Blockchain technology's best-known application lies within banking. Following the 2008 financial crisis, which caused considerable harm to global economies and caused widespread bank failures, governments implemented massive stimulus packages in an attempt to support economies and save failing institutions from collapse. Following its creation as Bitcoin technology in 2009 by this event alone.
Many of the weaknesses exposed during the global financial crisis could be addressed with blockchain. This article will look into its applications within banking and how and why this emerging technology might provide solutions to some of the banking industry's greatest difficulties.
Problems in Banking Today
Banking services provide essential economic functions, from trade, lending and borrowing transactions, transaction processing settlement, underwriting etc. However due to its longstanding existence this industry has stagnated over time, taking time to adapt with digital revolution realities.
Current banking industry conditions resemble an unwieldy beast that, while making steady progress due to the immense momentum it has built up, cannot move with grace and style. Bank procedures still rely on excessive paperwork which adds costs and security risks as well as time and money waste - meaning banks need dependable solutions while simultaneously dealing with an ever more formidable fintech industry.
Advantages of blockchain in banking
Banks have played an indispensable role for millennia as facilitators of trade, lending and borrowing transactions; transaction processing; settlement; underwriting etc. However due to its longstanding history the industry has become stagnant, taking time to adapt with digital realities.
Implementation of new technology can assist modernization efforts within an industry, like blockchain technology in banking. Here is what this type of innovation offers:
Cost Reduction
Large networks of counterparties still rely on banks using ineffective communication and coordination methods; solutions that improve speed and efficiency should be developed for certain financial operations such as clearing and settlement.
Blockchain technology could combat this challenge for financial services firms, eliminating inefficiency within companies and decreasing dependence on middlemen while offering substantial cost savings for an industry as a peer-to-peer data dissemination system. According to an estimate by Accenture from 2017, large investment banks may save as much as $10 billion by adopting blockchain in their clearing and settlement processes and using it more efficiently.
Robust Security
After experiencing numerous high-profile data breaches over recent years, banks have scrambled to strengthen their safety protocols and security systems. Cyber attacks, technology issues and human mistakes have caused major financial compromises for thousands of consumers whose information has been exposed, resulting in their finances becoming available on black markets such as Ethereum. Some lenders are using Blockchain technology in an effort to further their security systems and increase safety protocols.
Bank security may be strengthened through blockchain in various ways. Because cryptographic security ensures identities of participants in a blockchain network can be verified, KYC solutions can be established using this technology. Furthermore, users on all network channels may share data more readily among themselves, eliminating middlemen as intermediaries to manage data dissemination.
As blockchain is decentralized, there are no single points of failure, which significantly lowers the chance of data breaches.
Instant Payments and Money Transfers
Bankers are actively exploring what blockchain protocols have to offer, given that the banking industry is already facing difficulties from this technology when it comes to payments and money transactions. Utilization of blockchain could prove very advantageous in particular when dealing with international transfers of payments.
Banks typically rely on the Society for Worldwide Interbank Financial Telecommunications (SWIFT), an extensive messaging network that manages information transfer between member banks, to process cross-border payments. But blockchain offers another alternative by connecting lenders directly. Recent attacks against SWIFT serve to strengthen this argument further;
Digital Currency
Blockchain's capacity to digitize tangible assets makes it an attractive solution in banking; digital currencies could potentially reside on blockchains, amongst other things.
At first glance, cryptocurrency and stablecoin initiatives (linked to fiat currencies or assets, or to an asset basket) may seem unfamiliar and far removed from conventional banking and finance. Yet recently a growing number of central and commercial banks have begun developing digital currency initiatives of their own.
People's Bank of China's initiative in creating its own Central Bank Digital Currency (CBDC), also referred to as DC/EP or Digital Currency/Electronic Payments, stands out as perhaps its most impressive development. Experimental projects relating to CBDC are taking place throughout major Chinese cities at present.
JP. Morgan Chase recently launched JPM Coin - its own digital currency powered by their in-house blockchain, Quorum - into commercial banking markets worldwide. They plan on eventually expanding the use of this token across more platforms.
Due to blockchain's potential of digitizing tangible assets, its application in banking is especially intriguing. Thus, digital currencies of various sorts may be stored securely on this type of network and thus used as part of financial services systems.
Coins like Bitcoin and stablecoins that link directly or indirectly with fiat currencies or assets or to baskets thereof have become mainstream over the past years. While traditionally not part of conventional banking or finance industry practices, central and commercial banks have increasingly begun developing digital currency initiatives in recent years.
People's Bank of China's attempt at creating its own Central Bank Digital Currency (CBDC), also referred to as DC/EP or Digital Currency/Electronic Payments, stands out as its most noteworthy initiative. Experimental projects for CBDC can currently be found across major Chinese cities.
Reduced Error
As previously indicated, money transactions between counterparties can be handled automatically via smart contracts, with this strategy providing several distinct advantages: trust requirements are reduced significantly while chances for errors decrease dramatically.
Read More: Unlocking the Future: How Blockchain Technology Can Make You Smarter and Safer
How can Blockchain be used in Banking?
Accounting and Audit
Blockchain's ability to preserve unchangeable data could transform how bookkeeping, accounting and auditing functions in the financial industry are carried out. Technology might prove instrumental by cutting back on paperwork while optimizing manual bookkeeping techniques for easier use in audits - meaning regulatory compliance will likely significantly increase across industry boundaries.
Borrowing and Lending
DeFi (decentralized finance), one of the more prominent blockchain and banking movements recently, aims to revolutionize various aspects of conventional finance including lending and borrowing. Instead of working to improve banking system access for retail users through improved products or services, DeFi works directly against it - increasing retail users' access directly instead. For more insight into what DeFi has accomplished thus far, we suggest reading our article about decentralized finance; learn about how DeFi is helping facilitate cutting-edge services like peer-to-peer lending/borrowing applications as a result.
But blockchain technology in banking may also help improve bank lending and borrowing services, thanks to its strong verification capabilities that may reduce problematic loans and identify dishonest or malicious borrowers, ultimately strengthening banks' anti-money-laundering (AML) and know-your-customer (KYC) capabilities.
Blockchain can also prove helpful with syndicated loans, providing business clients with large loans through multiple banks in a multi-step procedure that typically lasts 19 days and involves cooperation among lenders. KYC/AML compliance presents its own set of challenges; under conventional rules, each lender would individually need to comply with regulatory regulations like KYC and AML separately - however, thanks to blockchain technology, one bank that has completed compliance may now safely share that data amongst loan partners, drastically streamlining this process.
Credit Suisse, Ipreo, Symbiont and R3 formed a consortium in 2016 with the intention of using blockchain platforms to facilitate syndicated loans. By 2017 this was successfully accomplished via Synaps Loans solutions.
Trade Finance
One sector that has been long overdue for modernization is one that blockchain is best equipped to address. Trade financing is still mostly dependent on paperwork, which is sent out globally via mail or fax. Blockchain technology has the potential to end this once and bring in a period of fast digitization in the industry.
Trading
DeFi has demonstrated an increasing interest in decentralized exchanges and marketplaces such as DeFi. Although such exchanges and marketplaces currently operate outside of banking sectors, lenders could soon adopt this idea; as was stated before, blockchain technology offers promise in completely altering clearing and settlement processes essential to trading firms.
Fundraising
Banks traditionally handled most forms of financing, including initial public offerings (IPOs). Recently, however, initial coin offers (ICOs) were introduced as an innovative fundraising approach that allowed start-ups to issue and sell cryptocurrency tokens directly to investors without bank involvement in order to challenge established paradigms and challenge established paradigms of finance. With time, however, came STOs as a more evolved version of an initial coin offer concept; although controversial by nature, these initiatives opened new ways of looking at fundraising strategies.
Logically, banks will likely consider strategies for entering the market as long as this trend persists.
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Conclusion
Blockchain was initially created as an alternative banking technology; however, financial institutions themselves are beginning to embrace its benefits after years of dismissing or even mocking this technology. Bankers recognize its unique benefits cannot be disregarded after initially dismissing and mocking its potential impact.
Numerous blockchain banking applications present methods to enhance current practices within banking. But in the future, banks could conceivably adopt solutions built using blockchain that operate independently from conventional systems - an event that would prove successful as proof that blockchain's challenge against industry would have succeeded in its mission.
