If you are following cryptocurrency, you might have heard of the term ‘Blockchain.’
In essence, blockchain is a distributed ledger technology handling transaction records that are immutable, cryptographically secured, and openly shared with users.
Of course, blockchain might not cure cancer, but it can revolutionize how we do business across different sectors — government, retail, supply chain, gaming, and banking. The secure and transparent nature of the technology is the sole reason for its adoption in various industries.
In fact, banking was one of the first sectors to get impacted by blockchain technology. In this article, we will ponder the importance of blockchain in banking and how it’s transforming the whole industry to become more efficient in its business operation.
P.S. Like it helped the DeFi industry. DeFi is short for decentralized finance, it includes a host of financial services built on the back of blockchain. You can invest in DeFi with the DeFi Coin Set.
How Blockchain Is Transforming the Banking System
The banking industry has been muddled with challenges for a very long time.
Luckily, blockchain’s secure, transparent, decentralized, and cost-effective nature helps handle these industry-wide issues.
Below are the ways blockchain technology will transform the future of the banking system.
1. Eliminates middlemen & commissions
The banking industry fostered a middleman economy and charged insane commissions to feed them.
For example, in its current form, transferring money from one country to another can take multiple days as it needs third parties to process the transactions. Unsurprisingly, these third parties take a portion of the transaction amount as their commission. Hence, a good chunk of the amount is lost in transit.
Adding blockchain to this equation can improve the whole process. Blockchain is a peer-to-peer technology that allows people to interact and trade directly with the help of a crypto wallet, reducing the middlemen population. This approach could reduce the overall cost of banking services and improve product quality, benefitting international businesses and retail customers.
2. Improves security
Cyberattacks are becoming a global threat, and even developed nations plan to include them in their war strategy.
You might have realized that banks and financial institutions are ideal spots for committing cyber crimes. These attacks could compromise sensitive information and lead to the victim losing hundreds of millions of dollars.
Blockchain can be an effective solution to improve security as it’s maintained by thousands of nodes or computers. It means there is no one central point where hackers could attack and change the record without a trace. Thus it is almost impossible to modify any information once it has been uploaded to this network.
3. Reduces human error
Do you know? Human errors in record-keeping and accounting are significant causes of financial fraud. Moreover, there were several instances where simple negligence turned into huge cybersecurity issues.
Blockchain has streamlined and automated the process of recording transactions that can’t be tampered with later. Hence, this technology eliminates many manual efforts, minimizing human errors and cyber threats.
4. Reduces delays
Despite large-scale digitization, several banking services still have frictions that delay the whole process. The reasons could be many, including bank holidays, missing paperwork, fraud prevention procedures, different currencies, etc.
If you can pick one service that gets severely impacted due to these delays, it would be lending. Lending is a key revenue driver for banks and helps retail and commercial customers handle their cash needs.
Blockchain can make lending easier as it can automate the payment and lending process, allowing for instant settlement of transactions.
What Are the Challenges of Implementing Blockchain in Banking?
It’s not all sunshine and rainbow.
Though Blockchain is considered the next big thing after the internet, there are some real challenges and roadblocks to implementing it in the banking sector.
1. Scalability
Though numerous developments (like ‘The Ethereum Merge’ or layer two solutions) are improving blockchain scalability, we still have a long way to go to handle the scale of the entire financial service industry.
To give you some perspective, India alone handled 48 billion transactions in 2021, the highest in the world. It was followed by 18 billion from China. If we take the Bitcoin or Ethereum network, both handle 0.29 million and 1.2 million transactions per day at their current level.
2. Setup cost
Of course, blockchain tech helps in cost reduction but setting up the initial infrastructure is quite expensive. Also, other factors like scalability could lead to maintenance costs.
Thus, it would be hard for small financial institutions to handle such expenses.
3. Security
Adopting blockchain has a lot of security benefits as it doesn’t have any central authority. It’s very hard to modify the ledger secretly since it’s an open network. However, there is a catch.
If we take the Bitcoin network, there would be security incidents when an individual or a group has more than 50% of the mining power. Though owning more than 50% might sound far-fetched, there is still scope for such incidents. To avoid this, the mining pool must be monitored continuously.
4. Regulations
Regulations, or the lack thereof, are one of the most significant barriers to blockchain adoption.
For example, the U.S. maintains a generally positive outlook toward Blockchain tech. However, a lot of discussions have been happening at the agency level. This includes the Federal Trade Commission (FTC), Department of Treasury (DoT), Securities and Exchange Commission (SEC), and Internal Revenue Service (IRS). They’ve been debating how regulation should be applied on Blockchain and the associated elements like smart contracts, tokens, stablecoins, etc.
5. Culture
Blockchain is a non-traditional way of transferring assets. Hence, it will create a cultural shock to those who are used to the traditional system.
It would take a huge amount of education to make the common audience embrace the tech.
Top Blockchain Banking Examples
Global banks are not hesitant to experiment with blockchain tech.
Below are some examples of such experiments.
1. J.P. Morgan
JP Morgan is using blockchain to improve their money transfer services. The technology helps in lowering the verification time needed for large payments.
2. HSBC
HSBC collaborated with R3, a blockchain tech company, to build Digital Vault — a blockchain platform for storing digital assets. Currently, Digital Vault handles up to $20 billion worth of assets (including debt, equity, and real estate).
The platform is integrated with distributed ledgers and smart contracts, creating a frictionless value chain across asset issuance and wealth management. Hence, clients can access their private assets directly and in real-time instead of having to request paper-based records, thus reducing the overall cost of their custodial service.
3. Asian Bank
Appinventiv supported Asian Bank in developing a banking platform that offers features such as wire transactions with cryptocurrencies, trading of cryptocurrencies, etc.
The Future of Blockchain in Banking
‘Promising’ is one word that comes to my mind when describing the future of blockchain in banking.
The rise of blockchain is changing the status quo. Large banks are already buying or joining hands with new-age fintech startups to utilize the technology. Between August 2021 and May 2022, 23 banks made at least one investment in blockchain-related entities. These include well-known banks like Morgan Stanley, Goldman Sachs, Citi, Wells Fargo, etc.
This trend will likely continue, considering the visible cracks in the traditional banking sector. Nevertheless, the speed of adoption depends on solving the existing issues of the technology (like scalability, regulation, and so on).
Moreover, we are not claiming that the future of banking will be 100% on the blockchain. However, a good number of use cases (like cross-border payments, peer-to-peer transactions, asset trading, lending, etc.) can be improved with the blockchain.
Conclusion
At first, the banks were suspicious about adopting blockchain, but things changed with time. Currently, the technology is being explored by 90% of major North American and European bankers, per a survey conducted by Accenture.
Also, Accenture and McLagan studied eight banks to understand the monetary impact of blockchain. The results showed annual savings of $8 to $12 billion.
It would be an understatement to say that blockchain improves existing banking services, from payments to securities trading to cross-border payments.
Each day, millions of transactions happen from one location to another with the help of blockchain. It is just a matter of time before these numbers multiply.
FAQs
1. How many banks use blockchain technology?
If we take India, 15 banks, including 11 private and four PSBs, have formed the Indian Banks’ Blockchain Infrastructure Co Pvt Ltd (IBBIC) to integrate blockchain technology in trade-related operations.
Some global banks that utilize blockchain are JP Morgan, Asian Bank, HSBC, and Goldman Sachs.
2. Can blockchain be hacked?
Yes, but there’s a very low chance of it happening. Each network has a built-in mechanism to prevent security incidents. If we take the Bitcoin network, there is scope for hacking only when an individual or a group has more than 50% of the mining power.
3. Can I buy Bitcoin through my bank?
You cannot buy Bitcoin (BTC) or other crypto directly with a bank account. You will have to use a dedicated crypto exchange to buy them.
However, an effective strategy would be to invest in a theme or basket of crypto rather than individual crypto assets. Mudrex Coin Sets offer you an excellent opportunity to do just that. Feeling excited already? Kick-start your investment journey by exploring the platform.
