Since its inception in 2008, blockchain technology has demonstrated the potential for revolution in a variety of industries. Even in its infancy, technology has disrupted a variety of industries and areas. Blockchain’s decentralization, immutability, and transparency make it appealing to a wide range of business sectors and domains around the world. The banking and financial industry is one such industry that is leading the way in exploring the potential of blockchain.
Even though there are now various hurdles in the way, Blockchain can alter the finance and banking sectors by lowering potential costs and labor savings. According to a PwC survey, 24 percent of financial executives from all around the world are extremely familiar with blockchain technology, with North Americans having a substantially higher level of understanding than those from other areas. Companies are continually studying methods to implement blockchain in many areas as a result of the technology’s far-reaching ramifications.
Hundreds of thousands of dollars are routinely transported from one region of the world to another each day in the banking and financial sector. As a result, the global financial system is one of the most popular areas that could profit from Blockchain implementation. The banking and finance sector, which is based on highly reliant manual networks, is vulnerable to errors and frauds, which could result in a crippled money-management system. By 2020, 77 percent of Fintech institutes aim to use blockchain as part of an in-production system or process, according to the Global Fintech Report 2017.
Blockchain On Banking Sector
With a rudimentary understanding of blockchain technology and how it works, the actual question that arises in our minds is if Blockchain is truly beneficial to the banking industry. If that’s the case, how can we make the most of Blockchain for the industry? Most importantly, is blockchain here to stay, or is it on its way out?
Blockchain, according to the Harvard Business Review, will do for banks what the internet did for the media. When it comes to today’s banks and financial institutions, Blockchain has the potential to tackle a variety of issues. Blockchain technology has all of the appealing properties that a trustworthy financial technology should have. It is secure, decentralized, transparent, and reasonably inexpensive.
When it comes to transmitting data, information, and money, blockchain delivers a very high level of safety and security. With the help of decentralization, it also allows customers to take advantage of the transparent network architecture as well as reduced operational costs. For the banking and finance business, these attributes make blockchain a dependable, promising, and in-demand solution.
Financial institutions are responsible for keeping people’s money safe and secure, and as a result, the mechanisms in place necessitate a large number of mediators. The engagement of these mediators is what drives up the cost of the industry. Furthermore, when there are too many people involved and manual methods are used, the chances of errors and fraud grow. Blockchain technology intends to take care of the heavy work by safeguarding transactions and improving the entire consumer experience while saving money.
Examples of Some Banks Using Blockchain
With Blockchain’s success in numerous industries, the banking industry is aggressively looking for new areas and applications of the technology.
JP Morgan Chase, for example, has put a lot of faith in the future of Blockchain technology. The Quorum subsidiary of the American international investment bank located in New York City has been established exclusively for the development and deployment of Blockchain technology. Quorum is a distributed ledger and smart contract platform for businesses that enables high-speed transactions and throughput, addressing issues faced by the finance industry, banks, and other businesses. They have already released a yearly deposit certificate based on a distributed register with a variable rate, according to sources.
Aside from this, Bank of America, a major US bank, has filed a patent document that has been published by the US Patent and Trademark Office. The document discusses how a permissioned blockchain might be used to secure records and authenticate commercial and personal data.
Only approved users would be able to access the data, and the system would maintain track of all logging entries. Furthermore, the proposed system will employ blockchain technology to integrate many existing data storage platforms into a single platform. This secure single network will improve overall efficiency while reducing the number of data storage locations for users.
Another name on the list is Goldman Sachs, which is heavily involved in distributed registry technology research and support. They’ve put money into the Circle cryptocurrency project. The project is widely regarded as one of the most well-funded blockchain businesses. It intends to address the primary issue of volatility in the digital currency arena, making crypto alternatives more reliable in the banking sector.
By supporting such a popular project, Goldman Sachs hopes to outperform its Wall Street rivals in terms of bitcoin adoption. They’re also putting together their cryptocurrency trading desk to handle all of their digital transactions.
Blockchain Applications in Finance
With new use cases developing every day, blockchain technology can disrupt the current banking and financial sector. The following are a few ways that blockchain can alter the existing state of the banking industry:
1. Decreased Fraud
When money is involved in any circumstance, the risks of fraudulent activity grow. And for a sector that is based on the most fundamental model of money, security is critical. Every year, more than 40% of financial entities and intermediaries, such as money transfer service providers and stock exchanges, suffer significant losses as a result of economic crimes.
The use of centralized database systems for operations and money management is the reason. As a single point of failure, a centralized database system is vulnerable to cyber-attacks potential can take advantage of such systems. Once a hacker has access to such a system, taking the money is a piece of cake. This necessitates the development of more secure systems capable of fending off such attacks.
Blockchain is a non-corruptible, secure technology based on a distributed database system. There is no single point of failure because blockchain is dispersed. Each transaction is saved as a block with a cryptographic technique that is incredibly difficult to decipher.
Furthermore, all of the blocks are linked to one another, and as a result of this linking mechanism, if one block is breached, all of the other blocks on the blockchain reveal the change immediately. This, in turn, aids in the tracking of the breach and gives the hacker no time to make modifications to the system as a whole. With a secure Blockchain system in place, we can eradicate the cybercrime and financial sector attacks that are now taking place.
2. Know Your Customer (KYC)
Banks and financial institutions are increasingly concerned about the rising expenses of complying with AML and KYC (Anti-Money Laundering and Know Your Customer) regulations. All of these procedures take a long time to complete and must be completed independently by each bank and money-based business.
According to a Thomson Reuters survey, the annual cost of these processes is estimated to be between $60 million and $500 million. The purpose of these customer due diligence requirements is to eliminate money laundering and terrorist activities. Currently, banks must upload a customer’s KYC data to a central register that may be used to verify information on an existing or new customer.
With the deployment of a blockchain system, each client’s independent verification by one bank or financial organization would be accessible to other banks, avoiding the need to restart the KYC procedure.
Meaning, with the help of blockchain technology, duplication of work would be minimized. Furthermore, all client updates will be sent in near real-time to all financial institutions. Compliance departments’ administrative efforts and expenditures would be reduced as a result of this.
3. Smart Assets
When transactions in the form of assets must be recorded with a clear date and time stamp, trade finance can become extremely difficult. Many different entities and components are constantly bought and sold in supply chains all around the world. Even more complicated is the documentation necessary in documenting the intricacies of demand and supply. These records of smart assets can be stored in digitized form on blockchain and updated in real-time. A smart asset system would not be restricted to the tracking of goods traveling from one location to another, but could also keep track of where a specific item is delivered and where it originated.
In today’s competitive environment, a smart asset tracking system for banks and financial institutions has a lot of potentials. With the use of blockchain, a bank with a large data set may turn that data into valuable information for its customers.
4. Smart Contracts
The use of smart contracts in the banking and financial industry could be very beneficial. A smart contract is a self-executing piece of code that starts running when specific circumstances are met.
When smart contracts are used for financial transactions, they can help speed up and simplify complicated operations. This will help ensure proper data transmission because the transaction will only be permitted if all of the code’s written requirements are met. Furthermore, because these terms are available to all parties participating in the transaction, the odds of an error occurring during execution are greatly reduced.
5. International Trade Finance
One of the most useful applications of blockchain technology in the financial sector is trade finance. All of the parties engaged in a complex transaction can be added to a blockchain network, and the data can be shared among exporters, importers, and banks on a single distributed ledger. When certain agreement criteria are met, smart contracts will automatically execute themselves, and both parties will be able to see all of the actions taken.
According to insiders, an Israeli start-up and Barclays have used Blockchain technology to complete a trade transaction that would ordinarily take 7 to 10 days in just 4 hours. When compared to conventional infrastructure, blockchain can significantly lower expenses associated with licensing, ticketing, and other administrative charges.
What is Blockchain’s Role in Banking?
The existing financial systems rely heavily on paper and time-tested procedures. The urgent need is for an improved system with reliable and trustworthy technology that can withstand fraud, scalability, and security challenges. The decentralized nature of blockchain technology may provide the banking institutions with the competitive advantage they want.
Banks cannot be considered self-contained, self-contained entities because all transactions conducted through them include intermediaries. Furthermore, money transfers on an international scale might take up to 5 days, which comes with its own set of concerns. With a blockchain system in place, banks would be able to perform transfers quickly and without taking any risks, as the system would be self-sufficient in resolving the issue.
The world is becoming more digital, and even minor transactions and payments are becoming more digital. The rate of economic activity is rising, and there’s no reason to believe it won’t continue to rise in the coming days. Small transfers will be possible and quick because of blockchain technology’s reduced transaction fees and scalability.
Services in the financial sector Other than banks, companies are continually improving their systems with the help of cutting-edge technology to secure markets by making services more affordable. Banking and other financial institutions should anticipate the adoption of new blockchain technologies to maintain their position in the ecosystem.
Although blockchain has several advantages in terms of adoption due to its promised characteristics, some roadblocks must be overcome for banks and financial institutions to move forward with blockchain.
1. Interoperability: There are no international norms or regulations that bind blockchain technology. With the growing demand for interoperability among large sectors such as banks, technology must be compatible with a variety of systems and have the potential to be widely adopted. Because existing systems and processes cannot be completely replaced, integrating them with a blockchain-based approach is a major difficulty today. Operational feasibility can be realized if blockchain adoption allows numerous systems to work together smoothly.
2. Confidentiality: People put their trust in banks and financial institutions to store their money. For blockchain to take its place, it is critical that the data held on blockchain technology is kept secure and does not compromise anyone’s identity. Because public blockchain transactions are public, there is a need to investigate the possibilities of private blockchains for data-critical sectors, as well as the resolution of challenges such as interoperability.
3. Encryption: Private keys are crucial components of a blockchain since they play a critical role in securing an individual’s data on the network. A private key created once, on the other hand, must be maintained very securely because it cannot be recovered if forgotten or lost. Furthermore, identifying flaws in the network can damage the encryption used to store data, making the blockchain vulnerable to hacker attacks.
4. Security: Because cryptographic techniques are built in the blockchain network, it is secure and powerful. Cryptographic networks are difficult to penetrate, and any security breach in such networks would necessitate a large amount of computational effort to secure. When a blockchain network is used to secure a banking institution, numerous security procedures must be implemented. The network should be able to prevent participating authorities from taking control of the network unless they have been granted access permission. The blockchain used in such systems or organizations could be permissioned or permissionless, depending on the requirements. To protect the whole network from malevolent insiders and cyber hackers, everyone in an organization must be managed with varying levels of access permissions.
5. Scalability: It is evident that existing databases are growing. The number of entries will continue to rise as the number of people in the world grows. The use of blockchain technology networks faces a significant hurdle as a result of this. The blockchain-based network should be able to handle the increasing load while maintaining network participants’ access speeds. If blockchain technology is implemented in present banking systems and institutions, it must be capable of handling massive amounts of data.
6. Energy Consumption: The majority of already operational blockchain networks are built on the proof-of-work method, in which network participants are rewarded for solving the equation to add a new block to the network as rapidly as possible. While this keeps the network running smoothly, it also increases the amount of energy consumed in the form of computing labor by a significant amount. This kind of computational capacity generates enormous carbon footprints that hurt attacks the potential of the environment. This issue must be handled through alternative rewarding systems before Blockchain is adopted in an industry like banking.
7. Legal Rules: If blockchain is used in the financial sector, it will necessitate the adoption of international and national regulations. Cryptocurrencies, the most widely used blockchain application, currently lack any rules, making them vulnerable to both profits and losses. However, if and when blockchain is adopted by the banking or finance industries, restrictions must be in place to prevent turmoil among the public in the event of any losses.
Despite the rigorous regulations that surround the banking sector, financial institutions have begun to recognize the potential of blockchain technology in light of the present market’s popularity of cryptocurrencies. The banking industry’s behemoths have begun conducting experiments to determine the potential applications of this decentralized technology in their operations.
Furthermore, some corporations are heavily investing in such research and testing by startups roof produce blockchain-based solutions. Many difficulties could be remedied as a result of Blockchain’s introduction into the current environment, while also making the system more transparent, accessible, and reliable.