Blockchain is the buzzword now; and although it made its first appearance about a decade ago, it is now beginning to take several industries by storm. A significant number of major corporations are seeking to integrate bitcoin into their businesses by moving from traditional business models to blockchain business applications. Be it changing the way banks transact money or how medical records are operated, shared ledger technology will soon be the way most business transactions are carried out.
Particularly interesting is how blockchain — the backbone of Bitcoin — is clearly poised to create an immediate impact on the global banking system more than any other industry. According to Harvard Business Review, blockchain is doing to banks what the internet did to media. Consider this statistic by Forbes; as of 2016, 60% of financial organizations plan on using blockchain for international money transfers, 23% for security clearing and settlement, and 20% for Know Your Customer (KYC) regulations and anti-money laundering services.
So, let us now explore the changes that are likely to be effected by blockchain technology to the banking system.
Better mechanism to fight cyber crime
Identity thefts and cyber hacking attacks have become increasingly common in today’s financial systems. Blockchain, owing to its inherent ability to offer flexibility, allows banks to implement varying levels of control and permissions within the system. In effect, this precludes the need for a central authority to process or record transactions, thereby making interactions safe, secure and trusted. Owing to its structure as a distributed ledger, with each block holding a timestamp, and batches of individual transactions, blockchain seeks to safeguard transaction data, thereby effectively reducing the number of online crimes. Yet another characteristic feature is its immutability. The application of sequential hashing and cryptography, along with the decentralized structure, makes it next to impossible for anybody to distort data on the ledger. Security startup Gladius, based in Maryland, has placed its bet on this technology by incorporating a blockchain-based content delivery networks (CDN) and distributed denial-of-service (DDoS) attack mitigation services. Through this decentralized service, users can rent out spare network bandwidth and resources to support content delivery.
Related: Jumpstarting Digital Transformation in Banking
Aligning “Know Your Customer” (KYC) processes
For banks and other financial institutions, complying with due diligence standards is an important step in preventing inappropriate use of funds and services. Blockchain solutions with cryptographic protection would enable banks to verify each client and share the same information with other financial institutions upon request. For instance, consulting firm Deloitte developed KYCStart (pronounced as Kick Start) earlier this year. The application seeks to reduce onboarding spends and ongoing monitoring costs.
Increasing Efficiency of Money Transfers
Blockchain disruption is said to bring about a significant transformation in the payments process. It ensures higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves. The breakthrough of blockchain will eliminate linking chains and make the exchange of value of information processed faster and more efficiently. According to Accenture estimates, the giant banks could save $10bn by applying blockchain technology.
Related: AI for the Banking Sector – An Inescapable Reality
Increased efficiency of Stock Exchange Platforms
Stock trading platforms are going to undergo a curious change if they rely on blockchain-based technology. In fact, NASDAQ and the Australian Securities Exchange have been know to cut back costs and enhance efficiencies by exploring the possibilities of blockchain. Through functionalities such as automation and decentralization, blockchain can make stock exchanges much more optimal. It can help cut down costs imposed on customers as commission, while accelerating the process for quick transaction settlements. Operational errors are cut down to a large extent, thereby accelerating efficiency and trust among new and existing investors. As a matter of fact, Australian Securities Exchange has already shifted most of its post-trade clearing and settlement to the blockchain system.
Related: Upward trend in mobile banking: Mobile money trends
Introduction of Smart Contracts
One of the most promising attributes of blockchain technology is its ability to create smart contracts. Considering that blockchains are configured to store any kind of digital information, they facilitate the function of smart contracts by enabling automatic execution of commercial transactions and agreements. Smart contracts are efficient at enforcing the obligations of all parties in a contract without the additional expenses of a mediating agent. Since smart contracts are simply blocks of code, they can be incorporated into a variety of software applications; and banking systems are no exception.