In late April, blockchain evangelist Blythe Masters told a crowdin the London Docklands that banks could solve many of theirproblems if they embraced the transaction-processingtechnology.

The former JPMorgan Chase & Co. executive could alsohave been talking about SWIFT, which hosted the conference. Themessaging system for transfers between banks was facing a crisisthat had been bubbling under the surface for months. Hackers have exploited the SWIFT system to steal US$81 millionfrom Bangladesh's central bank, and may have infiltrated as many as12 banks.

The blockchain technology Masters was talking about is adistributed, encrypted system of transferring money. It's thearchitecture behind bitcoin and is seen as the truly transformative aspect of thedigital asset. While it doesn't offer protection against stolencredentials, blockchain is probably a better-defended record thanexisting systems.

“Blockchain is more secure,” said Richard Johnson, a marketstructure and technology analyst at Greenwich Associates.“Theoretically they wouldn't have been able to trick thedatabase.”

The financial services industry, including the regulators whooversee it, has scrambled to harness blockchain, but its focus hasmainly been the potential cost savings from replacing expensiveback-office systems with something cheaper and more automated. Oneof blockchain's most important, and perhaps overlooked, featurescould be its security technology.

In the case of Bangladesh's central bank, hackers used the SWIFTsystem to send messages to the New York Federal Reserve,instructing it to move the Bangladeshi bank's cash into accounts inthe Philippines. They impersonated bank officials to send the messages.

Hackers also used malware to compromise the bank's records,covering their tracks. That type of skulduggery, blockchainadvocates say, would be immensely difficult using the encryptedledger.

With blockchain, the statement of transactions is not kept inone place. Instead, the information is held on a network ofcomputers that verify the data and keep each other honest. Hackerswould have to break into the majority of computers on the networkto cover their trail rather than just exploiting a single computer.For the biggest blockchains, such as bitcoin's, that would meanhacking thousands of computers.

SWIFT has insisted that its core messaging service is secure andthat the vulnerabilities are on the machines that interface withthe network. Those computers are its members' responsibility, thebank-owned cooperative says. SWIFT says its data center's “goldencopies” of transactions remained intact and could have been used toverify what had gone missing from the Bangladesh central bank.

'Golden Copies'

Being blockchain, of course, the promise has yet to clear a fewkey hurdles. Assets such as cash would have to be placed on theblockchain. That means financial institutions' existing systemswould need to somehow interact with a live blockchain.

“There's no proof of concept that I know of that would put fiatcurrency onto a blockchain-type system yet,” Johnson said.

Financial technology company Ripple is developing an interledgerprotocol that could help blockchains interact with banks' existinginfrastructure. SWIFT, meanwhile, is part of the hyperledgerproject to advance blockchain technology.

Going forward “everything is on the table,” includingblockchain, even though the technology on its own can't fullydefend the network from attack, according to SWIFT CEO GottfriedLeibbrandt. And the keys used to access blockchains suffer from a20th-century problem: password vulnerability.

“Innovation has to be part of the solution,” Leibbrandt said inan interview. “You have to keep the keys to that money, and ifthose keys are compromised then the money belongs to somebodyelse.”

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