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8 WAYS BLOCKCHAIN IS TRANSFORMING FINANCIAL SECTORS

16 December 2021

In the context of banking, what precisely is blockchain?

Blockchain technology is an open, distributed ledger that efficiently and permanently records transactions between two parties. A blockchain is made up of discrete data blocks that include a sequence of connected transactions that are linked in a certain order. Without the need for a centralized authority or middlemen, all of the parties involved may share a digital ledger via a computer network. As a result, transactions on the blockchain are processed more quickly.

One of the many potential advantages of blockchain in banking is its speed. It’s about more than just efficiency; it’s also about a new degree of transparency and security.

What are the advantages of blockchain technology for banking?

When we examine the unique characteristics of blockchain, it’s only natural that the financial sector would be at the forefront of its implementation.

Consider why banks were established in the first place. Banking institutions were established to bring people together and facilitate all types of trade and business. A blockchain, on the other hand, is a technology that can do the same thing on a worldwide scale. Furthermore, it is safe and transparent.

Blockchain has the ability to change the way people do business throughout the world. It has the potential to increase trade efficiency by replacing manual and paper-based procedures with simplified and automated ones. Because it is decentralized and cannot be owned by a single party, a public blockchain may be an excellent collaboration tool. That’s why blockchain is more than simply the technology behind cryptocurrencies like Bitcoin and Ethereum.

There are several advantages to employing distributed ledger technology in the financial services business (for the sake of keeping things simple, I will refer to these technologies as Blockchain). The financial services business has a reputation for legacy systems, and some institutions have stacks of them, some of which are 30-40 years old. As a result, it’s no surprise that the financial services sector has adopted Blockchain to modernize many of its out-of-date processes while also saving a lot of money in the process (which, not surprisingly, might be the main reason for them to move to the Blockchain). Banks can trade quicker, cheaper, and more efficiently via a distributed ledger. 

8 WAYS BLOCKCHAIN IS TRANSFORMING FINANCIAL SECTORS

Immediate Payments

Transactions may be completed in minutes or seconds, however, settlements might take up to a week at the moment. Settlements become user-optimized using Blockchain, which saves both parties a substantial amount of time and money. Because transactions settle instantaneously, blockchain will eliminate the need for a large number of middle and back-office workers at banks. As a result, banks have a strong desire to investigate Blockchain as a means of enhancing settlements; some banks look into internal possibilities first, while others look into options across banks.

Increase capital efficiency

One of the most important characteristics of Blockchain is that it eliminates the need for a trusted middleman and allows for peer-to-peer transactions. When Blockchain is used in the financial services business, fee-charging middlemen such as custodian banks (those that move money between banks) and clearers may become obsolete (those vouching for counterparties’ credit positions). As a result of the huge decrease in operating expenses for banks, Blockchain allows for improved capital optimization. Furthermore, when banks share a Blockchain, the overall cost of the Blockchain and its ecosystem may be greater than the cost of handling transactions at a bank individually. The expenditures, on the other hand, are shared across all participating banks, resulting in major cost savings.

Counterparty Risks are reduced

When transactions are resolved very instantaneously, it eliminates a large portion of the risk that the counterparty would be unable to satisfy its commitments, which might be a considerable cost for banks.

Smart Contracts Improve Contractual Performance

Smart contracts, when used by banks and financial organizations, increase contractual term performance since they execute automatically whenever specific pre-set criteria are satisfied. It’s critical that that smart contracts be solidly founded in law and adhere to all regulatory requirements, including cross-jurisdictional compliance if necessary. As a result, R3CEV’s distributed ledger platform’s smart contracts had to be customized. Due to automated settlement utilizing smart contracts under the management of an incorruptible set of business rules, Blockchain may benefit particularly complicated financial asset transactions.

Increased Transparency 

If regulators have access to the blockchain, there will be more openness among financial firms, which will result in enhanced regulatory reporting and monitoring by central banks.

More financial solutions in the event of a crisis

Due to crypto or digital currencies or tokens, there are more choices for financial solutions in times of crisis. When the Bitfinex attack occurred, they devised a solution that included repaying consumers, who were all equally affected by the loss, with a tradeable Recovery Right Token (RRT). Each token was worth $1, and each token may be seen as an IOU. Customers may swap the token for market price (if they didn’t trust in Bitfinex’s recovery or did and wanted to profit), exchange it for stock (which occurred with roughly half of all tokens), or have it purchased back for $1 by Bitfinex at some point in the future. After a brief plunge in price to $0.30, the RRT is presently trading at roughly $0.80, and Bitfinex is back in business. Thanks to the Blockchain, an intriguing example of a new financial solution has emerged. Without it, Bitfinex would very certainly have gone bankrupt and all of its clients would have lost all of their funds.

Errors are reduced

The immutability of any data stored is a major aspect of Blockchain. Any data stored on a blockchain may be traced in real-time, providing a comprehensive audit trail. As a result, it reduces the need for mistake correction and reconciliation.

To verify digital identities

Without identity verification, banks would be unable to conduct online financial transactions. The verification procedure, on the other hand, includes a number of stages that customers dislike. Face-to-face verification, authentication (for example, every time you log into the service), or authorization may all be used. Every new service provider must go through all of these stages for security reasons. Consumers and businesses will benefit from faster verification procedures thanks to blockchain. This is because blockchain will allow for the safe reuse of identity verification for various services. Zero-Knowledge Proof is the most popular breakthrough in this field. Several governments and significant organizations are currently developing ZKP-based solutions. Users will be able to select how they want to identify themselves and with whom they want to disclose their identity thanks to blockchain. They will only have to register their identification once on the blockchain. There’s no need to repeat the registration process for each service provider, as long as they’re likewise blockchain-based. Putting this sort of data on a blockchain, of course, guarantees its security.

Future of Blockchain

In order to enhance its goods and services, the financial services business must innovate and study new technology. Newcomers will challenge incumbents’ businesses if they do not adapt their offerings and innovate, as we have already seen with a range of Blockchain FinTech firms that are developing new methods to manage your finances. Financial organizations may profit from blockchain, or distributed ledger systems, in a variety of ways. So it’s simply a matter of words whether you name it Blockchain or not. The reality is that it is time for financial institutions to evolve and make use of the benefits of distributed and decentralized networks and technology.

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