Why Cryptography Is the New Gold for Banking and Blockchain

Blockchain and Cryptography: The New Gold Standard

Over the past 200 years, the role of gold in international trade has been undeniable as a means to standardize prices across currencies and secure payments across borders. Before 1875, global financial systems based prices on the amount of gold held in coins, which could then be exchanged between people who had no common language, who didn’t necessarily trust each other and whose currency was of no use to the other.

By 1880, many of the leading industrial countries used the gold standard, converting currencies into meaningful equivalents by virtue of their weight in gold. This enabled unprecedented trade volume and international commerce growth.

The comparison between the science of cryptography and the commodity gold may sound dubious at first, but cryptography plays the historical role of gold today by enabling international trade, products and services. Put simply, our interconnected economies now rely on a technological common denominator that can be trusted to secure and enable trade beyond physical borders now that our assets, money and transactions are digital.

Cryptography: A Common Foundation

Cryptography secures the global information infrastructure by encrypting data flows and protecting data from third-party interception. Nowadays, cryptography secures data in transit and at rest, protects personal information and communications, and ensures the integrity of every online purchase. Cryptography has four key attributes:

  1. Confidentiality: The protection of information and prevention of unauthorized access;
  2. Privacy: Protecting the personal information of individuals;
  3. Non-repudiation: The inability to deny an action took place; and
  4. Integrity: Assurance that information cannot be manipulated.

Though its origins date back centuries, modern cryptography came into effect in the 1970s using public keys, asymmetric keys and digital signatures — techniques still in use today.

Financial services introduced public key infrastructures (PKI) in the 1990s, and the National Institute of Standards and Technology (NIST) standardized the cryptographic hash algorithm SHA-1, the operating standard used globally for the past 20 years.

The Future of Banking

Many banks are now pivoting their business models toward technology solutions as they seek to provide digital services for their clients and reduce costs due to regulatory compliance obligations. Similarly, banks are investing heavily in new ways to deliver products and services to clients to compete with technology companies’ alternative payment methods.

This refocus has spurred the term fintech, or financial technology, to describe the growing market segment. A reliance on technology creates a greater need for cryptography to secure and move digital assets. Many banks are now creating their own cryptographic service units to respond to the growing demand.

Blockchain Changes the Banking Game

A perfect example of these competitive forces is the current focus on blockchain. Blockchain has become synonymous with alternative business models. It has driven businesses to reimagine how their networks operate when using a shared distributed ledger of information to reduce costs and complexity and increase efficiency and transparency. These permissioned blockchain concepts — where participants in the network are known and vetted — are considered some of the most innovative technologies currently in development.

At its core, however, blockchain leverages a vast amount of public key cryptography to enable confidentiality, privacy and security of data and user identities. Banks envision organizing vast securities trading platforms, supply chains and back office functions into blockchain systems, essentially changing the rules of how information flows are managed.

A Murky Future

Changes in cryptography will likely redefine banking infrastructures globally in the next decade. According to the NIST, SHA-1 is being phased out. Banks are now preparing to migrate to the new SHA-2 standard, a costly and complicated process for many institutions. This migration, however, is only one step in the evolving cryptography landscape for banks.

Whether you like it or not, quantum computing (QC) is coming. All enterprises, including banks, will need to rebuild their current cryptographic systems to defend against the power of QC. Essentially, QC can decode all current cryptography regimes, requiring quantum-resistant cryptography to keep data safe. This evolving field will be at the forefront of massive infrastructure changes in the coming years.

Learn More

Visit IBM at booth No. 1033 during Money 20/20, happening from Oct. 23 to 26 in Las Vegas, to hear more about blockchain in the financial industry.

Contributor'photo

Luke Sully

Associate Partner, IBM

Luke Sully is an Associate Partner for Security Services, Global Center of Competency and Blockchain Security Services...