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The banking industry has been around for centuries serving as a facilitator for a variety of financial and economic activities, including trading, lending and borrowing, transaction processing and settlement, underwriting and so on. However, this longevity has led to stagnation, with the sector becoming over time slow to adapt to the rapidly changing realities of the digital age.
Implementing new technologies can help modernize the sector. Here’s what blockchain in banking brings to the table:
Cost reduction
Banks today still rely on outdated and inefficient systems to facilitate communication and coordination across large networks of counterparties. Various banking activities, clearing and settlement, for example are in need of solutions that can improve speed and efficiency.
Applying blockchain technology in banking can provide such a solution. As a secure and efficient peer-to-peer method for data distribution, blockchain technology can eliminate inefficiencies across an organization, reduce the reliance on intermediaries and deliver significant cost savings for the industry as a whole. A 2017 report by Accenture found that big investment banks could save $10 billion by utilizing blockchain to improve the efficiency of their clearing and settlement operations.
Robust security
In recent years banks have been scrambling to strengthen their security systems and safety procedures following a number of high-profile data breaches. Cyber attacks, technical glitches and human error have hit the industry hard, exposing the financial data of thousands of customers. Faced with these challenges, some lenders have in recent years been trying to unlock blockchain’s potential to improve their security systems.
Blockchain in banking can bolster bank security in a number of ways. Firstly, the technology can be used to develop robust know-your-customer (KYC) solutions, as the cryptographic protection it offers guarantees that the identities of all members of a blockchain network are verified. In addition, the information can be easily shared among all members of the network, while also reducing the need of intermediaries to handle data distribution.
The decentralized nature of blockchain also eliminates single points of failure, which reduces the risk of data breaches considerably.
Some blockchain protocols offer an additional layer of protection in the form of smart contracts which enable automatic transactions when certain requirements are met.
Instant payments and money transfers
Blockchain protocols are already starting to challenge the banking industry in terms of payments and other money transfers, so it’s not surprising that many lenders are examining closely what the technology has to offer. For cross-border payments, in particular, adopting blockchain could be a real boon for the sector.
To process payments across borders, banks today rely primarily on the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a vast messaging network that handles the transfer of information between member banks. But with blockchain, lenders are connected directly to each other, thus removing the need for such intermediaries. It should also be noted that SWIFT has seen its share of hacks in the past few years, which further bolsters the case for adopting blockchain.
Mathew McDermott, head of digital assets at Goldman Sachs, told CNBC in August that in the next five to 10 years, “you could see a financial system where all assets and liabilities are native to a blockchain, with all transactions natively happening on chain”.
Digital currency
One intriguing application of blockchain in banking comes from its ability to digitize physical assets. This means that blockchains can host, among other things, a large variety of digital currencies.
We’re already familiar with traditional cryptocurrencies like Bitcoin, as well as stablecoins which are pegged to a fiat currency/asset or a basket of currencies/assets. These types of projects typically exist outside the traditional banking and finance sector. In recent years, however, a number of commercial and central banks have been working on their own digital currency projects.
Perhaps most prominent is the effort by the People’s Bank of China (PBoC), which is working on launching its own Central Bank Digital Currency (CBDC). The DC/EP (Digital Currency/Electronic Payments), as the CBDC is called, is currently being piloted in several large Chinese cities.
In the commercial banking space, US banking giant J.P. Morgan Chase last week launched its own digital currency dubbed JPM Coin. The coin runs on J.P Morgan’s proprietary blockchain Quorum, with the bank having plans to extend it to other platforms in the future.
One intriguing application of blockchain in banking comes from its ability to digitize physical assets. This means that blockchains can host, among other things, a large variety of digital currencies.
We’re already familiar with traditional cryptocurrencies like Bitcoin, as well as stablecoins which are pegged to a fiat currency/asset or a basket of currencies/assets. These types of projects typically exist outside the traditional banking and finance sector. In recent years, however, a number of commercial and central banks have been working on their own digital currency projects.
Perhaps most prominent is the effort by the People’s Bank of China (PBoC), which is working on launching its own Central Bank Digital Currency (CBDC). The DC/EP (Digital Currency/Electronic Payments), as the CBDC is called,is currently being piloted in several large Chinese cities.
In the commercial banking space, US banking giant J.P. Morgan Chase last week launched its own digital currency dubbed JPM Coin. The coin runs on J.P Morgan’s proprietary blockchain Quorum, with the bank having plans to extend it to other platforms in the future.
