Blockchain Technology and Banking

The blockchain or distributed ledger is a documentation of digital actions that are shared among various stakeholders. It can be modified only upon an agreement from most of the stakeholders in the system.

Once information has been recorded, it cannot be removed. Hence, the blockchain consists of specific and validated documentation of each transaction executed. This implies that digital records can be maintained safely, despite the absence of a central authority.

Several banks, including Citigroup, Barclays, and UBS Bank are looking at options for using blockchain technology for cross-border payments. They are strategizing the process of integrating within the current system.

Some of the key benefits of blockchain technology are:

Security

Since the blockchain is spread across several computers, hacking is very difficult. It reduces the need for a server maintenance and enhances the bank’s overall security.

Transparency

The provider and the receiver for each transaction are highlighted and all transactions are in the public domain for scrutiny. The blockchain provides details on the circulation of money across the financial system, along with the markets into which it moves.

Privacy 

Since the users are not known, they can transmit money expeditiously and safely. This enables banks to decrease the processing time and reduce the costs of global transactions.

Risk

Control is not with any distinct authority. Therefore, for any issue, the remaining aspect of the network would continue to operate. At present, if a bank’s system shuts down, users cannot conduct transactions, while by establishing blockchain technology, the bank’s system would function normally.

 Eliminating inefficient banking intermediaries

This could result in significant savings for the consumers and the financial services sector.

According to a report by Accenture, “Asia-Pacific (APAC) banks, credit card firms and startups can be expected to increasingly focus on blockchain technology in the coming years. It also stated this trend would coincide with the need for FinTech firms to streamline operations and comply with regulations. As a stand-alone technology, blockchain could help banks, credit card companies, and clearinghouses collaborate to create safer, faster accounting and optimize capital use by reducing counterparty risk and transaction latency”.

As per experts, the applications are of various types including capturing client information, managing cross-border payments, clearing and settling bond/equity trades, and facilitating efficient contracts (credit derivative) that release funds automatically if a firm is bankrupt.

According to a report by Spanish bank Santander, management consultancy Oliver Wyman and venture capital investor Anthemis, “The technology could cut banks’ infrastructure costs for cross-border payments, securities trading, and regulatory compliance by $15bn-$20bn a year from 2022”.

For megabanks looking at opportunities to revamp the traditional IT systems due to pressure from regulators, digital, and cybercriminals, the blockchain provides an opportunity to reassess their strategy.

The capability of the technology to deliver a lasting record of status, which includes the timeline of a person’s transaction is one function with potential. Intermeshing records can be effective, according to insurers in verifying a person’s actions.

Several financial institutions are trying to evaluate if the blockchain technology provides a cost-cutting option or reflects a margin-eroding risk. Many banks have created internal models, for e.g., Citigroup has developed Citicoin (a digital currency that is being validated by its QA process).

Some have developed in-house models, such as Citigroup’s creation of Citicoin, a digital currency being tested in the bank’s laboratory. Others have chosen to invest in a specialist: Goldman Sachs initiated a $50m funding on behalf of Circle Internet Financial, which would utilize the bitcoin to oversee consumer payments.

Another option is through a partnership. Commonwealth Bank of Australia has collaborated with open source software provider (Ripple) to construct a blockchain system for payment transactions among its subsidiaries. Banks such as Barclays and UBS are interfacing with the blockchain startups via a technology incubator.

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