshida

Is Blockchain the Answer to Recent Hack Attacks on Funds Transfers?

Blog Post created by Hu Yoshida on Jun 6, 2016

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The hottest area of development activity in the banking sector is Blockchain, a distributed ledger technology that was started with Bitcoins, and is viewed as a replacement for the traditional central ledger approach that has been the core of the banking industry. The blockchain distributed ledger technology could save banks billions of dollars by eliminating central authorities and bypassing slow, expensive payment networks. It can also provide customers with increased trust in the banking system.

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Santander is the first large bank to introduce blockchain technology for funds transfer in a pilot project with 6000 users. It will become available to consumers after the pilot is completed. The app will be available on Apple’s iOS and will connect to Apple Pay where users can confirm payment securely using Touch ID. This will enable users to transfer £10 and £10,000 and make payments in euros or USD to euro based countries and the US. They will be using blockchain technology from a startup company, Ripple, a company in which Santander’s Fintechs venture capital fund, Innoventures, has an investment. This will make the settlement of fund transfers almost immediate and reduce the cost of settling the transfer between different banks.

 

While this will initially be used for consumer funds transfer. You can image imagine what this could mean for global funds transfers. You have only to look at the recent news of the hack of the SWIFT messaging system which resulted in the loss of $81m from the Bangladesh Bank that was holding funds in the Federal Reserve Bank of New York for use in international settlements. While there was no compromise to the SWIFT core messaging system or the Federal Reserve Bank, unknown hackers breached the computer systems of Bangladesh Bank and once they stole their credentials, attempted to steal $951 million from its account at the Federal Reserve Bank. Some attempted transfers were blocked, but $81 million was transferred to accounts in the Philippines in one of the largest cyber heists in history. Reuters reported that “Bangladesh's central bank was vulnerable to hackers because it did not have a firewall and used second-hand, $10 switches to network computers connected to the SWIFT global payment network.”

 

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a Brussels based cooperative owned by some 3000 global financial institutions which acts as a central clearing house for international funds transfer. Money transfers are effected with the help of SWIFT messages based on a six-digit Bank Identification Code (BIC) which is assigned to each bank. Banks charge for the use of Swift transfers and several banks may be involved. SWIFT payments usually take 1-3 days to reach their destination but could take longer based on time differences between sending and receiving countries.

 

While blockchain cannot make up for poor security, the use of a distributed ledger could have made the transfer time almost immediate and made it easier to detect or even prevent the theft.

 

Cyber Insight by Surfwatch has reported that Cyber-attacks against the financial sector is having a huge impact in 2016. Since February 2016, the financials industry has made big headlines for high-profile cyber events involving the Central Bank of Bangladesh, Vietnam's Tien Phong Bank, and most recently, Qatar National Bank.

 

Bloomberg news reports that: “Santander is among global lenders including Citigroup Inc., UBS Group AG and Barclays Plc vying to make use of the technology behind bitcoin in an effort to cut costs and stay a step ahead of digital challengers.” In FinTech 2.0, the established financial leaders view FinTech companies like Apple Pay and Ripple as allies in their digital transformation.

 

Hitachi has established a FinTech lab in Santa Clara specifically to focus on blockchain technology and pursue FinTech projects with strategic financial partners. Members of the lab are active in the Hyperledger open source consortium as a member of the board and of the technical steering committee.

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