After the invention of blockchain technology in 2008, there has been a boom in its use. The applications of blockchain are endless and go across many important fields like banking, healthcare, finance, insurance, real estate and are responsible for revolutionizing these sectors.
One of the sectors that blockchain will transform is the banking industry.
Blockchain has the potential to solve many problems and has proved to be a very attractive technology to employ in money matters mainly due to its foundation on decentralization which enables all processes to be transparent and cheaper to execute.
The efficiency, reliability, transparency, and cost-effectiveness of blockchain are what make this technology very promising in the banking sector.
Today, to keep transactions and accounts safe, banks involve many mediators which increases the chance of human errors and corruption. Blockchain aims to minimize human errors by doing all the heavy work like securing transactions and increasing the speed of work to increase customer satisfaction. It also promises better relations between investors due to the transparency and its strong security features. Also, because of the increased efficiency of secure transactions, there will be a greater velocity of cash flow and demand. It is very popular speculation that blockchain in banking could spell the end of cash as we know it giving way to cryptocurrencies like Bitcoin and Ripple.
It is a well-known prediction that blockchain will end traditional banking as we know it today, due to its ability to transact directly without any legacy payment networks, proprietary bank systems, or bank accounts. Since it is a different and more efficient mode of payment and storage, it will inconsequentially replace consumer bank functioning leading to the end of traditional banking.
How are banks using blockchain?
- In clearing and settlement:
Investment banks need billions of dollars to run records of loans and securities which are almost always unorganized and tangled. Blockchain has the potential of restructuring settlement history resulting in a lot of efficiency and a lot of savings for investment banks. - Payments:
After the success of cryptocurrencies like bitcoin, it came to the attention of various banks that they could shift their payment systems or parts of it onto blockchain technology. Some commercial banks have started using their projects by issuing tokens to people which will be exchangeable for cash at central banks. There is still time for central banks to be able to make their cryptocurrencies hence they are looking for alternative means and yet be able to retain settlement. - Trade Finance:
Trade finance even in today’s world is mostly based on paper, such as bills of lading or letter of credit that is still sent using the fax system and making it obvious that it needs to be modernized. It is a widely acknowledged area where blockchain needs to be implemented. However, the reason why trade finance is still not digitized is that it will be a futile exercise. Digitizing trade is more fruitful as there are many components involved like shipping companies, agents, freight providers, ports, and even insurers. If even one of those is not digitized then it will be a pointless exercise. - Identity:
Customer verification is a crucial aspect of banking. Banks have tried and failed to set up a digital record to store customer identities and keep them updated. The best answer to this problem is implementing blockchain due to its cryptographic protection and ability to share a constantly updated record.
Conclusion:
Blockchain is still in its early days and it will take some amount of time before it takes off. The technology is used where solutions are leveraged across multiple parties rather than within one single banking system. This will require a large amount of coordination between banks. Today, more than 80% of banks are experimenting with blockchain across many diverse fields.
