Among the many ways blockchain could be used, finance is probably the most well-known. The 2008 financial crisis, which wrecked the world economy, led to the creation of the technology in the form of Bitcoin. The traditional financial system had crashed, so governments had to come up with big stimulus packages to keep economies going and save banks that were in trouble.
Blockchain is meant to fix a lot of the problems that came to light during the global financial crisis. In this piece, we’ll look at how blockchain development services can be used in banking and why this new technology can help solve some of the biggest problems in the field.
Let’s discuss the Current Banking Problems first!
The banking industry has been around for hundreds of years and helps with many financial and economic activities, such as trading, lending and borrowing, processing and settling transactions, underwriting, and so on. But because it has been around for so long, it has become stuck in its ways and has been slow to change with the fast-paced realities of the digital age.
In its current state, the industry is like a giant who keeps moving forward at a steady pace thanks to the huge amount of momentum he has built up, but is too clumsy to move forward in a graceful way. For example, many banking operations still require a lot of paperwork, which takes time, money, and security risks to handle. Security systems need to be made stronger across the board. Banks also need reliable ways to keep track of credit history, reduce bad loans, improve compliance with regulations, and do other things. All of this is happening while the fintech industry is becoming a bigger threat.
How Can Blockchain be Used in the Banking Sector?
Auditing and Accounting
The fact that blockchain can store records that can’t be changed can have a huge impact on how accounting, bookkeeping, and auditing are done in the banking industry. In this area, technology can help by cutting down on paperwork, making traditional bookkeeping methods more efficient, and making sure that records are easy to access in case of an audit. As a result, compliance with regulations across the sector is likely to improve a lot.
So far, blockchain has caught the attention of PwC, KPMG, Ernst & Young, and Deloitte, which are the four largest auditing firms.
Borrowing and Lending
DeFi (decentralised finance) is one of the most popular blockchain and banking trends of the past few years. It aims to change many parts of traditional finance, such as borrowing and lending. DeFi’s goal is not to make the banking industry better. Instead, it wants to take it head-on by making financial services easier for regular people to get. Read our article on decentralised finance to learn more about how DeFi is making it possible for new services like peer-to-peer lending and borrowing apps to be made.
However, blockchain in banking can also be used to make it easier for banks to lend and borrow money. Strong verification tools in the technology could lower the risk of bad loans. Blockchain can also make sure that people who want to borrow money are not criminals or bad people. This will help banks improve their know-your-customer (KYC) and anti-money-laundering (AML) systems.
Grouped loans are another area where blockchain can help. Most of the time, a group of banks gives large loans to businesses. This is a complicated process that takes up to 19 days and needs the lenders to work together. Compliance with KYC and AML regulations is a big problem in this case. In the past, all banks involved in the processing of a syndicated loan had to make sure that KYC and AML compliance were met on their own. But blockchain technology makes it possible for a bank that has already gone through the compliance steps to share that information securely with the other people involved in a loan, which makes the process a lot easier.
Credit Suisse, Ipreo, Symbiont, and R3 got together in 2016 to form a group that would work on making it possible for blockchain systems to support syndicated loans. The consortium finished a proof of concept in 2017 with the help of solutions from Synaps Loans.
Blockchain is a good way to improve an area that hasn’t been updated in a long time. Even now, most trade finance is done with paper, which is sent all over the world by fax or mail. Blockchain could be the technology that finally puts an end to this and brings about a time when everything is quickly digitized.
DeFi has already shown that people want decentralised marketplaces and exchanges more and more. Even though these things aren’t happening in banking right now, lenders might be tempted to adopt the idea. As we’ve already talked about, using blockchain in banking could completely change clearing and settlement, which are important parts of a trading business.
Most types of fundraising, such as initial public offerings, have been handled by banks for a long time. A few years ago, initial coin offerings (ICOs) came along to challenge the old ways of doing things by letting new companies sell tokens to investors. Even though it was very controversial, the ICO trend made people think about how to raise money in a new way. This led to the creation of security token offerings (STOs), which are a much more mature version of the original idea.
If the trend keeps growing, it wouldn’t be strange for banks to start looking for ways to get in on it.
Key Advantages of Blockchain Development in Banking
The banking industry has been around for hundreds of years and helps with a wide range of financial and economic activities, such as trading, lending and borrowing, processing and settling transactions, underwriting, and so on. But because it has been around for so long, it has become stuck in its ways and has been slow to change with the fast-paced realities of the digital age.
Using new technologies can help bring the sector up to date. Here’s what blockchain development consulting brings to the table in banking:
Banks still use old, inefficient systems to communicate and work together with their large networks of counterparties. Several banking tasks, like clearing and settlement, need solutions that can make them faster and more efficient.
Using blockchain technology in banking can be a way to solve this problem. As a safe and efficient peer-to-peer way to share data, blockchain technology can get rid of inefficiencies across an organization, reduce the need for middlemen, and save the industry as a whole a lot of money. Accenture found in a report from 2017 that large investment banks could save $10 billion if they used blockchain to make their clearing and settlement operations more efficient.
After a number of high-profile data breaches in the past few years, banks have been working hard to improve their safety systems and safety procedures. Cyber attacks, problems with technology, and mistakes made by people have all hit the industry hard and put the financial information of thousands of customers at risk. Faced with these problems, some lenders have spent the last few years trying to figure out how to use blockchain to make their security systems better.
Blockchain can improve the security of banks in a number of ways. First of all, the technology can be used to make strong know-your-customer (KYC) solutions. This is because the security it provides ensures that all members of a blockchain network have their identities checked. Also, it’s easy for all members of the network to share information with each other, which cuts down on the need for middlemen to handle data distribution.
Blockchain is decentralised, so there are no single points of failure. This makes the risk of data breaches much lower.
Some blockchain protocols add an extra layer of security in the form of smart contracts, which let transactions happen automatically when certain conditions are met.
Fast Payments and Money Transfers
Payments and other money transfers are already being affected by blockchain protocols, so it’s not surprising that many lenders are looking closely at what the technology has to offer. Especially for cross-border payments, using blockchain could be a great thing for the business world.
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a large messaging network that handles the transfer of information between member banks. SWIFT is the main way that banks make payments across borders today. But with blockchain, lenders don’t need these middlemen because they can talk to each other directly. It’s also important to note that SWIFT has been hacked in the past few years, which makes the case for blockchain even stronger.
Mathew McDermott, head of digital assets at Goldman Sachs, told CNBC that in the next five to ten years, “you could see a financial system where all assets and liabilities are native to a blockchain and all transactions are natively happening on chain.”
One interesting way that blockchain can be used in banking is to digitize physical assets. This means that blockchains can host a wide range of digital currencies, among other things.
We already know about digital currency like Bitcoin and stablecoins, which are tied to a fiat currency or asset or a basket of currencies or assets. Most of the time, these kinds of projects don’t happen in the traditional banking and finance sector. In recent years, though, a number of commercial and central banks have been working on their own digital currency projects.
The People’s Bank of China (PBoC), which is working on its own Central Bank Digital Currency, may be the most well-known effort (CBDC). Digital Currency/Electronic Payments (DC/EP), which is what the CBDC is called, is being tested in a number of large Chinese cities right now.
As was already said, smart contracts can be used to handle the exchange of money between two parties without anyone having to do anything. One of the benefits of this method is that it reduces the amount of trust that is needed to reach an agreement. It also reduces the chance of making mistakes. As was already said, smart contracts can be used to handle the exchange of money between two parties without anyone having to do anything. One of the benefits of this method is that it reduces the amount of trust that is needed to reach an agreement. It also reduces the chance of making mistakes.
Blockchain was made to be an alternative to traditional finance, but now the financial institutions it was meant to replace are interested in it. Blockchain development services are becoming more and more popular in various sectors like government, healthcare, supply chain management, the real estate industry and many more. After putting blockchain technology down and making fun of it for years, banks are now realizing that they can no longer ignore its benefits. There are many ways that blockchain can be used in banking to improve the way things are done now. But it’s also likely that banks will use blockchain solutions in the future that are made to work outside of the traditional system. If that happens, the blockchain challenge to the sector will have been a success.