Banks often act as intermediaries in the global economy, managing and coordinating the financial system through their internal records. Because these accounting records are not available to the public, users are forced to rely on banks and the often outdated infrastructure. This is where Blockchain in Banking comes to rescue
Blockchain technology has the potential to revolutionise not only the world money market but blockchain in banking has far reaching consequences , eliminating intermediaries and replacing them with a system without the need for trust, without borders, transparent, and easily accessible to anyone.
Blockchain will potentially help facilitate faster and cheaper transactions, increase access to capital, provide greater data security, enforce compliance without the need for trust between the parties, through smart contracts, make compliance more fluid, and more.
In addition, thanks to the innovative nature of blockchain, how the new banking companies can interact with each other have the potential to lead to totally innovative types of financial services
- Security: Blockchain-based architecture eliminates single points of failure and reduces the need to disclose data to intermediaries.
- Transparency: The blockchain standardises shared processes and creates a single shared source of truth for all participants in the network.
- Trust: Transparent records facilitate collaboration between different parties and the conclusion of agreements.
- Programmability: Blockchain enables reliable automation of business processes through the creation and execution of smart contracts.
- Privacy: The privacy technologies provided by the blockchain allow selective sharing of data between companies or parties involved in an agreement.
- Performance: networks are designed to support a high number of transactions, while supporting interoperability between different chains, creating an interconnected network of blockchains.
Now that we know key attributes of blockchain and how they are tailor made for banking sector, lets look at some key use cases of blockchain in banking sector
Fast funds transfer using blockchain
Sending money in the current banking system can be a time-consuming process with multiple fees for banks and customers and may require more effort for administration and security checks. In the era of instant connectivity, the traditional banking system has failed to keep up with the rest of technological developments.
Blockchain technology provides a faster payment method, with lower rates available 24 hours a day, without borders, and with better security guarantees than that of the traditional system.
Fundraising directly on the blockchain
Historically, entrepreneurs looking to raise money have relied on outside financiers, such as “angel investors”, venture capitalists, or bankers. This can be a rigorous process that requires lengthy negotiations related to the division of assets, valuation, company strategy, and many other factors.
The Initial Coin Offerings (ICO) and the Initial Exchange Offerings (IEO) offer fundraising opportunities for emerging projects without the need for banks and other financial institutions. Driven by blockchains, ICOs allow companies to sell tokens in exchange for financing on the assumption that the tokens will generate returns for investors. Traditionally, banks charge high fees to broker business securitization and Initial Public Offerings (IPO), but blockchain technology can help avoid these costs and fees.
It is important to note that while ICOs have the potential to democratize fundraising, they do have problems. The relative ease of establishing an ICO has enabled projects to raise significant amounts of funds without any formal or concrete guarantees to deliver on their promises. The ICO market remains, in practice, an unregulated market and, as such, presents a considerable financial risk for potential investors.
Tokenization of assets in the blockchain
Buying and selling securities and other assets, such as stocks, commodities, currencies, and derivatives, requires a complex and coordinated effort between banks, brokers, agencies, and exchange platforms. This process must not only be efficient, but also accurate. The degree of complexity added directly corresponds to the increase in time and cost.
Blockchain technology simplifies this process by providing a technology-based layer that allows easy tokenization of all types of assets. Tokenization of assets on the blockchain is a convenient solution for everyone involved.
Some innovative blockchain companies are investigating the tokenization of real-world assets, such as real estate, art, and commodities.It would also open up new possibilities for investors with limited capital, allowing the partial purchase of very expensive assets – products that previously could not be viable for them.
Money lending using blockchain
Banks and other companies have monopolized the lending sector, allowing them to offer loans at relatively high-interest rates and restricting access to capital based on credit scores. This makes the process of lending money more expensive and time-consuming. While banks have the advantage, the savings depend on them providing the necessary funds for higher-cost items, such as cars and houses.
Blockchain in banking allows anyone in the world to participate in a new type of lending system, which is part of the movement called Decentralized Finance (DeFi). To create a more accessible financial system, DeFi intends to place all financial applications in blockchains.
Blockchain-enabled peer-to-peer money lending allows anyone to borrow simply, securely, and cheaply, without arbitrary restrictions. With a more competitive lending scenario, banks will also be forced to offer better terms to their customers.
Role Of Blockchain on the global financial market
Participating in international trade is extremely inconvenient due to a large number of international rules and regulations imposed on importers and exporters. Keeping track of goods and moving them through each stage still requires manual processes, with many documents and records still written by hand.
Blockchain technology allows financial market participants to provide a higher level of transparency through a shared ledger that accurately tracks goods moving around the world. By simplifying and optimizing the complex world of financial markets, blockchain technology can save a significant amount of time and money from importers, exporters, and other companies.
Safer agreements through smart contracts
Contracts exist to protect people and companies when making deals, but that protection comes at a high cost. Due to its complex nature, the process of creating a contract requires a lot of manual labor from legal experts.
Smart contracts allow contract automation through deterministic and tamper-proof code, which runs on the blockchain. The money remains safe and is only released when certain conditions of the contract are met.
Smart contracts significantly reduce the need for the element of trust to reach an agreement, minimizing the risks of financial agreements and the chances of ending up in court.
Security and data integrity provided by blockchain
Sharing data with trusted intermediaries always carries risks of data compromise. In addition, many financial institutions still use paper storage methods, which considerably increases registration and maintenance costs.
Blockchain technology provides streamlined processes that automate the verification and recording of data, digitize KYC / AML transaction history and data. It also allows real-time authentication of financial documents. All of this helps to reduce operational risk, fraud risk and lower the cost of data manipulation for financial institutions
The possible use cases are many, from real-time transactions to asset tokenization, loans, more fluid international trade, more secure digital deals, and more.
The solution of issues related to the technological and regulatory obstacles necessary for the potential of this new financial infrastructure to be fully utilized seems to be just a matter of time.
A banking and financial system shaped on a transparent basis, without the need for trust and borders, has enormous potential to effectively allow a more open and interconnected economy.
Co-Founder of BlockchainX, My vision and time to offer the best products for our clients without apprehensions at economic rates. Making virtual dreams a reality, My interest in Blockchain technology and crypto started when I was an undergrad. It has since then transformed into something much bigger for me. I believe that Blockchain is undoubtedly the future of technology as we know it, and have been trying to share as much knowledge as I humanly can with people. From analyzing and assessing the clients’ requirements in detail to proffering the best Blockchain and Crypto Consultant
- 1 Fast funds transfer using blockchain
- 2 Fundraising directly on the blockchain
- 3 Tokenization of assets in the blockchain
- 4 Money lending using blockchain
- 5 Role Of Blockchain on the global financial market
- 6 Safer agreements through smart contracts
- 7 Security and data integrity provided by blockchain
- 8 Final considerations