Q&A: What’s the Big Deal about Blockchain?
Remember that new kid at school with the stylish clothes, cool taste in music and charming smile that wins him invites to the elite tables in the cafeteria? For the payments industry, the new kid is blockchain, a permanent record of all digital events that can be updated by consensus of a majority of the participants in its system. This of-the-moment fintech backs bitcoin but many payments experts believe it could transform all types of transactions. From cross-border payment remittance to stock exchange transactions to safely issuing and redeeming gift-cards.
At last week’s InComm Partner Alliance 2016 conference in Austin, Texas, payments, gift card and retail professionals discussed prospects for blockchain technology, with a tone that was generally optimistic. “I’m bullish on blockchain,” said David Wolman, who wrote the book “The End of Money” and spoke in a session about the future of currency and how new payment technologies are earning the trust of consumers. “There’s a huge investment in blockchain right now.”
Indeed, late last year, a group of major industry players—Visa Inc., Fiserv, Capital One and others—made a $30 million equity investment in blockchain startup Chain Inc., underscoring the technology’s appeal and promise. Among the companies playing a part the fledgling blockchain movement is Feedzai, a data science company that detects fraud in the payments space. Paybefore recently spoke with Feedzai chief technology officer and co-founder Paulo Marques to get better acquainted with blockchain and gain a glimpse into its near future.
Paybefore: Please explain how blockchain is used in the fintech and financial services industries.
Paulo Marques: Blockchain, to put it simply, is secure and public permanent record of all transactions that take place between two parties. Essentially, any two-way transactions become registered and available to everyone to consult, completely independently of a central authority (like a bank) to keep that record. This enforces accountability and transparency for all parties involved. Blockchain also was designed so it’s extremely hard to tamper with. Since blockchain is not dependent on a single entity, it can be used as a common platform for exchanging money or doing transactions immediately between very distinct parties. Digital currency is one application but, increasingly, companies are using it for other transaction types. For example, digital gift cards can be used, exchanged and redeemed across multiple parties in a safer and more transparent way. In fact, by the use of cryptography, the blockchain enforces that no one is able to copy the gift cards and when they are used, everyone agrees that the transaction took place, removing the double spending problem. Blockchain also can enable transferring money instantaneously and with low costs across continents and countries, or a public ledger of company ownership through which stock can be exchanged.
Paybefore: Why should our readers care about blockchain?
PM: Readers should pay close attention to whether their financial partners have employed blockchain into their systems. While blockchain adds an extra layer of security by permanently housing data and transaction information, it cannot detect fraud. Feedzai, which is a data science company that uses machine learning to detect payment fraud, adds our machine learning algorithms on top of financial clients’ blockchain technology to actually analyze and predict fraud and criminal behavior before it happens. This is the key message for readers to understand: Blockchains are great because they increase security and accountability but do not inherently detect fraud. In the same way, digital money—which is a more efficient technology than cash—hasn’t completely eradicated bank robberies because thieves just now steal data instead of breaking into bank vaults. This is why you need a fraud detection mechanism in place.
Paybefore: But someone has to protect data from hackers, right?
PM: There is data that need to be protected. Not the blockchain data but the private keys [used in transactions]. When someone is using blockchain, the blockchain is visible to everyone on the network, and that’s part of its power. Now imagine that you’re doing a transaction that involves the blockchain. For instance, you are transferring some money from your wallet to someone else’s. To do that transaction you need to sign that transaction on the blockchain. For that you use your private key. That’s secret and must be kept safe at all times. When you sign the transaction it’s put on the blockchain and everyone agrees that it took place—because, only you can sign the transaction with your private key.
Paybefore: What are some other benefits of blockchain?
PM: Companies are interested in blockchain for a variety of reasons; however, chief among them is the two-way accountability for digital transactions. It creates a much-needed transactional accountability to both buyers and sellers that wasn’t previously available. Because no one controls the blockchain in a centralized way, every single participant can verify the transactions. Companies like Nasdaq and Gyft are among the companies employing this technology to increase digital security measures. Another important point is that you’re not dependent on a single entity to keep balances. This means that blockchain can serve as the common rails that simplify how transactions take place between different companies with much lower costs. For Feedzai this is extremely important. Since we employ machine learning for detecting fraud, having visibility on how transactions are being made and by whom, (even if anonymous) enables us to detect fraudulent behavior much more efficiently.
Paybefore: How widespread has blockchain become?
PM: Per a recent Forbes article, companies like Visa, Goldman Sachs, and other Wall Street incumbents are joining capital firms to pour $488 million into this industry. So 2016 is very likely the year that this technology will begin to be adopted in a more mainstream way.
Paybefore: Can blockchain technology protect against fraud on its own?
PM: Simply, no. It cannot protect against things like account takeover, identity theft or financial scams where legitimate users are unknowingly defrauded. While blockchain makes some types of fraud a lot harder (e.g., double spending, where, say, a given set of bitcoin is used for more than one transaction), fraud and crime is an adversarial problem. In fact, blockchain can even facilitate some types of criminal behavior like money laundering.
Paybefore: Why are money launderers using blockchain and how can companies protect against it?
PM: Organized crime is not using blockchain directly but bitcoin, which is built on top of blockchain. Since the blockchain keeps a permanent record of all transactions that took place it was built in a way that provides anonymity to its users. Although you can see that a certain transaction took place between two parties, the only thing that you know is a public anonymous address of the parties involved. Money launderers love anonymity. Once they have bitcoins they can move them around freely and use them to buy and sell things. You can move very large amounts of money around with little or no control. The way to protect against it is by using anti-fraud technology.
Paybefore: How might blockchain play in a role in making online shopping more secure in the coming years?
PM: Blockchain’s foundation is to make all transactions and the details of these transactions publicly available and permanent online. This means that while both buyers and sellers are accountable for their ends of a transaction, it also means that both buyers and sellers are more protected in this transaction. The reverse point of this is that in the cases of account takeover, once certain transactions are done there’s no way of going back. This is different from the credit card industry where consumers can dispute a charge and their bank will act as an intermediary to settle the dispute with the merchant. Granted that this can make some customers nervous, the fact is that credit card disputes mainly exist because it’s really easy to have credit cards stolen or cloned. It’s a bad solution to a design problem. Blockchain tries to address the problem of accountability directly by having buyers and sellers deal directly with one another. However, there is still a need for some intermediary to settle potential disputes that may arise between the buyers and sellers. For instance, if a buyer claims that their account credentials were stolen and used to make unauthorized purchases, and the merchant has no way to determine if this is true, then the intermediary will serve to resolve the problem. This intermediary, for example, could be the bitcoin operator that offers services on top of the blockchain technology. And that bitcoin operator would need anti-fraud detection systems to detect whether the disputing buyer’s account was truly compromised, or a case of “friendly fraud” where the buyer attempts to cheat the merchant.
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