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Seeing so much news about blockchains and banks I have a question that I may need your help.

Taking in consideration the Bank Secrecy Act, can a Bank use a completely Encrypted Ledger? KYC is still required, deposits and withdraws will still be reported if one deposits/withdraws more than $10k. But the bank has no idea about users' balances or their transactions. So, the bank uses an encrypted ledger that doesn't have a key to be decrypted. Namely, the ledger is encrypted in a way in which transactions are encrypted and unlinkable. Only the users can decrypt their balances and spend their funds with a... hardware token. Using this hardware tokens users can give a proof to the bank that the balance was right. Something like how is done in blockchains solutions focused on privacy.

Can public/private banks in the future use encrypted Ledgers? If yes why banks didn't do it until now. If no, why banks can't use encrypted Ledgers?

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  • Hi and welcome to the site. We ask people to use tags indicating what jurisdiction they are asking about. From your reference to the Bank Secrecy Act, I suppose you are asking about the United States? You can edit your question to add the united-states tag.
    – Nate Eldredge
    Commented Apr 14, 2020 at 0:08
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    This won't work because it would make every bank a money launderers dream - while the $10K limit might be one that everyone talks about, banks are interested in any amount deposited or moved around (one of the things they are watching out for is "structuring", where you are deliberately keeping your transactions under the $10K limit). Given the auditing and legal requirements around traceability, an encrypted ledger that the bank has no access to just wouldnt get implemented.
    – user28517
    Commented Apr 14, 2020 at 0:11
  • @Moo thanks for the reply. I understand your concern. But where in the law states that a bank is not allowed to have an encrypted ledger? This feature enables the bank to not be hacked. Banks in XVI century were used to have encrypted ledgers.
    – Banker
    Commented Apr 14, 2020 at 0:32
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    Your suggestions for how it would work are flawed as well - if the bank knows nothing about transactions or balances, how are they going to report transactions they are required to report? They would have to depend on the user reporting the transaction to the bank, and that means the reporting system breaks down because the user is inherently untrusted in this scenario (terrorist group bankrollers, money launderers, tax evaders etc). The bank needs full and unfettered access to balances, account details and transaction details to fulfil its legal obligations (as linked in previous comment).
    – user28517
    Commented Apr 14, 2020 at 2:30
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    Any bank that trusts the user to report on key things is a bank that wont be in business for long.
    – user28517
    Commented Apr 14, 2020 at 2:30

3 Answers 3

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No

So far as I'm aware there is no law explicitly against an "encrypted ledger" but retail banks have legal obligations that can only be met by awareness of activity in user accounts. They entail being able to see user accounts at transaction level.

E.g. rules relating to

  • money laundering

  • terrorism financing

  • serious crime financing

  • other activity considered suspicious in the jurisdiction

  • reporting on certain customers (persons or entities) under the Common Reporting Standard

  • risk, exposure

  • how much money the user had that is 'guaranteed' to be paid in the event of a crash

In at least the past decade the legal trends are towards greater transparency and traceability, less anonymity and financial privacy, and directly opening financial records to law enforcement authorities. And now we have Open Banking in the UK, EU and I think developing in the USA where the biggest banks are (going to be) obliged to facilitate licensed startups direct access to user accounts.

That's all aside from the bank being able to meet its obligations per the contract with the user and check the user is meeting his contractual obligations too. E.g.

  • is the user attempting to withdraw money over a threshold that he may not exceed?

  • did the user exceed their authorised overdraft (therefore can be charged higher interest and/or penalty)

  • calculating interest due either way (to the user or bank's benefit)

  • whether the account qualifies for positive or negative treatment due to frequency of withdrawals (e.g. supersaver account attracting higher interest may allow only five withdrawals a year)

  • investigating user complaints (e.g. fraudulent transactions or mistakes)

  • fixing mistakes

  • processing credits and debits

  • processing penalties

  • freezing or blocking certain amounts

(Indeed how could such a business operate as a retail bank?)

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  • Thanks for the reply. I was thinking just to allow financial transactions between parties using an encrypted ledger.
    – Banker
    Commented Apr 14, 2020 at 18:14
  • @ElliotScot A business providing transfer of funds services in the EU must comply with this gov.uk/guidance/how-to-comply-with-eu-payments-regulation
    – Lag
    Commented Apr 14, 2020 at 20:57
  • Thanks for the link!
    – Banker
    Commented Apr 14, 2020 at 22:18
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Banks need to know the balance in each of their accounts

The business of banking is taking the money of their depositing customers and lending it to their borrowing customers. They are subject to strict prudential laws about how much of the former they can lend to the latter; they need to know the balances to do this. Further, they make money by charging their borrowers interest and paying interest to their depositors and keeping the difference; they need to know the balances to calculate the interest. Further, they are generally public companies and need to be audited by law; the auditors need to be able to see the transactions to do this.

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  • I was talking about bank that simply allows individuals to transfer funds between their accounts anonymously. Maybe the banks will change 5% of deposits/withdraws.
    – Banker
    Commented Apr 14, 2020 at 11:08
  • "The business of banking is taking the money of their depositing customers and lending it to their borrowing customers" - not in modern times. See Money creation in the modern economy by Michael McLeay, Amar Radia and Ryland Thomas of the Bank of England’s Monetary Analysis Directorate. bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/…
    – Lag
    Commented Apr 14, 2020 at 12:25
  • Let's say PayPal instead of a traditional bank that lends money. I talking about a financial enterprise that has its own fully ledger encrypted.
    – Banker
    Commented Apr 14, 2020 at 12:31
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"Encrypted Ledgers", as used by blockchain cryptocurrencies, are no good for banks.

In blockchain cryptocurrencies encryption/cryptography is mainly used to:

  • Facilitate the integrity of distributed / decentralised ledger so that anyone could see mathematical proof that the ledger has not been tampered with.

    One could assume that has a value for banks too: look, our ledger is encrypted / modern / cool / bla-bla-bla. But not so. Doing this for ledgers controlled by one party (e.g. bank) does not prove the integrity because the party can always make changes retrospectively and re-calculate all hashes; unlike decentralised ledgers, it can just do it without having to agree on / coordinate those changes with anyone. You would have to keep historic clones of the bank's ledger yourself to verify that the bank does not tamper with it. Who is going to do this? And even if someone does, how to prove that they have not tampered with their clone to frame the bank? Lack of decentralization means lack of point.

  • Cover the asses of the money owners / senders / recipients. This just goes against of what banks legally must do: keep the asses bare.

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  • Whether the blockchain is useful or not here depends on whether the blockchain is published - publish it widely enough and often enough and centralised ledgers become a non-issue. Take this example of a blockchain-like approach dating back to the 1990s, which involves a published hash in a popular national newspaper to validate against (and thus changing history becomes somewhat difficult even for the single owner of the ledger) - vice.com/en_us/article/j5nzx4/what-was-the-first-blockchain
    – user28517
    Commented Apr 14, 2020 at 4:27
  • @Moo Funnily enough, these days that approach is difficult: published copies are digital only, and many independent members of the public must keep them available for verification (otherwise it's not that difficult to convince few copy holders to alter them).
    – Greendrake
    Commented Apr 14, 2020 at 4:34
  • Perhaps they could be stored in a distributed ledger of ledgers....
    – user28517
    Commented Apr 14, 2020 at 4:38
  • I am talking about a fully encrypted blockchain like monero, etc.
    – Banker
    Commented Apr 14, 2020 at 11:10
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    @ElliotScot your understanding is not correct. Banks around the world work under Know your customer regulations that require them to disclose the details of account holders and qualifying transactions to government regulators. Simply providing the encrypted version of the qualifying transactions would be material non-compliance.
    – Charles E. Grant
    Commented Apr 14, 2020 at 18:23

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