Blockchain Technology: A Solution for the Future of Banking

 

The digitization and automation of banking and financial services promise greater efficiencies, reduced costs and risks, unlocked coordination benefits, and previously tricky use cases. However, efforts to digitize banking and financial services over the past two decades have been hampered by outdated IT systems that suffer from weaknesses due to inadequate security and lack of interoperability. Blockchain enables the digitization of financial services by providing a more secure, transparent, and open data management system that can maintain confidentiality and secrecy when required.

Blockchain-based systems improve legacy systems in four key aspects

1. Safety
   Legacy system
   Single points of failure increase data security risks. This limits the products and services that financial services companies can offer in-house, forcing them to rely on data intermediaries and inefficient monopoly utilities.
   
   Blockchain-based system
   Providing financial information in a decentralized, consensus-based architecture dramatically improves security. In addition, this increases the number of products and services we can offer and reduces our reliance on service provider intermediaries and utilities.
2. Transparency
   Legacy system
   Stakeholders are forced to rely on a central source of truth. The resulting lack of trust limits the ability of participants to work collaboratively.
   
   Blockchain-based system
   Network participants agree on standards, protocols, and processes and work with a common source of truth. As a result, participants can more easily form business networks and benefit from coordination. In addition, audits and reports are enhanced and simplified, and compliance is automated.
3. Privacy
   Legacy system
   With traditional data exchange tools, information can only be securely exchanged point-to-point between participants. This hinders the growth of corporate networks.
   
   Blockchain-based system
   Granular read/write permissions can be easily defined for individual participants within the network. The ability to maintain confidentiality where necessary and grant access where legal means coordination can be done across a broad network of participants.
4. Visibility
   Legacy system
   Centralized data pools make it difficult to share data across a broad and diverse set of stakeholders. This limits the growth of corporate networks and the ability to coordinate participants.
   
   Blockchain-based system
   A shared version of the truth facilitates the growth of business networks and enables smooth coordination among participants.

The Role of DLT in Financial Services

Blockchain technology allows untrusted parties to agree on the state of a database without using an intermediary. By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments or securitization — without needing a bank. Further, blockchain allows for tools like “ smart contracts,” self-executing contracts based on the blockchain, which could automate manual processes from compliance and claims processing to distributing the contents of a will.

For use cases that don’t need a high degree of decentralization — but could benefit from better coordination — blockchain’s cousin, “ distributed ledger technology (DLT),” could help corporates establish better governance and standards around data sharing and collaboration.

Blockchain technology and DLT have a massive opportunity to disrupt the $5T+ banking industry by disintermediating the essential services that banks provide, including Payments: By establishing a decentralized ledger for payments (e.g., Bitcoin), blockchain technology could facilitate faster payments at lower fees than banks.

Billing and accounting systems: Distributed ledgers can reduce operational costs and approximate real-time transactions between financial institutions.

Funding: Initial Coin Offerings (ICOs) are experimenting with new funding models that decouple access to capital from traditional funding services and companies.

Securities: By traditional tokenizing securities such as stocks, bonds, and alternative assets and placing them on public blockchains, blockchain technology can create more efficient and interoperable capital markets. Credit and Lending: By eliminating the need for gatekeepers in the credit and lending industry, blockchain technology can make borrowing safer and offer lower interest rates.

Blockchain technology can improve transparency, security, and trust between trading parties worldwide by replacing the paper-heavy bill of lading process.

Customer KYC and Fraud Prevention: By storing customer information in decentralized blocks, blockchain technology makes information sharing between financial institutions more accessible and safer.

How will blockchain change the future of the banking sector?

Before blockchain becomes a mainstream banking technology, it must meet several criteria. It is essential first to set up the infrastructure necessary to operate a worldwide network with the right solution. Only when blockchain is widely adopted can it disrupt the industry. But the investment pays off well. Once fully implemented, blockchain is expected to help banks process payments faster and more accurately while reducing transaction processing costs.

Example of a banking Company using blockchain

1. Ripples
   Ripple’s real-time blockchain helps banks and financial institutions send money instantly. In addition, the company’s payment platform, RippleNet, enables banks worldwide to access a standardized network of institutions for faster and more transparent transactions. With a presence in over 50 countries, Ripple has made its platform and low-cost transactions available to a global audience.
2. Chainalysis
   Chainalysis enables customers to secure and compliant crypto transactions through their data platform. The company conducts an in-depth analysis of various trades, tracks funds to their source, and keeps the identity of each trader transparent. This helps customers avoid questionable funds and meet legal standards banks, law enforcement, and other financial institutions set.
3. Paxos
   Paxos is the first blockchain-powered trust to process assets and payments using distributed ledger technology. The company’s PAX token, which has the same credibility as traditional banks, is a one-to-one (1 PAX = 1 USD) Ethereum-based stablecoin that enables instant settlement in digital transactions. And he is one of the few stablecoins approved by the New York City Department of Financial Services, the strictest regulator of cryptocurrencies.
4. Republic
   Republic is an investment platform that allows users to invest in a startup or his ICO for as little as $10. Republic’s investment platform has a variety of purpose-driven startups, and the platform allows these companies to collect fiat or crypto. In addition, the company’s Token DPA is a tool specifically designed for startups to pre-sell and manage tokens for crowd sale.
5. Spring lab
   Spring Labs creates a DLT-based network that allows financial institutions to share information without sharing the underlying data. Spring Labs has developed a system to keep individual or group identities safe and ensure data security while sharing data by storing information on the blockchain.

Join our blockchain development team, who knows how to help banking institutions explore the growing potential of blockchain technology.

Conclusion

Blockchain’s ever-growing use cases will fundamentally change the banking sector. Blockchain in banking can disrupt traditional systems and render existing systems obsolete. Blockchain-based solutions are said to cap annual fraud losses of up to $9 billion. Therefore, developing a secure customer information database and sharing it across multiple financial institutions is critical. The result is reduced time, cost, effort, security, and transparency in interbank transactions. Blockchain in banking is a driving force for overcoming growing challenges and efficiently transitioning to a cashless society.