Is Blockchain a Game-Changer for the Banking and Finance Markets?
Blockchain Potential for the Global Financial Market
The modern world is on the verge of a decentralization revolution, initiated by the development of blockchain technology. According to WEF analysts, blockchain technology could be a driver for radical changes in a wide range of industries, business models, and operational processes: calculating payments, accounting, or customer cards and loyalty. In terms of the depth of outcomes that the development of this technology could have for the whole world, blockchain is often compared to the appearance of the Internet in the early 1990s.
Experts have identified several areas of the blockchain worthy of special attention. First, most blockchain applications are being developed for the financial and banking sphere. The list of technological solutions based on the blockchain, which is capable of revolutionizing the financial system, is quite extensive: interbank settlements, settlements between legal entities and individuals, payments, securities, and credit histories.
The financial services market is the largest sector in terms of market capitalization, while the global financial system is replete with inefficient processes such as paper transactions, asymmetric information, and vulnerable centralized systems, which ultimately increase costs and delays for the consumer. Every year, 45% of financial intermediaries, such as payment networks and stock exchanges, suffer from fraud. If blockchain technology replaces only a small part of these operations by including peer-to-peer transactions in other sectors, it could radically enhance the efficiency of the financial sector.
Experts from the European Bank of Santander have estimated the potential savings from the introduction of blockchain technologies at $15–20 billion a year. Blockchain and cryptocurrency opportunities are being studied and tested by many central banks, including those in Canada, Singapore, and England. Even though this technology could pose a serious threat to the industry, they will certainly still try to extract maximum benefit from its development. According to a forecast by IBM analysts, by 2020, about 65% of all banks will have blockchain in commercial production.
Banking and Finance: Ways to Improve with Blockchain
The goal of creating the Bitcoin blockchain (2009) was not to serve the world of finance, but rather to replace it. Over time, banks began to realize that this technology had the ability to disrupt their business model. Blockchain represents both a threat and an opportunity to them.
Let’s identify the characteristics the blockchain should possess in order to be used in the banking sector:
- Identification management: This is indispensable in the business-to-business network. You must be able to find out everything about the identity of the partner with whom you are making a deal.
- Modular consensus algorithm: Proof of work is too slow and expensive today. Depending on the usage situation, you should be able to change the algorithm of consensus.
- Guaranteed confidentiality: Transactions don’t have to be public.
- The ledger is available for auditing: If transactions remain confidential, they must still be accessible to supervisors.
- “Scalable” blockchain: Ideally, the blockchain should support a large number of transactions. Currently, the issue of blockchain scalability is one of the most urgent.
- “Durable blockchain”: Current payment systems have been around for quite some time. The new system should be a continuation of the old one.
Now, let’s see what the leading open-source blockchain technologies can provide for the financial industry:
Blockchain Use Cases For Fintech
In 2016, the international analytical agency Gartner published a regular forecast until 2020, which presented 10 trends in the development of the international economy and finance. All of them, as noted by analysts of the agency, were united by a common theme: the forthcoming digital revolution, the scope of which was predicted to grow over time.
In the Gartner’s list, blockchain technology was designated for the first time as a new phenomenon capable of changing the global economy and finances. Gartner analysts predicted that by 2020, turnover of business based on the blockchain would reach $10 billion.
In turn, Sweden believes that the launch of the e-krona will lead to the emergence of a “society without cash.” For this reason,, the central bank of Sweden began to assess the impact of the technological, legal, and political foundations of this electronic currency.
Participants in equity financing are interested in the blockchain for registry maintenance. Companies issuing debt securities, in addition to bonds and stocks, are required to keep a register of subscribers. If this registry can be delegated to third parties under certain conditions, the blockchain could significantly improve the situation.
Indeed, if a certain number of participants plan to maintain the registry as a standard database, the blockchain could be a very interesting backup option, because it has a form that is radically different from regular databases. Thus, it seems unthinkable that the two systems would collapse at the same time. Their synchronization is performed simply and almost instantly.
In June 2015, Banco Santander noted in its report “Fintech 2.0” that “The blockchain technology is able to allow banks to save from 15 to 20 billion dollars per year from now until 2022 by reducing infrastructure costs related to international payments, trade, and the coordination of transactions”.
Speaking of the blockchain system, it is necessary to mention its development, which was a serious scientific and technical breakthrough. A large number of industry professionals already believe in it and agree that this technology can change the financial infrastructure. For example, a PwC study describes the enormous potential of applying transactional blockchain technology. In the graph below, we can see that financial services have the biggest prospects for this technology.
The company also highlights the appearance of many different startups and companies working in blockchain technology or offering services indirectly related to it.These include, for example, Coinbase, a cryptocurrency exchange through which you can buy and sell Bitcoin and use services for the storage and protection of digital assets. Another leading technology, Libra, provides solutions for working with digital assets in the field of audit and integration processes based on blockchain technology.
Fluence Solutions For Banking & Finance
Despite all the advantages of the blockchain, almost all startups have problems with its deployment. This is where Fluence comes to the rescue.
Fluence is blockchain-as-a-service company providing blockchain-as-a-service (BaaS) and smart-contracts-as-a-service (SCaaS) for businesses and entrepreneurs in order to significantly ease the process of blockchain deployment and eliminate current issues of complexity, technological downfalls, and/or lack of experience on the part of developers.
Fluence provides humanless banking services with the help of smart contracts. Its architecture can be described as follows:
- modular structure: distributing tasks essential to the banking process between separate and distinct contracts
- customizable finance: the use of coefficients and smart contracts
- the creation of a third-party pool for confirmation of client finances: smart contracts that accept requests for document-checking and allow legal entities to review requests and accept or decline them
- an investment pool implemented with appropriate functionality. Not one banking operation moves forward unless the initial investment pool is sufficiently filled.
Real banking in SC requires an investment pool and the ability to receive credit according to successful credit history. Fluence checks this and provides feedback and the ability to make deposits. The user is verified by a KYC provider before all actions.
Blockchain carries with it the virus of revolution: the same phenomenon that made the advent of the Internet possible. This resulted in increased control, secrecy, and hegemony instead of increasing personal freedom and redistribution of value. The blockchain is capable of destroying this system with its ability to create a network of people who do not know each other, do not have to trust each other in order to work together and create value, and honestly share in a transparent and secure manner. Bitcoin — the first implementation of the blockchain — stands as proof of the practical possibilities of this model.