Practical Examples Of How Blockchain Is Being Used In Banking And The Financial Services Sector

While there are still several hurdles to overcome before blockchain transforms finance and banking as we know it, the potential cost and labor savings it could create for the global financial market are so appealing that many major financial institutions are investing millions in resources to research how best to implement it. I believe blockchain is a technological advance that will have wide-reaching implications that will not just transform financial services but many other businesses and industries.

Billions of individuals and businesses are served and trillions of dollars are moved around the antiquated global financial system each day. Still heavily reliant on paper, albeit dressed up with a digital façade, there are many issues with this system that cause added expense and delays as well as make it easier for crime and fraud to cripple it. Despite the financial industry’s resistance to change, blockchain and its expected benefits make it worthwhile.

What is blockchain?

Many of you may be familiar with Bitcoin, a type of digital currency that operates independently from a central bank, but the tech behind that system most people are not familiar with is blockchain. There are many different blockchains—public and private—and they allow anyone to send value anywhere in the world where the blockchain file can be accessed. Think of each chain as an online database stored in a distributed, peer-to-peer fashion. The storage devices for the database are not all connected to a common processor and each block—ordered records—has a timestamp and a link to a previous block.

Cryptography ensures that users can only edit the parts of the blockchain that they “own” —by possessing the private keys necessary to write to the file. It also ensures that everyone’s copy of the distributed blockchain is kept in sync.

A recent World Economic Forum report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain-related technology.

What blockchain can do for the financial and banking industry

Blockchain technology can potentially disrupt the financial industry that we know and use today. Here are just a few of the top ways I believe it will transform finance and banking:

Fraud Reduction

Even though blockchain is new technology, its potential to reduce fraud in the financial world is getting a lot of attention since 45% of financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Most banking systems around the world are built on a centralized database that is more vulnerable to cyberattack because it has one point of failure rather than many—once hackers breach the one system they have full access. The blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our financial institutions.

Know your Customer (KYC)

Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomson Reuters Survey. These regulations are intended to help reduce money laundering and terrorism activities by having requirements for businesses to verify and identify their clients. Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant.

Smart Contracts

Because blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved—delivery of products could signal an invoice to be paid for example.

Payments

Blockchain disruption could be highly transformative in the payments process. It would enable higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves. In the current reality, there are a lot of intermediaries in the payment processing system, but blockchain would eliminate the need for a lot of them.

Trading Platforms

It’s exciting to contemplate the changes that might occur with our trading platforms if they relied on blockchain-based technology. There’s no doubt that the risk of operational errors and fraud would be dramatically reduced. NASDAQ and the Australian Securities Exchange are already exploring blockchain solutions to reduce costs and improve efficiencies.

Hurdles to blockchain implementation for financial services

Before we can realize all the extraordinary opportunities blockchain technology offers us for the banking and financial services industry, there are some hurdles we need to overcome.

The blockchains that would be used by financial institutions would need to comply with privacy laws of today and the future and need to ensure the safety of the data. There are many questions regarding regulatory oversight for this new technology that need to be sorted out. And, any blockchain used in this sector would need to handle an extraordinarily large data set, therefore scalability is incredibly important.