Blockchain and modern banking sector
Today, blockchain technologies are represented by more than a thousand projects, and a fairly conservative banking sector cannot yet offer a single model of working with newfangled “currencies” that are not tied to national markets, do not depend on the work of Central banks and are not regulated by law. However, certain steps are being taken, and they all say that financial leaders take the emergence of the blockchain more than seriously.
The banking system is a global and well-established organism, where all players are bound by thousands of obligations, laws, norms, depending on the economic and political situation, etc. On the other hand, according to Barclays, the boundaries between new technologies and Finance are increasingly blurred — hence the emergence of the term FinTech. And the survival of financial institutions depends to a large extent on their ability to learn new technologies and make the most of new tools. The technology of blockchain today is terra incognita, which opens up opportunities in various fields. It intersects with IPO, crowdfunding, b2b2c, currency speculation, data encryption, etc.
So far, blockchain is a very young platform that continues to develop and look for new points for growth and practical application. The Financial Times believes that this is a system that organically fits into the development of financial markets and can become one of the points of growth for the next five years. The encryption technologies used will become the basis not only for the new system of safe storage and movement of funds but also for the information system of the widest profile — from medical records to the protocols of storage of any commercial and personal information. They will allow you to protect any important data from hacking and fraud, as well as share them in real time.
Unlike traditional banking, blockchain has no Central control. The exchange rate of cryptocurrencies is influenced by purely market factors, not government regulation. The transactions themselves are much easier and more transparent than standard Bank transfers, allow you to reduce the transaction time by a couple of minutes, and processing can be performed 24/7. Thanks to blockchain technology, employees of financial institutions and banks can work both with clients and with other institutions without having to follow the rules of a complex or excessive hierarchy.
The use of cryptocurrency tools eliminates the need to verify payments, insurance, depositing and other procedures that complicate the process. Consequently, unnecessary intermediaries and Commission costs are excluded from the financial chains. The greatest interest and prospects in this regard are the second generation of cryptocurrencies based on the system of smart contracts. Bitcoin, which is the most popular and monetized blockchain platform, belongs to the first generation and therefore its demand in the future raises questions. But Ethereum-based platforms attract such players as JP Morgan, Microsoft, Synechron, Sunthunder, IHS Markit, Broadridge, etc.
The Bank for international settlements (BIS) issued a statement in the fall of 2017 saying that the world’s Central banks “cannot sit idly by and ignore the rise in cryptocurrency rates, as this could pose a threat to the stability of the financial system.” No offense to BIS experts, but the need to work with blockchain became obvious to the banking community at the end of last year. According to a study published in September by Accenture & McLagan, eight of the ten largest investment banks in the world are already using or planning to launch their own blockchain projects. Rationale — new technologies can revolutionize operational management, especially in the part that is constrained by bureaucratic procedures and paper documents. The expected savings from the reduction of certain operating costs will be up to 30% (up to $ 12 billion per year).
The Bank of Montreal, Caixabank, Erste Bank and Commerzbank have partnered with IBM and UBS to “create a new global trade Finance system using blockchain technology that is designed to monitor trade and payments.” The main obstacle to the implementation of this ambitious project is the need for a global rejection of paper documents and the transition to digital. However, there are local examples of a successful transition to new technologies. Japanese Bank Mizuho completed a trade Finance transaction between Australia and Japan, which was conducted entirely in digital format. In the process, several obvious advantages were identified: reducing the time for the creation and transfer of trade documents (from a few days to two hours), as well as labor and other organizational costs. Plus increased transparency of data exchange with all parties.
For blockchain and related technologies to occupy a really prominent place in the financial market, the entire industry must adopt a number of tools to work with digital data. The cross-border nature of trade and the range of participants in any trade transaction make it difficult to promote a common set of standards that would make blockchain truly effective. The HSBC forecast on the development of the banking industry and international trade refers to the global digitalization of transactions not earlier than 2022.
However, the process is started. At the end of 2016, a consortium of seven European banks took the initiative to create a product called Digital Trade Chain. DTC is a blockchain-based digital platform for tracking and managing internal and cross-border open account transactions. The consortium members are KBC, Unicredit, HSBC, Rabobank, Societe Generale, Deutsche Bank and Natixis. The aim of the project is to provide European business with the most comfortable conditions for the expansion of trade operations.
Transactions will start on a paperless and secure basis with transactions tracked at each stage of the life cycle to the point of settlement and payment. Bank of America and Merrill Lynch in August 2017 developed a prototype application for trade financing on the DL3 R3 platform. Combined with the Internet of things (IOT), which is the integration of physical location data for exported or imported goods, blockchain infrastructure can be a powerful tool for entire industries.
One of the key problems today is the creation of a regulatory environment that will allow codifying relations in the field of cryptocurrencies. The range of opinions is very wide. For example, the Bank of Finland said that control over the blockchain is physically impossible. The Bank of England conducts stress tests for corporate banks in the context of the development of new technologies. In Japan, the US and Canada, blockchain technology have almost the official status of virtual currencies, and the attitude of the authorities to it is rather favorable. South Korea and China have passed several prohibitive laws that set the cryptocurrency market on a fever course, but eventually led to its growth and attracted the attention of tens of millions of new players. Taiwanese regulators are considering the idea of declaring bitcoin an official means of money laundering. France intends to hold public consultations on the laws governing ICO.
While Central banks are confused, and private corporations are trying to find their benefits, startups through ICO/IEO attract hundreds of millions to the development of blockchain banking. In their business models, they offer a full range of popular services, without the obvious disadvantages of traditional banks — such as slow transfers and payments, high-interest rates, complex and expensive international transfers, problems with obtaining credit, complicated documentation, etc. Integration with popular payment systems Apple Pay, Samsung Pay, and Android Pay is expected.
The demand for services can be judged by the interest of investors: in terms of successful ICO, startups in the field of Finance occupy a solid second place, collecting almost a billion dollars during 2017. As examples, we can cite Crypteriums, which is going to create the first digital crypto Bank with a credit token and an open platform. The startup Bankera plans to bridge the gap between traditional systems and crypto infrastructure by creating a Bank based on blockchain, closing three main areas: investments, payments, and loans. Bankera also plans to include in the service the ability to work with cryptocurrency exchanges, where users will work without intermediaries. WorldCore offers a full payment service for businesses and individuals: the ability to send and receive Bank transfers worldwide, integration with Visa and Mastercard, no Commission for individuals, the ability to send mass payments on the list, etc.
Despite the problems of modernization, the formation of new rules in the market, the emergence of competitors, blockchain brings one very large-scale bonus for the entire banking sector. The technology of cryptocurrencies involves the encryption of data is virtually hack-proof. Digitalization of data, Big Data, the growth of the number of international partners and partners, the introduction of mobile technologies — all this has led to a huge number of vulnerabilities for cyber crooks. By default, banks are forced to collect detailed data about their customers — and thus literally give this personal information to criminals who find a vulnerability in the next Protocol.
Blockchain reduces such risks to a minimum.
Today it is difficult to predict how the blockchain will develop and what it will come to in the end. But there is no doubt that we are waiting for changes on a global scale. The introduction of the concept and technology of cryptocurrency will significantly increase the speed and efficiency of financial services. As with any new technology, there are pitfalls: the blockchain itself will not eliminate existing problems in the markets, the transition to new formats will require a lot of money, and there will inevitably be controversial moments. However, this is the cost of any evolution, and FinTech is unlikely to be an exception.