A lot of attention has been paid to blockchain technology in the last decade, moving it beyond the praise of Bitcoin enthusiasts and into the mainstream conversation among banking experts and investors. Already, it has disrupted the financial industry and created an impact on the Fintech landscape. The banking sector may be affected by Blockchain, but why is understanding this concept important?
Corporations could benefit from blockchain technology by establishing better governance and standards for data sharing. By disintermediating the key services provided by banks, blockchain technology and DLT have the potential to disrupt the $7T+ banking industry.
BANKING AND BLOCKCHAIN: THE ROLE OF BLOCKCHAIN TECHNOLOGY IN FINANCIAL SERVICES
By using blockchain technology, untrusted parties can agree on the state of a database without the need for middlemen. The blockchain can provide specific financial services - such as payments or securitization - without the need for banks since it provides a ledger that is not administered by any one person or authority.
Keep reading to learn about how blockchain technology can help the banking sector.
Currently, trillions of dollars are sloshed around the globe by a slow payment system with added fees
You might have to pay up to 7% in additional fees if you work in San Francisco and want to send part of your paycheck home to London. Banks take a cut, receiving banks take a cut, and exchange rates are charged.
The blockchain allows anyone to send and receive money with cryptocurrencies like bitcoin and ether. Payments can be made fast, cheap, and borderless using public blockchains, which eliminates the need for third parties to verify transactions.
Bitcoin transactions settle on average in 25 minutes, but in extreme cases, they can take hours or days. Even though it isn't perfect, it is a notable improvement over the average 3-day bank transfer processing time.
Settlement And Clearance System
The way our financial infrastructure was built, it takes 3 days to settle an average bank transfer.
The consumer isn't the only one who suffers. Money transfers around the globe are logistical nightmares for banks. The simple transfer of funds from one account to another today must bypass a complex system of intermediaries, from correspondent banks to custodial services. Traders, funds, asset managers, and other players in a global financial system must reconcile the two bank balances.
As a decentralized "ledger," blockchain could disrupt this current state of affairs. It is possible to keep track of all transactions on an interbank blockchain in a transparent and public manner. A public blockchain would allow transactions to be settled directly without relying on custodial services and correspondent banks.
An extremely difficult process is involved in raising venture capital. The process of selling a piece of a company to investors involves assembling decks, meeting with partners, and negotiating equity and valuation for countless hours.
Some companies use public blockchains like Ethereum and Bitcoin to raise funds via initial coin offerings (ICOs). Millions of dollars have been raised by high-profile ICOs even before they had a viable product to offer. In 2017, Filecoin raised $257M from investors, while EOS raised over $4B in its year-long ICO.
With ICOs, companies can access a large pool of investors worldwide and online. The government no longer limits investment opportunities to high-net-worth individuals, institutions, and others. Companies have immediate access to liquidity through ICOs. Tokens are traded on a global 24-hour market the moment they are sold. In contrast, venture-backed startups take 10 years.
Keeping track of who owns stock, debt, and commodities is necessary when buying or selling these assets. Brokers, exchanges, central security depositories, clearinghouses, and custodian banks enable today's financial markets to accomplish this. A slow, inaccurate, and prone to deception system of paper ownership has built these different parties around an outdated system of paper ownership.
Through the creation of a decentralized database of unique, digital assets, blockchain technology is destined to revolutionize financial markets. Using a distributed ledger, assets can be transferred with cryptographic tokens. Blockchain companies are developing ways to tokenize real-world assets, from gold to stocks. Bitcoin and Ethereum have done this with purely digital assets.
Loans And Credit
Loans are underwritten by traditional banks and lenders using credit reports. Peer-to-peer (P2P) loans and complex programmed loans similar to mortgages or syndicated loans can be made possible by blockchain technology. Moreover, the process of approving loans is more secure and faster with blockchain technology.
Banks evaluate whether or not you will be able to repay a loan when you apply for one. Credit scores, debt-to-income ratios, and home ownership status are considered as part of this calculation. Fees and interest collected by banks are based on the risk of default.
The use of blockchain technology can reduce costs, improve efficiency, and make personal loans available to more consumers. A decentralized, cryptographically secure database of historical payments could give consumers access to global credit scores.
Banking and financial services are slowly but surely adopting blockchain technology. Furthermore, it can transform the security of the banking sector. Global transactions are set to be transformed by blockchain technology from remittances to securities trading to cross-border payments. Blockchain consulting companies like Blockchain Software can give you the best blockchain solutions. Connect with Blockchain Software if you think your business can benefit from blockchain technology.