Perhaps many still get on edge when they hear blockchain in banking mentioned. Contrary to some people’s criticism, though, the technology is progressively establishing itself as one of the change-makers in traditional financial services.
There's likely still a long road to be walked until blockchain fully modernises banking and we can enter the financial future so many long for. But the foundation has been set and by constant evolvement, soon nobody will be surprised to hear about "blockchain and banking" in a casual conversation.
But how exactly is blockchain changing banking and what are the benefits of this interaction? Here we'll dive a little deeper into their connection and how banking institution can improve their services through this technology.
A Brief Reminder: What’s Blockchain
The proper way to introduce blockchain in banking would be to first explore what the technology is actually about. 14 years ago a new type of money, the first successful digital currency, was introduced to the world. Bitcoin was created to act as an alternative to fiat currencies and help people regain control of their money from institutions and banks.
This new type of currency, commonly known as cryptocurrency, has no physical form and thus only exists on the Internet on a new type of network called a blockchain.
The new technology is a type of digital ledger with blocks of information that are linked to one another to form a chain. Each block contains information about the previous one and if someone was to try and modify it, it would affect the whole chain.
The initial purpose of blockchain was to serve as a place for Bitcoin to be created, or "mined" in crypto vocabulary, and for its transactions to happen. The control over these operations was given to the users, as many people across the world oversee the correct completion of tasks on the blockchain. As time passed and the technology gained popularity, its uses also expanded beyond a home for digital currencies.
Several years after the official release, a new version of blockchain was introduced. Enterprise blockchain, often referred to as private blockchain, came to serve companies. This new alteration of the technology offered the business the same benefits its predecessor has – security, traceability, and speed, but with an important change.
Naturally, organizations can't put out their internal information to the public. That's why using the conventional blockchain model, known as public, was insufficient. The shift that came with enterprise blockchain is that although employees within an organisation have access to data, it is role-based. This time the technology is centralised by a decision-maker, either an administrator or a natory.
They are the ones making important decisions and with the most rights on the blockchain. In that way organisations, including banking institutions, can experience the advantages of the technology, but through enhanced security and safety of their and their users’ data.
Is It Possible for Blockchain and Banking to Work Together?
You may have noticed mentioning that cryptocurrencies, and their accompanying technology, came into existence in order to replace traditional money. How would it be even possible to discuss blockchain in banking then?
The first prototype of blockchain technology was introduced at the end of the last century by a company called Surety. Its purpose was to act as a reliable data storage and ownership proof. The type of blockchain that came with Bitcoin, created by Satoshi Nakamoto, utilised the technology for financial purposes.
What makes it possible to talk about the relationship between blockchain and banking are exactly these diverse sides of the technology. For one, it can be used for secure and encrypted storage by banks for their customers' data. Another purpose can be for financial operations, as money is money, no matter its physical or digital form.
Cryptocurrencies were introduced in the midst of the 2008 financial crisis when people's trust in banks was shaken. This type of currency has gone a long way, turning many people away from fiat money and into digital currencies. However, banks are still able to retain their customers by offering them improved services. This can be done exactly through blockchain technology.
In the following paragraphs, we’ll look at the possible ways blockchain can be used in banking and the perks this may bring.
Use Cases of Blockchain in Banking
There are many possible ways of using blockchain in banking. The following are some of the best ones to utilise the technology and bring various benefits to banks.
Alternative Settlement System
One of the biggest sales points of blockchain technology against traditional financial services is its ease. When you want to transfer money through this type of network, it can be done for a few minutes in the best-case scenarios.
Banks, on the other hand, still struggle with lengthy settlement systems, burdened by several middlemen and intermediaries. That’s where one of the most obvious uses of blockchain in banking comes. Burdensome operations can be surpassed using blockchain instead of centralized processing techniques. In that way, transactions can be executed and traced within hours, not days, and both the customer and the bank can benefit from faster times and less complex protocols.
Central Bank Digital Currency (CBDC)
Another use of blockchain in banking is for central banks, rather than for commercial ones. A step further in transforming finances would be offering central bank digital currency (CBDC).
This is not a new type of money but rather a digital form of a national currency which can be used for payments officially. It's issued by a country and its central bank and acts as one of the leading steps towards the digitalisation of financial services.
CBDCs can utilise different types of blockchains or distributed ledgers, depending on the platform a bank chooses to build it on. Currently, there are many countries that have taken the first steps to adopt this new type of banking service. China, a country that is highly opposed to cryptocurrencies, is actually the pioneer of CBDC, by introducing its Digital Yuan. This showcases that even crypto critics can benefit from blockchain and the currencies that can be built on it.
Alongside revolutionising existing transactions, blockchain in banking can bring easier peer-to-peer transactions. P2P transactions refer to electronic money transfers from one person to another through an intermediary, typically a mobile application or web platform.
While banks have embarked on digital transformation, there's still a lot that needs to be done, in order to meet the evolving demands of clients. Providing P2P transactions through a scalable blockchain would facilitate the movement towards modern services. Since blockchain is already being used for peer-to-peer transactions, the groundwork for it has already been established. All that's left for banks is to adapt it to their needs and allow clients to use P2P applications built on robust networks.
Digital Identity Verification
In line with the previous use case that involves applications, blockchain in banking can be used for verifying digital identity. Most banks already provide customers with mobile banking apps or websites where various operations can be conducted.
Accessing the digital services of banks requires different types of authentification, including SMS or email. A step towards modernising that would be by using blockchain technology instead. There are several ways how banks can utilise this, including non-fungible tokens (NFTs) or simply using the encrypted environment of an enterprise blockchain to build an application and its related identification processes.
Borrowing and Lending
Cryptocurrencies have grown to be a big competitor to traditional banks when it comes to borrowing and lending money. There are various platforms that make borrowing money a lot less complex than if you were to go through the procedure with banks. Blockchain in banking can balance the powers.
It's not expected of banks to start giving out cryptocurrency loans or lower their criteria. On the contrary, they can use an enterprise blockchain and benefit from its strong security. Through the technology, banks can enhance their anti-money-laundering and know-your-customer policies. Thanks to blockchain technology, the candidates for loans can be easily verified, whether they're actually suitable to receive money, or not. This can save up time for banks and potentially prevent giving out loans to unreliable borrowers.
Accounting and Reporting
As mentioned earlier, once information has been recorded on this type of network, its alteration is possible, however very complex, and would affect the whole chain. This means that creating an enterprise blockchain system for bank accounting, auditing, or reporting, would be a suitable choice.
Bookkeeping can be significantly changed through blockchain in banking, as banks can remove the arduous paperwork for themselves and their clients. Additionally, all the information can be stored on a reliable platform with different access rights, depending on the employee's status. This can allow not only for easier access to information but also for quicker retrieval times.
The Top Benefits Using Blockchain in Banking Could Bring
The observed use cases of blockchain in banking showcase that there's plenty of room for the technology in traditional financial services. Let's in short look at the benefits of doing this, as banks require more convincing to change their ways towards modernisation.
Among the advantages of banks using blockchain are:
International transactions facilitation
Let’s take a more detailed look into each of them.
Blockchain in banking brings a high level of security. This is due to the encryption of the network, as well as the already discussed fact of how information can be edited. Banks can build an enterprise blockchain and benefit from its high levels of safety regarding their data.
This is related to both the personal information of clients that can be stored on a blockchain and the internal processes that can be facilitated there. If a bank uses this type of network, it can rely on quality protection for sensitive data.
Blockchain transactions are anonymous. What this means is that if John Smith sends Jane Doe a sum of money, on the network the names of the sender and the receiver won't be written. However, this doesn't mean at all that the transactions can't be traced.
Using blockchain in banking services can be very beneficial because every operation on this type of network is easily traced. Although the names of people aren't written, the wallet addresses are. That’s why every single thing that happens on an enterprise blockchain of a bank can be traced to the exact second of when and by which address it was performed.
3. Cost Management
Blockchain in banking can reduce costs for both institutions and their customers. At the moment, many operations in traditional banks cost a certain amount that can often put off clients. This is a serious threat to banks as cryptocurrencies often allow the same operations for lower costs.
Using an enterprise blockchain, banks can reduce internal spending, for different software and processes, and simultaneously cut fees for their users. That way in-office services as well as online ones can be much more accessible.
4. Transaction Speed
When we discussed blockchain in banking as an alternative settlement system, we already established that conventional transaction speed can be very slow. This is due to various operations, some not even conducted by the bank itself but by some third-party middleman that is participating in the operation.
Enterprise blockchain transactions can be considerably faster than conventional ones. For example, in a traditional bank, you may need to wait several business days for your money to be transferred, and even longer if it's overseas. Looking at popular public blockchains, some take not hours but literal minutes to let you send or receive payments. If banks are able to offer that to their clients, certainly the engagement will increase multiple times.
5. International Transaction Facilitation
Another benefit of blockchain in banking is surpassing geographical barriers. Currently, many clients and companies suffer from long processes when sending and receiving payments to accounts in different countries.
For blockchain the locations – where the money comes from and where they're sent to – are irrelevant. Since the network is on the Internet and operates fully there, it doesn't need to rely on physical borders. This means that clients can benefit from a lot cheaper transactions and banks can improve their services by speeding up time.
Can All Banks Benefit From Blockchain Technology?
All banks, no matter commercial or central, can utilise blockchain technology and benefit from it. The first step toward this would be building a reliable network which later institutions can use for various processes and services.
Every bank that needs assistance or guidance about enterprise blockchain, can rely on INDUSTRIA. The company specialises in delivering fully functional blockchains that can improve the work of any organisation. Banks can take advantage of consulting and advisory, blockchain rapid prototype development, and full blockchain and DLT development. This means that INDUSTRIA can carry out the whole process for any bank – from the strategy, to design, and then development and deployment.
As a company with several successful partnerships for blockchain in banking, INDUSTRIA can help banks digitalise their services, simultaneously benefitting from speed, security, and reliability. The company can also offer developing CBDC for banks, as well as intuitive applications or web platforms with expertly designed user experience.
Every interested institution in blockchain in banking should select the company to build its network very carefully. Moving the data of a large number of clients must be done onto a reliable platform that is not only functional but also safe. That's why choosing professionals like INDUSTRIA to build enterprise blockchain, would be both the easiest and the best decision for banks that want to take this step.
How Will Financial Services Shift in the Future?
Blockchain in banking certainly is affecting the field of traditional financial services. It's speeding up digitalisation and improving the experience for both employees and end-customers. While banks may be opposed to cryptocurrency, it's important to separate the network from digital currency. This is more than simple when you see how many advantages can incorporating an enterprise blockchain in banking bring.
Although it's still unknown if central bank digital currencies will gain popularity or if crypto will become an equal rival to fiat money, the effects of blockchain in banking sector are more than prominent. They will only become more visible with time, as the technology matures and evolves.
That's why banks that undertake the shift from current methods and technologies towards blockchain as early as possible would be among the pioneers who first undergo positive changes. Our society is moving to the digitalisation of all processes and banks still have plenty to do to catch up with other sectors. Blockchain in banking can not only contribute to that but potentially help evolve the services to something more, suitable for the changing needs of clients and companies.
INDUSTRIA is a global technology consulting, development, and ventures company with expertise in the field of enterprise blockchain, confidential computing, process automation, and digital experience. As one of the official partners of R3, we are implementing cutting-edge blockchain technologies and reshaping the fintech world. At INDUSTRIA, we are focused on providing permissioned blockchain solutions, such as Central Bank Digital Currencies, Electronic Bill of Lading, and Smart Contracts. Our solutions apply to a wide range of industries and use cases to empower and modernise society.
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