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Blockchain And Banking

Summary

Blockchain is a new technology with wide implications well beyond cryptocurrency.

There are many companies looking at innovative ways to take advantage of blockchain to create new products and services.

Through a thorough patent search, Bank of America stands out as a potential leader in the field.

While most investors are trying to wrap their head around the soaring price of Bitcoin, I'm more focused on its underlying technology - blockchain. No matter what ultimately happens to Bitcoin and the other cryptocurrencies, blockchain is here to stay.

First, my take on cryptocurrencies in general and I’ll keep it short and simple. Cryptocurrencies are here to stay as well, in my opinion. Will they be regulated by various countries in the future? Most likely. Will there be an unregulated black market regardless? Most definitely. 

I’ll leave speculating on the appropriate value up to the pundits. The value of cryptocurrencies is no different than the value of anything else. It is worth whatever someone will pay for it. The bulls make a valid argument. They are a limited resource. There’s only a limited number of Bitcoins that can be created, for example. 20,999,999.9769 to be exact. And, it is expensive to create. That sounds like an asset class that holds value to me.

I do think the term cryptocurrencies is a misnomer. They’re all “blockchain assets” and they will keep popping up until blockchain goes mainstream. 

Blockchain

So, what is this revolutionary technological innovation called blockchain? It’s pretty simple really. As most know by now, it’s a decentralized, digital accounting of transactions in chronological order. Each transaction builds on top of the other. When one “block” is complete another begins in linear, chronological fashion. 

The technology is more complicated and powerful than that simple explanation so I encourage the reader to google blockchain for a more definitive description, or just click the link above.  You can’t have cryptocurrencies without blockchain but you can certainly have blockchain without cryptocurrencies. Blockchain creates the ecosystem and cryptocurrencies are just one aspect of that system. As the system grows, cryptocurrencies will maintain a smaller and smaller space in the system. 

For that reason, my focus will be on blockchain and I’ll be content letting others dream of becoming Bitcoin billionaires. At current valuations, there's a good chance that ship has sailed. I’m going to take a different tack.

First, I’m going to dispense with the cryptocurrency mining companies. There’s plenty of prognosticators more than eager to pitch the latest speculative cryptocurrency play, some of which appear questionable at best. Take, for example, this excellent article on Riot Blockchain (RIOT). When it comes to investing in start up companies using bleeding edge technologies, its investor beware. It's difficult to separate the contenders from the pretenders.

The Search

When investing in new technologies and looking for the latest ideas, I often start with the US Patent and Trademark Office. Patents provide a good guidepost to what companies are working on for the future. When searching a topic, you will typically find some companies that are public while others are private startups worthy of putting on a watch list for investment opportunities down the road. The list of companies are usually interspersed amongst creative individual inventors. The search for blockchain patents was no different.

A query for blockchain-related lists show there are hundreds of separate patents. Of those, a sizable number are large cap corporations trying to get a jump on the competition. Also on the list is a number of startups supported mostly by angle investors. While the majority of the patent assignees are in IT, one of America's largest banks is also among the top ten.

The Future Of Secure Banking

Bank of America (BAC) in among the top ten patent assignees with 8 granted patents.  They also have several (approximately 53 last count) patent applications pending while continuing to be one of the most active banks filing for blockchain and cryptocurrency-related patents to date.

Of the 8 patents granted, patent 9,825,931, is the most interesting and carries the most impact. The title of the patent is "System for tracking and validation of an entity in a process data network", which sounds fairly benign. However, the possible implications are astounding. Think of yourself and everyone you know as blockchains. That's patent 9,825,931!

The abstract is provided below:

"Embodiments of the invention are directed to a system, method, or computer program product for generating and using a blockchain distributed network for tracking and validating a user identification morphing over time. The blockchain database comprises a distributed ledger that is updated with real-time identification information including an initial identification of the user. Subsequent identifications are stored and changes or morphs in identification, such as signatures, physical attributes, or locations of the user are identified. User facts are correlated with the identifications to build a timeline for the user. Subsequently, the system generates authentication questions based off of the timeline generated. The authentication questions allow for authentication of a user into a third party system."

As individuals we all morph over time as we age. To record us using block chain in real time over time is a reflection of who we are. It's a general ledger of our lives. Talk about know your customer!

It doesn't take much of an imagination to consider the uses. For security purposes, the bank will have a much better understanding of our behaviors and habits and if anything deviates from our normal pattern of living, the bank can automatically make an inquiry and, based on the database, easily identify us.

Taking it a step further, the identification process can be used to access areas that require higher levels of security as described below.

"In some embodiments, generating the one or more authentication questions based on the user facts and timeline further comprises generating a tier level authentication question based on authentication strength requirements for accessing the third party secure location."

Blockchain and Artificial Intelligence

Humans represented as blockchains is a powerful concept. Coupled with artificial intelligence, it could be taken to an even higher level. That clearly is where it's headed. A further patent query, this time including "Bank of America" AND AI provided some interesting results.

The first patent on the list, patent 9773285, was titled "Providing data associated with relationships between individuals and images." The following is the abstract:

"In general terms, embodiments of the present invention relate to methods and apparatuses for providing information regarding relationships between individuals, who may be associated with a user of a mobile device, and objects (e.g., products, locations, businesses, etc.) identified in an image. In some embodiments, this image may be captured by a mobile device. For example, in some embodiments, a method is provided that includes: (A) receiving first information associated with an image, where the image was captured by a mobile device operated by a user; (B) receiving second information regarding one or more individuals; (C) determining, based at least partially on the first and second information, one or more relationships between information regarding individuals and information associated with the image; and (D) presenting, via the mobile device of the user, information associated with the one or more relationships."

Here's the part in the Background section that ties it together: 

"In general terms, embodiments of the present invention relate to methods and apparatuses for providing information regarding relationships between individuals, who may be associated with a user of a mobile device, and objects (e.g., products, locations, businesses, etc.) identified in an image. In some embodiments, this image may be captured by a mobile device. For example, in some embodiments, a method is provided that includes: (A) receiving first information associated with an image, where the image was captured by a mobile device operated by a user; (B) receiving second information regarding one or more individuals; (C) determining, based at least partially on the first and second information, one or more relationships between information regarding individuals and information associated with the image; and (D) presenting, via the mobile device of the user, information associated with the one or more relationships."

Now add data from the blockchain of those individuals. Can you imagine walking through a store using augmented reality to Christmas shop for family members who are also customers of Bank of America? That's just one example - one that I could use right now!  The possibilities seem endless.

Conclusion

Banking has come a long way over the years from its simple beginnings of taking in deposits, lending out money and earning the spread on the difference. Today's banks have to innovate to stay ahead. It's not surprising that due diligence around blockchain led to Bank of America. Obviously, Bank of America is not alone in their thinking. There are plenty of financial institutions looking at the new technology for innovative ways to service their customers.  Bank of America's activity, and results, in the blockchain-related patent arena prove they are a jump ahead!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.