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Fintech & Finserv CX

Blockchain: A Primer

The Promise of Blockchain to Build Trust & Fight Fraud

Blockchain has been heralded as a new technology that could redefine the way we shop, prove our identities, and exchange funds. While it was originally developed as a security mechanism for the digital currency Bitcoin, organizations are now exploring how it can transform other activities too, such as trading, peer-to-peer payments, supply chain tracking and identification. 

Blockchain technology could make it possible for everyone from individual consumers to large corporations to establish trust in transactions quicker and more reliably. What does that mean for business? Simply put, blockchain could introduce next-level security for transactions that may save billions in fraud. Here’s how it works and why companies should be paying attention.

What is blockchain?

The basic idea behind blockchain is that it functions as a distributed digital ledger with data stored on hundreds, thousands or even millions of computers in a network. The transactions it records can involve any exchange of money, goods or data. It’s called blockchain because, just like the name says, the recorded transactions are stored in blocks that are strung together sequentially in a chain.

A block is a parcel of digital information. A block stores transaction data (e.g., dates, times and dollar amounts), participant data (using unique digital signatures), and distinct identifying information called a hash that names the block itself.

The blockchain is a public database composed of multiple blocks. When a block stores new data, it is securely added to the chain using a cryptographic function.

How does it work?

Take the basic example of an online shoe purchase. When you purchase the shoes, the information about that transaction (time, date, dollar amount, etc.) is stored and shared with others in the blockchain network. The record of that purchase is packaged with many other transactions to make a block. Each record is time-stamped and stored sequentially so it’s easy to locate. Once the block is full, it also gets a timestamp to keep things chronological, and then it’s added to the chain.

The chain is protected by a cryptographic function called a hash. A hash is a unique identifying string created from an algorithm that uses the information contained in each block. As a new block is added, the hash from the previous block is stored in its data. Based on this system, every subsequent block has a trace of the previous ones in its hash, making it immediately evident if a malicious actor tries to tamper with the information. It would be impossible, for example, for a fraudster to alter your shoe purchase data to make you pay for the same pair of shoes twice. It would disrupt the whole chain. Like a string of beads that falls apart when you try to remove a single one, the blockchain won’t tolerate any single block being altered.

How blockchain prevents fraud

Blockchain is designed to foil fraudsters and establish trust among participants because it is:

  • Verifiable: The basic structure of blockchain is to record every single transaction that has been made. This creates a genuine record that cannot be changed without the appropriate permissions. 
  • Transparent: Unlike most conventional transactions today that are validated by a central authority, blockchain is distributed. It verifies the authenticity of information through a “crowd-sourcing” approach of sorts. Everyone on the blockchain network has their own copy of the blockchain, meaning there isn’t one single accurate copy, but instead thousands or even millions. If anyone tries to tamper with a copy of the data, it is easily identified and flagged. To be successful, a hacker would have to alter every single copy of the blockchain – an extremely difficult and unlikely scenario.
  • Traceable: Once a block has been added to the blockchain, it’s not easy to go back and change its contents. If a hacker tries to edit the information in a block at any point in the chain, the hash changes as well, which means it will no longer match up with subsequent blocks. Changing a single block would require a hacker to change every block after it. The amount of computing power that would take makes this virtually unattainable.

The business value of blockchain

As a fairly straightforward, completely digital method of establishing trust, blockchain holds huge possibilities for the future of secure transactions in many industries. 

  • Juniper Research predicts that blockchain could save $31 billion in food fraud by the year 2024 by facilitating a way for all participants in the supply chain to track and trace assets. 
  • According to McKinsey, 5-10% of all insurance claims are fraudulent, costing insurers an estimated $40 billion per year. Blockchain can reduce this number by validating the authenticity and ownership of goods, confirming dates of purchase, checking for police theft reports and claims histories, and confirming ownership changes.
  • Bank-to-bank financial transactions are a $20 billion-a-year problem, largely because they are multi-step processes that can take days and involve currency exchanges, intermediaries and human interaction. Blockchain eliminates these factors by sharing information instantaneously. The ledger can only be updated when all participants agree, cutting down on time, costs and opportunities for fraud.
  • Digital identification through blockchain using fingerprint data can make it possible for an airport authority anywhere in the world to verify a person’s identity by scanning their fingerprint to unlock their ID – no passports, ID cards or proof of airline tickets required.

The future of blockchain technology

Blockchain could be a disruptive force in many industries. But there are still significant obstacles to wide-scale adoption of the technology, not least of which are the high upfront implementation costs. The technology itself still needs to be refined too, particularly to be able to measure up to, for example, the scale and speed of credit card networks that are capable of much higher processing volumes than what established blockchains can do. Early adopters will have to accept potential security risks involved with a new solution. And, of course, there’s always the possibility that hackers will evolve at pace with the technology. Still, the promise blockchain holds – potentially billions of dollars in reduced operating costs and fraud – could greatly outweigh the risk.

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