Banking today is far from what it used to be. Increasingly, in order to power the services that consumers demand, banks need to have access to wider arrays of tech as well as new methods of interaction and transaction. While this may seem like it would only lead to further inefficiencies in banking, it can actually streamline the industry thanks to new innovations in blockchain tech, all taking inspiration from game theory.
Modern banking, the type that you access on your phone when you deposit a check with a photo or when you send money using Venmo, often functions according to a Banking as a Service (BaaS) model. This lets customers undertake traditional banking operations without needing to find the nearest ATM or needing to know when exactly their local branch is open. Because of this new use of BaaS models, banking is now represented by myriad features often developed by third-party fintech companies. These individual features are then integrated into a banking environment unified under a brand. But this flexibility can be used for more than just integrating mobile banking applications. The flexibility represented by the BaaS model will enable banks to integrate blockchain solutions to solve an issue plaguing the financial world, one that John Nash noticed and expanded on in a well-known contribution to game theory, best represented by the thought experiment of the prisoner’s dilemma.
Game Theory, The Prisoner’s Dilemma, and Blockchain
For a quick refresher, game theory is a branch of mathematics that studies the strategic interaction among rational actors. One of the most well-known thought experiments in this field is the one mentioned above, the prisoner’s dilemma. In this thought experiment, there are two prisoners who are both brought in for questioning for their suspected participation in separate but similar crimes. The sentence for these crimes is three years. However, the police suspect the two prisoners, prisoner A, and prisoner B, of collaborating to commit a more serious crime that carries a sentence of four years. The police offer a deal: if one prisoner confesses to the more serious crime and indicates that the other prisoner was involved, then the prisoner who confesses will be given a sentence of two years while the other prisoner will get a harsher sentence of eight years. Importantly, this hinges on one prisoner confessing and the other denying. If both prisoners confess, then both are given the standard sentence of four years. For clarity, reference the chart below:
As is obvious, the best option for both prisoners is to deny involvement in the more serious crime and thus only get three years of prison time. However, since neither prisoner can be sure of the other’s strategy, both will choose to confess. This is purely logical; if one prisoner confesses and the other doesn’t, the prisoners run the risk of doubling their potential prison time. The confession is the best option they have given their circumstances. This is what Nash observed and what is known as a suboptimal equilibrium.
This is the situation that the banking sector finds itself in right now. Trust among financial players is almost non-existent and there is no transparency in transactions. This leads, as exemplified by the thought experiment, to a suboptimal equilibrium being reached within the financial sphere, which causes systemic inefficiency and incurs costs thanks to the resulting requirement for regular audits.
Here is where blockchain can integrate with traditional banking. It can increase trust among market participants thanks to its eminent transparency and can reduce costs by eliminating audits that once were relied on to establish the reliability of banking information. This is accomplished since all transaction information will be recorded on the decentralized and accessible blockchain.
The Proof of Asset Protocol
The integration between the spheres of banking and blockchain is exactly the mission of BANKEX, a fintech company founded in 2015 with the goal of providing Know Your Customer (KYC) services to banks. Soon after the successful KYC project, the company, thanks to its team made up of bankers and blockchain evangelists, decided to move into the sphere of blockchain so as to power this new blockchain environment for banks.
BANKEX is looking to lead the way to this integration by developing its Proof of Asset Protocol, a method by which extant assets can be logged on the blockchain. The idea of the Proof of Asset Protocol, expressed simply, is that the qualities of an asset can be amalgamated and verified digitally, and then the asset is made virtual as a token that can be bought and transferred. The banks will serve as the gatekeepers for this system, and thus, the assets registered on the blockchain will be visible to anyone with an internet connection. No longer will audits be required; thanks to this new protocol, assets will be visible and accessible to anyone who wants to see. In the BANKEX system, asset value can be established algorithmically and thus makes inefficient asset evaluation processes moot.
Not only will this make trust among banks increase, but the BaaS-enabled integration of blockchain will also increase asset liquidity. Liquidity is the ability for an asset to be bought and sold quickly and at a reasonable price. It is an important consideration when an asset’s value is being established. For an example of liquidity affecting asset price, consider a used car. A used car, when listed online, professes to have certain qualities, but these qualities have to be verified by outside sources, often at the expense of the buyer. This makes it harder for the asset to enter the market, leading to a decrease in liquidity, and this makes the value of the asset decrease. However, if these checks and verifications are carried out and established digitally, then liquidity increases. Buyer trust in the used car would be comparable to buyer trust in any other new good since the qualities would be verified by unbiased programming and recorded on the immutable blockchain.
Blockchain for Bankers
BANKEX is led by Igor Khmel, a man with extensive experience in the world of banking. He has no illusions about blockchain, and neither do any other team members. There’s no pie-in-the-sky thinking here. Sure, the blockchain environment brings trust to transactions, but, BANKEX likes to operate on the principle of “trust but verify.” For example, to take part in its Token Exchange, clients will have to go through Anti Money Laundering and KYC procedures. This is the financial sphere they are dealing with here, and they take it seriously. The team’s background in banking can likely be thanked for that.
Those concepts form the basis of the actual complete STO framework through a security token’s full life cycle – including the digitization, issuance that meets both KYC and AML requirements, secondary market trading, and burning.
In addition, they have developed BANKEX Custody Service, a crypto storage solution that supports the main cryptocurrencies, Bitcoin, Bitcoin Cash, Ethereum, and Litecoin, as well as ERC-20 utility tokens and other security tokens. That is rather unimpressive and comparable to other similar services until one detail is added: the service is totally removed from human interference. Just like assets will be verified with the cold logic of computation, so will access to these assets be protected. No human will have direct immediate access to the assets and the access points are protected by new, highly secure cryptographic protocols.
The suboptimal operational equilibrium of the financial industry that is illustrated by game theory does not have to be the norm. The fact that players on the market have accepted insufficiencies in trust and liquidity up to this point may simply be the result of the fact that no solutions to these problems existed. BANKEX professes to have a solution for these issues: blockchain, which can be integrated quickly and simply thanks to the already ubiquitous implementation of BaaS technologies. It behooves the banking sphere to see just how significantly blockchain can improve their business. The tech is here to stay, the question now is simply: which bank will fully adopt its solutions first?