The current trend of the vast increase in cryptocurrencies and digital wallets has made banks and other related financial institutions adapt to this trend. It’s an alarming necessity for banks to let investors trade valuable assets using a more secured and transparent platform in various parts of the world. The potential benefit that blockchain technology has to offer can no longer be talked down, the banking industry has now adapted and adopted the use of blockchain technology into their banking activities. The effect and importance the blockchain technology has around the global commerce ecosystem are enormous, it has shifted global commerce into another era.
Blockchain technology runs on an open-sourced software that enables investors to gain simultaneous access to the public ledger updated and no single opportunity to alter transactions. Just as blockchain technology has made a great impact on the world economy, it has created a new era for the banking industry, from the usual methods of securities to more Hi-tech securities. Most alteration in transactions takes place because third-party intervention leaves flaws or windows for it to be possible, but Blockchain technology increases efficiency and security without the intervention of any third party.
Let’s now dive into the ways by which banks and other financial institutions make use of blockchain technology.
Ways By Which Banks And Other Financial Institutions Uses Blockchain Technology
It has become a frequent occurrence to hear news of banks are currently looking for how to make use of blockchain technology to transform and adapt to the new norm. Banks at first criticize the use of the blockchain technology that led to the creation of cryptocurrencies like Bitcoin. But with the vast increase in the importance of the technology, banks could no longer watch as the banking industry suffer the aftermath of not adapting and adopting the technology.
So these are the areas blockchain technology can be effective and efficient for the banking sector:
1. Incorporating Clearing and Settlement into BlockChain
This is one of the biggest areas of the banking sector, the tangled web which takes records of loans and securities and to run it cost billions of dollars. Hence the need for blockchain technology, a statistic showed that banks could save a whopping sum of 10 billion dollars using blockchain technology to boost the efficiency of the clearing and settlement sector of the banking industry.
Blockchain technology can restructure this sector, having a major impact on the clearinghouse. One of the best examples of a financial institution that’s restructuring is the Australian Securities Exchange. The ASE aims to move most of its post-trade clearing and settlement into blockchain technology.
2. Payment Systems
In the various countries of the world, most central banks are seeking the potential shift of some of their payment system into blockchain technology, while other central banks are exploring options to creating their digital currencies. This is in response to the threat that Bitcoin poses to the monetary policy under their control, the inability to subject the cryptocurrencies to their control. This shows that central banks have finally seen the possible benefits of incorporating their payment system into the blockchain technology
Most banks are already pushing onto their project and not waiting on the central banks. They are already incorporating blockchain technology into their payment system. Although with the complexity involved in shifting to another era of the payment system, it might take several years before central banks can be able to issue their digital currencies.
3. Trade finance Into Blockchain
Trade finance is a bulky part of the banking sector, that bankers even plead for a modernized way out, because it is mostly on paper, examples like, letter of credit, bill of lading, which are sent via fax or post. It is believed that blockchain is a modernized way out as there is a vast number of people that need to access the same information. Blockchain is a solution and can provide a vast number of elements in the area of trade finance.
The nature of trade finance made it impossible to modernize, since it’s of old ways, and even requires a physical stamp on paper and transferred through the fax machine. This gives blockchain the avenue to be efficient. As much as digitalization of trade finance is important, so is digitalizing trade itself. This means shipping companies are involved in this digitalization process, also the freight providers and the agents, the insurers, and others. So banks can’t work alone to achieve this aim but work with all the arms of trade to effectively make an impact.
4. Customer’s Identity
Identity is a core component because it’s very vital to incorporating blockchain technology. Confirmation of clients and counterparties is very essential for the banking sector. With this feature, lenders wouldn’t rapidly forfeit their roles as trusted managers of people’s money. Regulators hold banks accountable for checking that clients are not criminals, thieves or impostors and make sure they pay fines when a wrong deed has been done.
Banks have failed on several occasions to come up with the formula to record customers’ identities and update them regularly. But with blockchain technology possess cryptographic protection and also can share a regularly updated record with various parties. This helps tackle money laundering and enables knowing your client, which regularly, the cost to run these systems are way huge and if a mistake is made, the cost is much more.
5. Syndicated loan Market in Blockchain
The period it takes a company to raise money through syndicate loans on average takes about 19 days for the banks to settle the transactions. A fax machine is mostly used for communicating, when loans are being given out, or being paid early, which is backtracking the sector. Syndicate loans are being incorporated into the blockchain system, has it proven to be the perfect system for guarding the lifecycle of loans.
Blockchain technology would not only correct the inefficiency of syndicate loans on its own, just like trade finance. The business process must change to be able to incorporate blockchain technology into the syndicated loan market.