The world of banking is in the middle of a major change. From neobanks and other fintech startups to major technological giants such as Google, Apple, and Amazon, banks are under pressure to adapt – and traditional banks find themselves at a crossroads.
Banks can either embrace digital transformation with cutting-edge tools or risk becoming obsolete. Central to this transformative landscape is blockchain technology. Originally the backbone of cryptocurrencies such as Bitcoin, blockchain has evolved far beyond its initial application.
With its decentralized, transparent, and immutable nature, the use of blockchain in banking presents an enticing prospect for financial institutions seeking to optimize their operations – and expand their customer offering.
Common Problems in the Banking System
It’s no surprise that banking behemoths worldwide are pooling resources to explore this technology’s potential. Collaborative research and innovative initiatives are setting the stage for a banking ecosystem where blockchain isn’t just an afterthought but a core part of operations. But what are currently banking’s biggest challenges? Here are a few examples:
Ensuring Consistently Secure and Transparent Transactions
Blockchain applications in banking technology offer several key advantages in the banking sector. Firstly, it ensures secure and transparent transaction recording, a leap from traditional banking, where transactions are logged in a centralized database.
The blockchain operates on a semi-decentralized system, permitting only trusted entities to host validating nodes. This design minimizes the chances of the entire system getting compromised from a single weak point, thus curtailing the threat of fraud and cyber-attacks.
Inefficiency Caused by the Use of Intermediaries
Furthermore, blockchain technology in banking can significantly enhance efficiency and diminish expenses. Traditional banking processes involve intermediaries like clearinghouses and custodians, which extend the time and cost of transactions. With blockchain, the need for these intermediaries is drastically reduced, facilitating swifter and more economical transactions. Such efficiency can translate to substantial cost reductions for both banks and their clientele.
The Slow Process of Settlement
Banks often grapple with protracted settlement procedures riddled with numerous intermediaries. This is where the application of blockchain technology in banking can shine. The cumbersome processes inherent to traditional banking can be sidestepped using blockchain as opposed to centralized processing methods. As a result, transactions are not only traceable within hours instead of days but also streamline operations for both banks and customers, ensuring quicker turnaround times and more straightforward procedures.
7 Blockchain Benefits in Banking
There’s a long list of banking challenges that can be addressed by using blockchain banking solutions. Just a few of the use cases we see include:
Enhancing Security
Banks commonly face cyberattacks, technical glitches, and human errors that expose customer data. The use of blockchain in banking improves security through cryptographic protection for identity verification and data distribution without the need for intermediaries. Furthermore, blockchain reduces data breach risks by eliminating single points of failure. Smart contracts offer automated transactions, adding another layer of security.
Payments
Cross-border payments can benefit from blockchain’s direct lender connectivity, sidelining intermediaries like SWIFT – while SWIFT’s past vulnerabilities also make a clear case for blockchain applications in banking. Blockchain transactions are secure, fast, and low-cost, making international remittances more efficient.
Accounting, Audit and Error Reduction
Blockchain’s immutable records streamline accounting and audit procedures, likely enhancing regulatory compliance. Smart contracts manage exchanges, minimizing trust issues and reducing errors.
Overall, blockchain has the capability to ensure more control and implement further safeguards, drastically minimizing the risk of fraud and improper use of company resources. With blockchain, every transaction is transparent and easily verifiable, leading to more consistent and accurate processing by banks.
Lending and Borrowing
Blockchain in banking could revamp traditional lending by improving verification, reducing bad loans, and bolstering KYC and AML measures. Likewise, syndicated loans, which require multiple banks’ coordination, can benefit from blockchain by sharing KYC and AML data.
In conventional systems, it can be a tedious process for lenders to assess a borrower’s credit history, especially since detailed credit reports from third-party bureaus might not be available for many small business operators. Blockchain, on the other hand, introduces mechanisms that can enhance the accuracy, transparency, and secure sharing of credit histories.
Trading
Blockchain can revolutionize clearing and settlement in trading, reducing costs and increasing efficiency. When thinking about trade finance, blockchain also has a role to play because blockchain can digitize the paper-heavy trade finance sector.
Trade finance, an industry still reliant on outdated paper processes, can take up to 120 days for individual transaction processing, but blockchain offers a solution by digitizing the trade finance lifecycle, enhancing security, transparency, and efficiency, and modernizing document authentication and financing structures.
Asset Management
Blockchain impacts asset management by streamlining asset and stakeholder processes. It enables automated fund launches, digitizes assets for better market access and liquidity, and integrates customizable privacy settings for secure transactions.
Additionally, blockchain enhances user experience by embedding shareholder rights into digital assets, which reduces human error and promotes transparent governance. It fosters efficient cap table management, automated fund administration, and transfer agency in asset management.
Enhanced Compliance
The immutable nature of blockchain also bolsters compliance. By granting access to auditors and governmental authorities, every transaction can be viewed with unparalleled transparency on the blockchain.
Moreover, banks have an improved capability to detect and flag suspicious transactions swiftly, making the auditing process more efficient. This advancement benefits financial institutions and fintech companies alike, as they can now furnish digital records promptly, facilitating a swifter and more straightforward audit.
Popular Cases of Using Blockchain in the Banking Sector
Now that the benefits of blockchain in banking are clear, let’s take a look at a few use cases of blockchain in banking. In this section, we look at two most illustrative examples: CBDC projects and Onyx by JPMorgan.
CBDC Projects by Various State Governments
These days, Central Bank Digital Currencies (CBDC) are undoubtedly the hottest blockchain-related trend in banking. The concept of implementing digital tokens instead of physical tokens – banknotes – as national currencies has drawn global interest. That’s why more and more countries are actively researching the benefits and potential flaws of digital currencies issued by central banks.
One of such countries is Australia, where the Reserve Bank has conducted a CBDC pilot program. The results of this program outlined four financial aspects that can use digital currencies to their advantage. Overall, the potential Central Bank Digital Currency may lead to the following improvements:
- Ensuring uniformity among new types of private digital money. For example, such types include bank deposits in the form of digital tokens, as well as stablecoins backed by reliable assets. Here, the role of a CBDC is to ensure interoperability regarding new forms of digital money.
- Promoting further innovations in asset markets. The main point of interest in this context is the implementation of specialized platforms using the DLT – distributed ledger technology. It gives the possibility to perform asset tokenization, including real assets, financial assets, and other types.
- Enhancing smart payments. The introduction of a digital token supported by the central bank can enable various complex transactions that are not currently supported by payment systems. Another related possibility here is the rising popularity of smart contracts using CBDCs. They enable performing automatic payments upon meeting certain predefined conditions. For example, this allows performing simultaneous automated transactions between several parties, reducing the need for reconciliation.
- Improving the resilience of the country’s digital economy. CBDCs provide an alternative method of payment for businesses and individuals. The most beneficial feature in this context is that this form of digital money does not require an account in a commercial bank. Additionally, with the help of modern technological advances, it may allow performing electronic transactions in “offline” or emergency situations, for example, during blackouts.
In the case of the Australian CBDC, it represented a direct claim on the Reserve Bank of Australia. However, other countries are actively experimenting with other types of digital currencies and their integration into national financial systems. For example, the Bank of England is currently developing a digital pound or “Britcoin” by testing the features of public blockchains and other distributed ledger types. Similarly, the European Central Bank is preparing the pilot program for the digital euro.
Now, according to the Atlantic Council, 130 countries have CBDC-related programs, compared to only 35 countries in 2020. Moreover, 11 states have already launched their respective digital currencies. So, as you can see, blockchain technology in the form of Central Bank Digital Currencies is the next big thing in financial systems around the world.
Onyx by J.P. Morgan
In 2020, J.P. Morgan, a subsidiary of one of the largest global banks, JPMorgan Chase, launched its blockchain-based platform. The creators of this platform, called Onyx, aimed at revolutionizing the flow of assets and financial data around the world. For this ambitious task, Onyx uses blockchain technology to enhance and automate various steps of payment and settlement processes.
Onyx has several components that are focused on providing different services. For example, Liink is a peer-to-peer network for the secure exchange of information. Coin Systems and its JPM Coin are designed to mitigate the flaws of existing payment systems. Digital Assets is a platform that enables converting financial assets into blockchain tokens in order to provide transparency and improve their mobility and utilization.
Overall, J.P. Morgan has surely found a way to integrate the benefits of blockchain technology into the banking sector. Onyx is constantly developing, bringing more services and improvements for its clients. The extensive list of features includes smart contracts with programmable payments, asset tokenization, cross-border, multi-currency, or machine-to-machine payments, and much more.
Conclusion
As you can see, the banking sector is undergoing significant changes these days. Conventional methods can barely keep up with the pace and demands of the modern world. That’s why even the oldest banks have to undergo digital transformation, including the implementation of blockchains. Banks need technological advances to enhance their services and bring their clients higher levels of convenience, transparency, and security.
Blockchain isn’t new, yet its potential in banking has still not been fully explored because of the industry’s conservative view and behavior. The fear of experimenting with blockchain and other technologies is fully understandable because of the risks. However, refusal to adapt to modern rules and technologies will very likely bring significant challenges in the future.
As a company that has 15+ years of experience in creating digital solutions (including blockchain-based) for the banking industry, we are open to collaboration with businesses of all sizes. A Neobank startup or an established fintech enterprise – we can satisfy every business need in blockchain and technology.
Our blockchain consulting and development services cover a wide range of solutions for banking, fintech, insurance, and many other industries – DApps (distributed applications), smart contracts development and audit, wallets and exchanges, AML/KYC compliance, and a lot more. If you’re looking for an experienced and reliable team that can build complex solutions from scratch and integrate them in your banking ecosystem, don’t hesitate to drop us a line and tell us what you need.
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FAQ
What are the benefits of implementing blockchain technology in banking?
In general, blockchain technology improves existing banking services and enables new types. It greatly enhances security and transparency of operations, especially for cross-border or multi-party payments. Among other benefits, blockchains also enable asset tokenization and digital currencies that are both convenient and secure.
What is the biggest blockchain-based banking trend in the world nowadays?
We would say that CBDCs are the biggest trend, considering their scale and influence on the banking system. The research and gradual adoption of digital currencies issued by central banks are spreading worldwide as more and more states look for a viable alternative to traditional banknotes. So, digital euros, pounds, dollars, and other currencies will soon revolutionize the global financial system.
How can blockchain make the banking industry more secure?
Blockchain is a type of distributed digital ledger, so some of its innate features, such as its decentralized nature, can be used by banks. As one example, instead of keeping data in one central server, banks use computers as independent nodes in a network. This way, they can record transaction-related data individually and then share and synchronize it with other nodes. Once information is recorded and synchronized, malefactors cannot secretly tamper with it.
What new services can I offer my customers if I employ a blockchain-based solution?
In the context of the banking industry, one of the most popular services would be smart contracts. Blockchain technology enables programmable payments that are performed automatically upon meeting predefined conditions. It also allows simultaneous transactions between several banks or other parties. Overall, blockchains make banking operations much faster, more secure, and transparent, improving convenience and customer satisfaction.
