Cryptocurrencies and the blockchain technology that supports them are hailed as the next big thing. One area where new technologies are expected to have a big influence is the financial sector. Even though blockchain technology is still in its early stages, it is widely regarded as a game-changing, disruptive invention with the potential to drastically alter the banking landscape in the coming years.
A blockchain is a decentralized, immutable database that allows network transactions to be recorded. In recent years, blockchain has gained prominence as a technology that can be utilized in several sectors, and numerous businesses have sprung up around it. The permanent recording of transactions in a block is enabled by blockchain technology. It removes the possibility of third-party involvement.
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Benefits of Blockchain technology
In theory, blockchain has the potential to transform the banking and financial industries. It has the potential to transform the financial industry significantly.
Transactions are completed faster and at a lesser cost.
In the transaction authorization procedure, there are no middlemen.
Decentralization and, as a result, independence from central repositories are both desirable outcomes.
Paperwork and bureaucracy will be reduced.
Transparency Data security and integrity
The role of distributed ledger technology (DLT) in financial services
Without the use of an intermediary, blockchain technology allows untrustworthy parties to agree on the status of a database. A blockchain may deliver specialized financial services — such as payments or securitization — without the need for a bank by providing a ledger that no one manages.
Furthermore, blockchain enables the use of technologies such as “smart contracts,” which are self-executing contracts based on the blockchain that can automate manual procedures ranging from compliance and claims processing to the distribution of the contents of a will.
Blockchain’s cousin, “distributed ledger technology (DLT),” might help corporations develop stronger governance and rules around data sharing and cooperation for use cases that don’t require a high degree of decentralization but could benefit from improved coordination.
Blockchain technology and distributed ledger technology (DLT) offer a huge chance to disrupt the $5 trillion banking sector by disintermediating essential services that banks provide, such as:
Payments:
Blockchain technology might enable quicker payments at cheaper rates than banks by providing a decentralized ledger for payments (e.g. Bitcoin).
Bitcoin and Ethereum, for example, are based on public blockchains (Bitcoin and Ethereum, respectively), which anybody may use to send and receive money. Public blockchains eliminate the need for trusted third parties to verify transactions, allowing anyone all over the world to make quick, inexpensive, and borderless payments.
Bitcoin transactions typically take 10 minutes to settle, although this might take hours or even days in severe situations. That’s still not ideal, but it’s an improvement over the typical 3-day processing period for bank transactions. Crypto-based transactions are also difficult for governments and regulatory agencies to regulate, supervise, and shut down because of their decentralized and complicated nature. Cryptocurrency certifications would be greatly helpful for understanding the deeper meaning of the process.
Clearance and Settlement Systems:
Distributed ledgers can lower operating expenses while bringing us closer to real-time financial transactions.
An interbank blockchain might preserve a public and transparent record of all transactions. That implies transactions may be settled directly on a public blockchain rather than relying on a network of custodian services and correspondent banks.
Furthermore, blockchain technology enables “atomic” transactions, which are payments that clear and settle immediately. This is in contrast to conventional banking systems, which take days to clear and finalize a transaction.
Fundraising:
Initial Coin Offerings (ICOs) are a new type of financing that separates access to cash from traditional capital-raising services and businesses.
Projects offer tokens, or coins, in return for financing in an ICO (often denominated in bitcoin or ether). The token’s worth is linked to the success of the blockchain firm, at least in principle. Investing in tokens allows investors to bet on usage and value directly. ICOs allow blockchain firms to bypass the traditional funding process by selling tokens to the general public.
Securities:
Traditional securities, such as stocks, bonds, and alternative assets, might be tokenized and placed on public blockchains, allowing for more efficient and interoperable capital markets.
By generating a decentralized database of unique digital assets, blockchain technology has the potential to transform financial markets. It is possible to transfer the rights to an asset using cryptographic tokens, which represent assets “off-chain,” on a distributed ledger. While Bitcoin and Ethereum have done so with solely digital assets, emerging blockchain startups are developing ways to tokenize real-world assets such as equities, real estate, and gold.
Loans & Credit:
By eliminating the need for gatekeepers in the loan and credit sector, blockchain technology can make borrowing money safer and more affordable.
Alternative lending based on blockchain technology is a more cost-effective, efficient, and secure means of offering personal loans to a larger group of people. Consumers might apply for loans based on a worldwide credit score using a cryptographically secure, decentralized register of previous payments.
Trade Finance:
Blockchain technology can increase transparency, security, and confidence among trade participants throughout the world by eliminating the laborious, paper-heavy bills of lading procedure in the trade finance business.
The usage of blockchain and distributed ledger technology can help facilitate cross-border commercial transactions that would otherwise be prohibitively expensive due to trade and paperwork fees. It would also cut the amount of paper used and reduce delivery times.
With trade finance accounting for 80-90 percent of global commerce, the impact of blockchain on the industry would be seen internationally across all businesses that employ cross-border trading.
Customer KYC and Fraud Prevention:
Blockchain technology can make it simpler and safer to transfer information between financial institutions by keeping customer information on decentralized blocks.
KYC compliance may be made easier and less expensive by using blockchain technology. Because KYC client information is kept on a blockchain, the platform’s decentralized structure allows any organizations that require KYC to access it. Using blockchain for KYC reasons may cut bank employee needs by 10%, resulting in yearly cost savings of up to $160 million.
Detecting fraud and cyberattacks is another security procedure where blockchain may assist banks.
Wrapping up
Disruption does not happen immediately, and most blockchain technology is still in its infancy.
Some ardent supporters think that blockchain and cryptocurrencies will one day completely replace banks. Others believe that blockchain technology will improve the efficiency of traditional financial infrastructure.
The extent to which banks adopt the technology remains to be seen. However, one thing is certain: blockchain will undoubtedly alter the sector.