If we look at the history of blockchain, we will have to begin with Bitcoin. The magical cryptocurrency was incepted to carry out transactions without the involvement and the cost of intermediaries. It would not be an exaggeration to say that blockchain technology was born to disrupt finance.
Cryptocurrency like Bitcoin, Litecoin, and Monero keep running with openness, anonymity, and security because of blockchain tech. Blockchain, in essence, is a digital ledger with cryptographically secure transaction records that is transparent and publicly accessible. The cryptographic security ensures that users edit only the parts of the records they have access to. It also ensures that the transactions of the past can never be tampered with. The copy of the blocks is kept distributed but always in perfect synchronization.
Giving a second read of all the above-said points will tell you loud and clear that the digital distributed ledger technology can be a great solution for many problems faced in the banking and finance industry.
A Glimpse of the Future
Blockchain technology has the potential to save billions of dollars by reducing transaction and processing costs. The technology used for multiple processes in banking and many financial entities is already adopting the future tech. The Australian Securities Exchange has started to use this distributed ledger technology for cutting costs and improving efficiency. JP Morgan, one of the leading banks in the United States, has its own blockchain – Quorum and cryptocurrency called the JPM Coin. Glimpses of events like this should speak volumes about what the future holds for banking and financial services when it comes to utilizing the new technology.
A Few Applications
Reducing Instances of Fraud
With immutability and decentralization, blockchain is considered as reliable technology that would help mitigate instances of fraud. Leading reports project a 45% probability of financial intermediaries like stock exchanges experience financial crimes. Most of the banking systems are built on centralized databases, which naturally makes it more vulnerable to cyber-attacks. However, with the new technology, the instances of attacks on centralized points of vulnerability reduce considerably, almost bringing it down to zero.
Growing instances of money laundering, financial institutions obligated to comply with the KYC (Know Your Customer) norms. The institutes spend anywhere from $60 million to $500 million every year for establishing KYC compliance, as reported by Thomson Reuters survey. These regulations, in addition to reducing money laundering, are also expected to mitigate terrorist funding activities. Blockchain allows an organization to access the verification details already performed by other organizations. Hence, avoid the repetition of the KYC process and consequently, the cost involved and the time spent.
Smart contracts are self-executing programs that govern the functionality of a blockchain. The execution of a smart contract can be programmed to happen after two or more parties enter the credentials. This entry of credentials can automate financial transactions by reducing the time taken without compromising on trust.
Clearing and Settlement
Record keeping of loans and securities alone costs investment banks billions of dollars. In today’s messy ecosystem, the current system is managed by messages and manual reconciliation. However, blockchain can change the way it functions. The Australian Securities Exchange is a living example of the transformation that the new technology can bring about.
Letters of credit are being sent by fax or post around the world. However, with the blockchain coming in, all the parties involved can access the same information without compromising on the security. The head of innovation at HSBC Products has stated that the the new technology has the potential to be the genuine game-changer in this segment.
In the United States, it takes an average of 19 days for a bank to settle the transaction when a company raises money using a syndicated loan. When the loan changes hands or when the borrower decides to foreclose the loan, the communication is still exchanged by fax. Today, there might be challenges in finding a separate blockchain to connect with each other to facilitate the change of ownership of a loan. However, in the long run, it is quite clear that the technology will evolve to accommodate this process as well.
Right from 1765, it is quite known that any Revolution is met with resistance! When Bitcoin was born, the finance and banking sector did not look at it as a Revolution but rather resist the blockchain and the advantages it brings about. However, as time passes, the advantages of the new technology will slowly become more accepted. Moreover,it might not be long before we see decentralized banking become a utopian reality.