Blockchain technology has the potential to revolutionize the way organizations in various sectors store and disseminate information. As it is a shared database where transactions can be viewed and verified by all the network participants, the technology helps in propagating a culture of transparency across industries and organizations.
While you may know about cryptocurrency as the most popular application of blockchain, it has many other use cases apart from that. Blockchain in banking and financial services is one such use case.
But how can blockchain be used in banking? What is an example of a bank using blockchain? Is blockchain the future of banking? You are in the right place if you have been pondering over these questions. This article will help you learn more about blockchain in banking, its uses and the benefits of blockchain in banking technology.
What is Blockchain Technology?
Blockchain is a distributed database with all the participants in the network having access to up-to-date information. It enables the secure sharing of information on a peer-to-peer network.
As there is no central authority overseeing everything, participants or nodes on a blockchain are incentivized with digital tokens to validate transactions on the network.
Blockchains are secured with cryptography and enable the creation of transparent, immutable and permanent data records. These records cannot be deleted or modified without the consensus of the nodes which makes it the ideal technology to track orders, payments and other transactions.
How Blockchain Can Be Used in Banking?
The banking sector faces several problems such as time-consuming processes, excessive reliance on paperwork and other security vulnerabilities. Blockchain can be used to address these issues in the following ways:
Secure Records
Traditionally, banks use a centralized database to store transaction records. This means that a single point of failure can compromise the entire system. This is remedied with the help of blockchain which records transactions in a decentralized network where the trusted participants can validate them.
In this way, the possibility of cyber attacks is reduced and a central system failure can be avoided.
Payments and Transfers
Bank transfers, especially international ones, can take a few days to be settled as they require intermediaries like clearing houses, custodians and third-party service providers. With blockchain, the role of these intermediaries can be eliminated allowing for faster and more cost-effective transfers. The increased efficiency is beneficial for both banks and customers.
Securities Investment
There are multiple parties such as brokers, custodian banks and clearing houses involved in the process of buying or selling stocks, commodities etc. Along with that, they usually maintain a paper ownership system which makes the process slow and prone to inaccuracies.
It becomes easier to transfer assets with a distributed ledger like blockchain. The use of blockchain can help cut out the middlemen, reduce asset exchange fees and build a decentralized database of unique digital assets.
Loans and Credit
Blockchain has opened the doors for peer-to-peer lending– a system that is more customer-friendly than the traditional centralized process adopted by banks. It facilitates a lending system that efficiently and securely disburses loans to customers in a cost-effective manner.
Simplifying the KYC Process
If you know how blockchain technology works, you will understand how it can help to simplify the KYC process in retail banking. Banks can easily access and verify the information stored on a blockchain network which reduces time and helps to lower the personnel cost for KYC verification.
Importance of Blockchain in Banking
There are several blockchain in banking use cases. The technology has multiple benefits for an industry that has generally been slow to adapt to the realities of the digital age.
Decentralization
Blockchain technology provides banks and financial institutions with a viable alternative to a system dependent on third-party validation of transactions. It distributes control among all the network participants and reduces counterparty risk.
This further helps in assuring users that their transactions have been implemented as per the protocol and cannot be altered.
Cost Reduction
Banking activities like clearing and settlement can certainly benefit from the adoption of blockchain technology. The removal of intermediaries brings down the settlement time and eliminates inefficiencies across the organization.
A 2017 Accenture report has also stated that big investment banks can save upto $10 billion by utilizing blockchain for their clearing and settlement operations.
Robust Security
Banks face many security problems such as data breaches, cyber attacks and technical glitches. Blockchain has the potential to bolster bank security in a number of ways. It can be used to develop efficient KYC solutions and eliminate the possibility of a central failure.
Reduction in Errors
Automatically executing smart contracts can be utilized for money exchange between counterparties. This minimizes the element of trust needed to reach an agreement. Further, the use of smart contracts reduces the possibility of duplicate transactions and other human errors.
Blockchain in Banking Examples
Now that we have talked about its benefits and uses, it is time to learn about some real-life blockchain in banking examples.
Ripple
You may know Ripple in the context of the cryptocurrency or its controversies in the USA. But keeping that aside, let us talk about its product suite. Ripple has developed a real-time blockchain that assists banks and other financial institutions to instantly transfer money.
With its RippleNet payment platform, banks across the world can access a standardized network of institutions for transparent transactions.
BlockFi
It is a lending platform that accepts cryptocurrency as collateral and loans out dollars. Getting a loan is quite simple here as users have to just fill out an application form and send their crypto to a blockchain storage address once their application has been approved. The loans on BlockFi also come with benefits like same-day funding and no prepayment penalties.
Chainalysis
Chainalysis provides users with valuable insight into the crypto world. It conducts in-depth analyses of transactions, tracks the source of funds and keeps trader identity transparent. This data is useful for customers as they can then steer clear of funds from suspicious sources and comply with various legal standards.
Hivemind Capital Partners
This New York-based firm works as a multi-stage crypto native investment platform. It focuses on applying institutional best practices and financial infrastructure to Web3 investing. This helps crypto organizations to link the conventional asset management model with the new-age crypto ecosystem.
Spring Labs
Spring Labs uses distributed ledger technology(DLT) to enable financial institutions to share information in a secure and private manner. It creates DLT-based networks with which organizations can share information without needing to share the underlying data as well.
This means data can be securely shared without giving out the identifying information of an individual or group.
NYDIG
NYDIG works towards making Bitcoin more accessible for the general public. It integrates blockchain abilities in the banking realm so that banks can offer Bitcoin options for bank accounts, loyalty rewards and interest payments. NYDIG’s platform also supports Bitcoin transactions and storage.
Republic
It is an investment platform that assists users in investing in startups and initial coin offerings(ICOs). Users can choose from a variety of purpose-based startups and the companies can collect fiat currency or crypto. Republic offers a Token DPA tool that helps startups pre-sell and manage tokens for their crowd sale.
Nium
San Francisco-based Nium provides businesses and financial institutions with a global platform with which they can seamlessly move money. Customers here can settle transactions in various currencies including cryptocurrency. They can even personalize their financial services and integrate crypto into their regular operations.
SALT
With SALT Lending, members can leverage their crypto for cash loans without selling off digital assets. Borrowers here can customize their loan terms, choose their rate and also decide which crypto they want to leverage. The firm has also create a Proof of Access tool that lets customers modify their loan conditions with the SALT token.
Uulala
Uulala is a great tool for underbanked and unbanked populations. It enables peer-to-peer banking for such communities. People just need to have a smartphone with which they can lend to other members cash on a ledger. With Uulala, borrowers can receive loans quickly and safely due to the elimination of the role of middlemen.