Banking on blockchain
Blockchain technology, according to the description on Coinmarketrate.com , runs on open source software, which allows investors to simultaneously access an updated registry (public ledger) and not have a single opportunity to change transactions.
Just as blockchain technology has had a major impact on the global economy, it has created a new era for the banking industry, from conventional methods of dealing with securities to more high-tech securities. Most changes in transactions occur because third-party intervention leaves flaws or windows for this to be possible, but blockchain technology increases efficiency and security without third-party intervention.
Let’s now look at how banks and other financial institutions use blockchain technology.
Ways of using blockchain technology by banks and other financial institutions
Recently, you can often hear news that banks are looking for ways to use blockchain technology to transform and adapt to new norms. At first, banks criticized the use of blockchain technology, which led to the creation of cryptocurrencies such as Bitcoin. But with the growing importance of this technology, banks could no longer watch the banking industry suffer from the consequences of not adapting and adopting the technology.
So, these are the areas where blockchain technology can be effective and efficient for the banking sector:
- Enabling clearing and settlement in the blockchain
This is one of the biggest areas of the banking sector, a tangled web that keeps records of loans and securities, and billions of dollars are spent on its maintenance. Hence, there is a need for blockchain technology. Statistics show that banks could save an impressive amount of $10 billion by using blockchain technology to improve the efficiency of clearing and settlements in the banking sector.
Blockchain technology can restructure this sector, having a significant impact on the clearing house. One of the best examples of a financial institution that is restructuring is the Australian Securities Exchange (ASE). ASE intends to transfer most of its post-trade clearing and settlement operations to blockchain technology.
- Payment systems
In different countries of the world, most central banks are seeking to transfer part of their payment systems to blockchain technology, while other central banks are exploring options for creating their own digital currencies. This is in response to the threat that Bitcoin poses (yes, it does) to the monetary policy they control, the inability to subordinate cryptocurrencies to their control. This shows that central banks have finally seen the possible benefits of including their payment system in blockchain technology.
Most banks are already promoting their projects without waiting for central banks. They are already implementing blockchain technology into their payment system. Although, given the complexity of the transition to another era of the payment system, it may take several years before central banks will be able to issue their digital currencies.
- Trade Finance in blockchain
Trade finance is a cumbersome part of the banking sector, and bankers are even asking to modernize it, since it is mainly carried out on paper, for example, a letter of credit, a bill of lading, which are sent by fax or mail. It is believed that the blockchain is a modernized way out, since a huge number of people need access to the same information. Blockchain is a solution and can provide a huge number of elements in the field of trade finance.
The nature of trade finance has made it impossible to modernize it, since it has old methods and even requires physical printing on paper and transmission via fax machine. This gives the blockchain the opportunity to be efficient. As important as the digitalization of trade finance is, so is the digitalization of trade itself. This means that shipping companies, as well as cargo suppliers and agents, insurers and others are involved in the digitalization process. Therefore, banks cannot work alone to achieve this goal, but must cooperate with all parts of the trade for effective impact.
- Customer identity
Identification is a key component, as it is very important for the implementation of blockchain technology. Confirmation of clients and counterparties is very important for the banking sector. Thanks to this feature, lenders will not quickly lose their role as trusted money managers of people. Regulators hold banks responsible for verifying that customers are not criminals, thieves or impostors, and make sure that they pay fines in case of misconduct.
Banks have repeatedly failed in developing a formula for recording customers’ personal data and updating it regularly. But blockchain technology has cryptographic protection, and can also share a regularly updated record with various parties. This helps to fight money laundering and allows you to know your client, who regularly, the cost of running these systems is huge, and if a mistake is made, the cost will be much more.
- Syndicated Loans Market in Blockchain
The period required by the company to raise money through syndicated loans takes about 19 days on average, during which banks settle transactions. The fax machine is mainly used for communication when loans are issued or paid ahead of schedule, which throws the sector back. Syndicate loans are included in the blockchain system, it turned out to be an ideal system for protecting the life cycle of loans.
Blockchain technology will not only correct the inefficiency of such loans by itself, as well as trade finance. In order to introduce blockchain technology to the syndicated loans market, the business process must change.
Blockchain technology has turned the world upside down. Yes, it’s great that Biden signed the Cryptocurrency Regulation Act, which doesn’t actually regulate anything. And on March 14, yesterday the European Parliament approved the same bill, well, just a twin clone. But against this background, the main emphasis was placed on CBDC, a digital copy of Fiat.
Today are difficult times, and the confrontation between cryptocurrencies and the traditional financial system will be joined by an emerging new, hitherto unseen system that will exceed SWIFT at times. But, let’s not get ahead of ourselves, but let’s see what happens next.