Bitcoin — that is what most people think of when they hear the term blockchain. However, blockchain has morphed into an incredible technology tool that can be utilized across industries in a variety of capacities, including in mortgage lending. Blockchain is a ledger system stored on a decentralized database which can consist of one or multiple owners across many computers or “nodes” linked together.  Records are linked in the form of time-stamped blocks.  It was originally utilized in the technology used by bitcoin – the electronic cash system. When the open source code for bitcoin was released in January 2009, the technology of blockchain was brought forth.

This technology allows for documents to be stored and transferred in a process that cannot be altered or tampered with, enables validation and is less error-prone than current processes. The decentralized nature of blockchain can result in increased productivity since multiple parties can access the network and are able to work on files simultaneously.    

WHAT DOES BLOCKCHAIN HAVE TO OFFER? 

Blockchain promises many advantages; two of the most important ones are cyber breach protection and document security, both critical to the mortgage process. For mortgage lending, this could mean saving millions of dollars. 

First, in addition to a more streamlined and technology workflow, there could be a reduction in the cost of using third-party vendors due to automation.  Second, blockchain allows for transparency in the storage of data.  Entries on a blockchain ledger become time-stamped blocks which means that there cannot be hidden alterations to the chain. By using blockchain for document management, such immutable data could help in regulatory compliance tracking and ultimately in customer confidence because of the transparency of such data.                  

Another benefit to using blockchain is the characteristic of document authentication which confirms that data being placed upon the network belongs there.  When data is placed on the network, the document blocks are coded with specific hash sequences which must match the specific hash sequence of the network.  If the sequence does not match, the data will not be saved onto the blockchain. 

Blockchain technology is highly versatile and can be applied to many industries, including those that utilize payment and money transfers, stock trading, voting capabilities and reliance on secure storage of data.  Such industries include law, healthcare, insurance, car leasing and sales, online music, stock trading, supply chain management, storage and, of course, mortgage lending.

THE DOWNSIDE TO BLOCKCHAIN 

While blockchain offers many advantages, there are a few factors that need to be considered, including the “51% attack,” energy consumption of the networks and regulatory oversight. The proposition that blockchain offers a secure network relies on the principal that the network cannot be tampered with by cyber criminals unless they have the energy resources to hack into a majority, or 51%, of the computers on the network to gain control of the blockchain.

Thus data and records that are stored on each computer that has access to a particular blockchain would not be very valuable to a cyber thief. While an attack on a full network of computer nodes is unlikely, private blockchains have an added layer of security by requiring credentials and permissions to gain access to nodes.  Should a cyber attacker have the computing power and time to gain control of the nodes, these permissions and credentials further the difficulty needed to enter the network and manipulate the blockchain.

In a 51% attack, the majority of the computing power on the network is attacked and hackers are able to interfere with the process of recording new blocks. The interference prevents other users of the blockchain from completing new blocks, allowing these cyber attackers to monopolize the input of data on the blockchain.  While this type of attack could be devastating, the amount of computing power a hacker would need to possess in order to launch an attack on a blockchain is massive.

With regard to energy consumption, the distributed nature of the network calls for continued power in the multiple locations housing the nodes.  According to environmental researcher Sebastiaan Deetman, the blockchain network that bitcoin is housed upon is expected to consume energy somewhere between an amount equal to the output of a small power plant and the consumption of a small country such as Denmark by the year 2020.  Deetman’s study further cites that the bitcoin network currently consumes enough electricity to power 280,000 homes in America.

Given that blockchain is an emerging technology, there are not yet formal regulations pertaining to it, however there is guidance that addresses its characteristics, such as privacy and security, as well as governance of its use and implementation. U.S. regulators, including the Securities and Exchange Commission and the Treasury Department have indicated that there are risks and uncertainties, such as cybersecurity and regulatory oversight associated with blockchain which will need to be monitored. 

The Treasury Department’s Financial Crimes Enforcement Network issued a guidance in 2013 that discusses the applicability of the Bank Secrecy Act regulations to blockchain and individuals distributing, exchanging or transmitting virtual currency.  While the Consumer Finance Protection Bureau has not yet made a statement about the use of blockchain, it has issued warnings to consumers regarding risks associated with bitcoin.

Transaction processing time is also a concern among those developing blockchain networks.  Currently the size of a block is one megabyte and the blocks are mined every 10 minutes.  With the limited size of the blocks and mining time of 10 minutes, this means that only about seven transactions per second can be recorded.  The limited number of transactions may be a barrier to entry for the blockchain network in the mortgage industry;  however as the technology advances, blocks with larger storage capacity and increased computing power in mining blocks should make blockchain a more attractive option for the industry.