Blockchain
Blockchain technology is a form of digitalized, de-centralized public record of transactions. A blockchain is a digital transaction record. Its architecture is such that each record is stored in a block and all the records of blocks are linked together in a single list, called a chain. This digital record of information is duplicated, encrypted, and distributed across the entire network of computer systems on the blockchain. Blockchains can be used for keeping records of any type of information, in digital form, which may be of virtually everything of value such as financial information, property transactions, cryptocurrency transactions, etc.
Banking sector is digitalizing its most of its services and in the transforming phase of dematerialization. The banking sector has started replicating its transactions pertaining to securities or assets on the blockchain. Blockchain is an opensource software designed to support the transfer of digital assets in realtime to its market participants.
Blockchain effectively decreases asset transfer costs, decreases timelines, enhances security and provide portability of global operations in realtime.
One of the most important feature of blockchain is the history of unremovable transactions. Once a transaction is recorded it can’t be removed. It will help to reduce most of the financial crimes in banking industry or financial institutions.
Blockchain allows the party involved in transactions to access or modify data only in accordance with a set of predefined terms and conditions.
Financial institutions and companies pay millions of dollars a year to retain all their customers records. But blockchain allows all the information to be stored in one location. This guarantees the dignity and non-repudiation of the stored data. It allows organizations to access the verification information of a specific customer from another organization and thus avoids duplication of data.
Blockchain and Distributed Ledger Technology have enough potential to disrupt the banking industry by disintermediating the key services that banks provide, including-
Payments:
Blockchain technology could facilitate faster payments at lower fees than banks by setting up a decentralized ledger for payments like cryptocurrency (ex. Bitcoin)
Clearance and Settlement Systems: Distributed ledgers have the potential to save operational costs and bring us closer to real-time financial transactions between FIs. Distributed ledger technology could allow transactions to be settled directly and keep track of transactions better than existing protocols like SWIFT. If you want to send money from a x Bank account in India to a Y bank account in the US, the money transfer will be executed through the Society for Worldwide Interbank Financial Communication (SWIFT), which sends 40M messages a day for more than 10,000 financial institutions.
Because X and Y Bank don’t have an established financial relationship, they have to search the SWIFT network for a correspondent bank that has a relationship with both banks and can settle the transaction — for a fee. Each correspondent bank maintains different ledgers, at the originating bank and the receiving bank, which means that these different ledgers have to be reconciled at the end of the day.
The centralized SWIFT protocol doesn’t actually send the funds, it simply sends the payment orders. The actual money is then processed through a system of intermediaries. Each intermediary adds additional cost to the transaction and creates a potential point of failure. Further, 60% of B2B payments require manual intervention, each taking between 15-20 minutes.
Blockchain could keep track of all transactions publicly and transparently. That means that instead of having to rely on a network of custodial services and correspondent banks, transactions could be settled directly on a public blockchain.
Allows for “atomic” transactions, or transactions that clear and settle as soon as a payment is made. This stands in contrast to current banking systems, which clear and settle a transaction days after a payment.
Securities:
Blockchain technology may create more efficient, interoperable capital markets by tokenizing traditional securities such as stocks, bonds, and alternative assets and placing them on public blockchains.
Loans and Credit:
Blockchain technology can make it more secure to borrow money and provide lower interest rates by removing the need for gatekeepers in the loan and credit industry.
Trade Finance:
Blockchain technology can create more transparency, security, and trust among trade parties globally in the trade finance industry by replacing the cumbersome, paper-heavy bills of lading process .
Customer KYC and Fraud Prevention:
Blockchain technology can make it quicker, easier and safer to share information between financial institutions by storing customer information on decentralized blocks.