Blockchain in Banking

Blockchain technology enables untrusted parties to reach an agreement on the status of a database without the use of an intermediary. A blockchain might deliver certain financial services — such as payments or securitization — without the need for a bank by providing a ledger that no one manages. Everything from financial transactions to how money is raised in the private sector is being transformed by blockchain. Will the traditional banking business accept or be replaced by new technology?

1. Faster payments

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Banking institutions can employ emerging technologies to promote speedier payments and cheaper processing fees by providing a decentralized channel (e.g. crypto) for payments. Banks might introduce a new level of service, launch new goods to the market, and eventually compete with innovative fintech firms by delivering stronger security and lower payment costs. Furthermore, by implementing blockchain, banks will be able to reduce the requirement for third-party verification and speed up the processing of traditional bank transfers. By 2025, 90 percent of European Payments Council members predicted that blockchain would profoundly disrupt the business.

2. Clearance and settlement?

Blockchain, a distributed ledger technology, might allow bank transactions to be settled instantly and trace them more effectively than conventional protocols. A standard bank transfer takes a few days to settle due to the way our financial system was set up. When it comes to transporting money throughout the world, many banks confront logistical hurdles. A basic bank transfer must pass through a complex chain of intermediaries, such as custodial services, before reaching its destination. Bank accounts must also be reconciled across the global financial system, which consists of a huge network of funds, asset managers, dealers, and other businesses.

SWIFT

If you want to send money from a German bank account to a bank account in the United States, you'll use the Society for Worldwide Interbank Financial Communications (in short, SWIFT). SWIFT members send 24 million communications every day to a total of 10,000 different organizations. Only payment orders are processed using the centralized SWIFT system. A system of intermediaries is used to process the actual money. Each one comes at a premium and takes a significant amount of time. A decentralized transaction ledger, such as blockchain, could allow banks to maintain track of all transactions in a public and transparent manner. Banks will no longer need to rely on the SWIFT network of custodial services and regulatory authorities. They may just use a public blockchain to settle transactions.

3. Buying and selling assets

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Blockchain decreases asset exchange fees and minimizes the volatility of the traditional securities market by eliminating the middleman and transferring asset rights. Moving securities on a blockchain, according to one source, may save $17 to $24 million per year in worldwide trade processing costs. Keeping track of who owns what while buying and selling assets like stocks, commodities, or debts is essential. A sophisticated network of exchanges, brokers, clearinghouses, central security depositories, and custodian banks helps financial markets do this. All of these distinct parties have been built on an antiquated paper ownership system. As you can expect, the system is not only slow, but also prone to trickery and blunders. Electronically executing such transactions is difficult since buyers and sellers don't always use the same custodian banks, and they don't always rely on trusted third parties to keep track of all the paper certificates.

Cryptocurrencies

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It's worth noting that the German government now permits banks to provide cryptocurrency-related services. Ukraine is also on this track. If you're buying or selling something, your order will be routed through a number of different parties. It's for this reason that transferring ownership is so difficult. It's worth noting that each party keeps track of its own version of the truth in its own ledger. Not only is the system inefficient, but it is also inaccurate. By building a decentralized database of digital assets, blockchain will transform financial markets. A distributed ledger enables the transfer of asset rights via cryptographic tokens that can be used to represent assets off-chain. With purely digital assets, currencies like Bitcoin and Ethereum achieve this, but many blockchain businesses are currently working on solutions to help us tokenize real-world assets like gold and real estate. By eliminating the middleman, asset exchange expenses will be reduced and the process will be greatly accelerated.

4. Credit and loans

Traditional banking organizations use a credit reporting system to underwrite loans. We're looking at the future of peer-to-peer lending, as well as speedier and more secure loan processes in general, and even complex programmed loans that can resemble syndicated loan structures or mortgages, thanks to blockchain. Banks that process loan applications look at things like credit scores, homeownership status, and debt-to-income ratio to assess risk. They'll need your credit report from specialized credit agencies to gather all of that information. Consumers are often harmed by such centralized systems because they contain inaccurate information. Furthermore, confining such sensitive data to a small number of institutions makes it extremely susceptible. Loan applications can now be processed in a more secure, efficient, and cost-effective manner using blockchain technology.