Bridging Banking Systems and Blockchain: Technical Realities Behind the Integration Problem

Source: Dev.to

Architectural Gap

Engineers often assume banks can plug into blockchains the same way they integrate with internal services. In practice, the two environments speak entirely different languages. Banking systems operate on deterministic, regulated workflows; blockchains operate on open, probabilistic, and metadata‑poor ledgers. The gap isn’t philosophical — it’s architectural.

Metadata Mismatch

• Banking messages (e.g., ISO 20022 pain.001, pacs.008) contain:
  • Identity fields
  • Purpose codes
  • Remittance information
  • Compliance metadata
• Blockchain transaction typically includes only:
  • from address
  • to address
  • amount
  • Optional contract call data

The missing metadata is not a formatting issue; it’s a structural incompatibility. Without a mapping engine, both systems cannot interoperate cleanly.

Regulatory Requirements

For financial reporting under IFRS/GAAP, positions must:

1. Be measurable and traceable
2. Prove ownership
3. Fit valuation rules
4. Link to a legal identity

A blockchain hash alone cannot satisfy auditors. Transparency ≠ auditability.

GDPR / BAFIA

• Strict control over personal data, including erasure rights, is required.
• Public blockchains expose everything permanently, creating a conflict with data‑subject rights.

Reversibility vs. Irreversibility

• Bank ledgers allow corrections and reversals.
• Blockchains enforce irreversible execution.

Meaningful integration therefore requires cryptographic privacy layers, not simple masking.

Identity & Compliance Gaps

Banks cannot operate on pseudonymous data. They need:

• Customer identity
• Sanctions screening
• Source‑of‑funds context
• Travel‑rule compliance
• Purpose‑of‑payment metadata

None of this exists natively on‑chain. Wallet analytics can help, but identity must sit above the chain, not be derived from it.

Chain‑Specific Transaction Models

A bank attempting to integrate all of them directly would need to build multiple systems with different data models and failure modes.

Compliance Computation Layer

Validators confirm technical correctness, not legal correctness. They cannot:

• Evaluate AML rules
• Enforce jurisdictional constraints
• Perform sanctions filtering
• Generate ISO 20022 messages
• Produce audit‑ready logs

A dedicated compliance computation layer is required — ideally stateless, deterministic, and chain‑agnostic.

Proposed Integration Stack

1. Compliance middleware – receives raw ledger events.
2. Normalization engine – harmonizes multi‑chain data.
3. Policy engine – enforces AML, sanctions, and risk rules.
4. ISO 20022 message generator – formats data for banking core ingestion.
5. Optional ZK/MPC layers – reconcile transparency with privacy.
6. Stateless validators – guarantee deterministic compliance outputs.

This minimal architecture enables banks to treat blockchain activity as valid financial records.

Further Reading

For a full technical analysis, refer to the research paper:

“Connecting Banking Systems with Blockchain: Comprehensive Challenges and Solutions”

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5634150