Banks adopting blockchain technology: Why, and which banks are leading the way?
Introduction:
In today's digitalized world, we are aware that blockchain has attracted many sectors, but finance is arguably the most prominent one. The digitised inception in the form of Bitcoin currency, was promoted in 2008 during the Global Economic Recession 2007-09. In this period, the global economy was devastated badly. The conventional financial system has crashed, forcing the government to issue huge stimulus packages.
Blockchain focused on addressing the blackouts that occurred during the global financial crisis. As a leading blockchain development company, we understand the potential of this technology and its applications across industries. In this blog, we'll discuss the front face of blockchain in the banking sector.
Blockchain technology: A brief overview
Blockchain is a decentralized digital ledger that records transaction information in a secure and immutable manner. The technology was first introduced in 2008 and was created for cryptocurrency, but since various expansions, it has reached a potential beyond being a digital currency. Now it is used for a wide range of applications beyond cryptocurrency across the world.
The basic ideology behind blockchain is to create distributed blocks where the database is stored inside every block. Every block’s data is linked to the previous one in a sequence of cryptographic techniques. This means that once the block is included in the chain, it cannot be altered or deleted without disturbing the integrity of the entire blockchain.
Considering the decentralised nature of blockchain, it signifies that it cannot be controlled or powered by a central authority or institution. It is built to make it resistant to tampering or censorship. The transaction is verified with a network of users or nodes rather than by one single centralised authority.
Blockchain is paving the way beyond cryptocurrencies. Now, it is offering a decentralized platform for other sectors like supply chain management, healthcare, banks, voting systems, and many more. Some of the key benefits of blockchain technology are transparency, increased security, and efficiency, as well as the potential to eliminate intermediaries and reduce costs.
What can banks do with blockchain technology?
Blockchain technology has the potential to bring revolutionary transformations in the banking sector. It proffers a broader perspective for improvements like new ways to conduct transactions, data storage, and managing financial systems. Here are some reasons blockchain technology is implemented in the banking sector.
- Quicker payments
There are enormous numbers of transactions going on in banks every single second. Returning to the current situation, trillions of dollars are wasted during banking transactions. It is primarily because of some added fees and slow payments.
Digital currencies like Ether and Bitcoin are public blockchains that facilitate people to receive money digitally without any extra transaction fees and in real time. Banks can achieve greater customer satisfaction by using these decentralized payment channels. It eases the complex levels by offering more security, faster payments, and quick processing.
- KYC and AML compliance
In banks, under certain circumstances, it takes at least three months to execute all the KYC proceedings. It includes general information about the customer; also, it costs banks a lot to perform KYC. On the contrary, blockchain technology helps to ease the KYC process.
Blockchain technology creates a more secure and efficient way to manage KYC. It facilitates banks to store the customer's information on the blockchain. Keeping customers' data on the blockchain reduces the risk of fraud and identity theft.
- Cross-border transactions
The movement of money across global borders becomes complex to deal with lengthy proceedings. Even if the international bank transfer is done, it takes several days to settle. It goes through various chains of intermediaries before reaching its receiver. The procedures also include lots of cost and time.
Blockchain technology can ease by creating a more efficient and cost-effective way to conduct cross-border payments. With blockchain, cross-border payments can be settled in near real-time, reducing transaction times and costs.
- Buying or selling securities
Buying and selling assets, like shares and stocks, involves lengthy procedures. It involves third parties, such as the stock exchange, custodian banks, and personal brokers. The involvement includes outdated system procedures, making the process slow and prone to inaccuracy and fraud.
Blockchain technology in the banking system brings a decentralized database of digital and unique assets. It creates a tokenized security that carries the potential of cutting out the middlemen and reducing the asset exchange fees.
Firms that have implemented blockchain: Their use cases, statistics, and figures.
Many major banks have already adopted blockchain technology. Here are some examples:
1) JPMorgan
JPMorgan Chase has implemented blockchain technology to streamline and optimize financial processes, creating Quorum, a permissioned blockchain that provides privacy, security, and scalability. It has also developed the Interbank Information Network, which allows banks to share information and resolve compliance issues more efficiently. In 2019, JPMorgan Chase conducted a repo transaction using blockchain technology, reducing settlement time from three days to just a few hours while reducing counterparty risk and increasing transparency. Cost savings and efficiency gains have been achieved by reducing the time to settle payment and KYC process by up to 75%.
2) Goldman Sachs
Goldman Sachs has been utilizing blockchain technology to quickly settle securities transactions, lower counterparty risk, and boost liquidity. The Komgo blockchain-based trade finance platform is designed to reduce fraud and mistakes. Goldman Sachs has been investigating the use of blockchain technology in futures trading, joining the R3 consortium, and exploring the prospect of providing cryptocurrency trading services to its clients. However, these plans were put on hold due to the regulatory framework governing cryptocurrency trading. With investments in 10 startups since 2013 and submitting patents pertaining to the technology, Goldman Sachs is one of the most active investors in blockchain technology. Blockchain technology has been used by Goldman Sachs to boost efficiency, lower risk, and promote transparency.
3) HSBC
HSBC implemented blockchain technology to improve efficiency, transparency and reduce costs. Voltron, a platform based on the Corda blockchain, enables banks to share trade information in real-time, reducing the need for physical documents and manual processes. FX Everywhere, a blockchain platform, enables the bank to settle FX trades in real-time, resulting in faster transactions, lower transaction costs, and greater efficiencies for all parties involved. As of 2021, HSBC is exploring new areas of improvement in blockchain development, such as supply chain finance and digital identity verification. The bank is exploring new use cases for blockchain technology, which could lead to further adoption in the future.
4) Swedish Central Bank and E-Krona
The Swedish central bank is experimenting with releasing its own digital currency, the e-krona, using the Corda distributed ledger technology solution developed by R3. The project includes Riksbank and Handelsbanken, giving them the opportunity to participate in what may be the first digital central bank-issued money in the world to be available to the public. China is the first to issue a digital currency, handing out $6.2 million in digital currency to Beijing residents as part of a trial. The bank is looking forward to the adoption of new versions and improvements in the future.
These are just a few examples of major banks that have adopted or are exploring blockchain technology. Many other banks worldwide also leverage blockchain technology for various applications.
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