Think traditional banking system and the adjectives that come to mind are cumbersome, stifling and complex but all this could change within the next decade, owing to the rise of blockchain technology startups within the financial ecosystem. These startups aim to leverage the benefits of blockchain technology to solve the challenges faced in Banking, Financial Services and FinTech industry sectors and have collectively attracted as much as $4 billion in investments .
Before we dive into the potential use cases of blockchain technology in the financial ecosystem it’s important to understand what blockchain technology is.
The rise of blockchain technology
Invented nearly a decade ago by Satoshi Nakamoto, blockchain is the underlying technology powering the world’s first cryptocurrency-Bitcoin. Motivated by the 2008 financial crisis, Satoshi aimed to create a financial system that was free from banks and other financial ecosystems, as the 2008 crisis was caused by fractional-reserve-banking. Bitcoin has become sensational over the years, albeit largely due to its extreme price fluctuations but nevertheless is currently valued at over $70 billion, while blockchain has branched out from the financial ecosystem into sectors such as healthcare and gaming.
Financial institutions join the Bandwagon
In retrospect, financial institutions were sceptical about the viability of Bitcoin and largely opposed the idea of a decentralized, peer-to-peer network, citing the risks involved. But over the years, numerous financial institutions have garnered interest in the potential use-cases for the technology.
Now financial institutions all over the world, are experimenting with distributed ledger technology and proof of concepts so that the technology can be used to augment the current financial systems instead of the technology replacing it. For example, Ripple’s blockchain based platform has attracted at least 200 financial institutions from across the globe with 13 new financial institutions joining this including Euro Exim Bank and Ahli Bank of Kuwait. On top of this, several banks are also taking a more stance towards crypto by allowing customers to make a direct transfer of cryptocurrencies, as with the case of Falcon bank in Switzerland.
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How blockchain technology can benefit banking
Blockchain integrated financial services are the reason why traditional banking will cease to exist in the future, and as more banks and financial institutions adopt the technology it could have a snowballing effect that leads to the mass adoption of blockchain and crypto. Therefore let me breakdown the three reasons why banking as we know it will cease to exist in the future.
- Increased security-
A significant portion of financial intermediaries are vulnerable to cyber attacks because they rely heavily on centralized database structures. According to a study as much 45% of financial intermediaries were a target of economic crime. Centralized structures are vulnerable because they have a single point of failure, hack into the central database and the data is compromised.
On the other hand, blockchain has a decentralized structure meaning there is no single point of failure, which makes it incredibly more difficult for hackers. Blockchain also has an extra layer of security, as information stored on the blockchain is secured using cryptographic techniques.
- Augmented KYC procedures-
The financial ecosystem is heavily regulated by authorities to curb money laundering and other illicit activities but financial institutions have failed to get the formula right. According to a study financial intermediaries can spend anywhere between $60 to $ 500 million on keeping up these regulations.
Blockchain could also help increase trust between various entities in the financial ecosystem by enabling one party access to the verified client of another. This would not only help these parties save money but also save a lot of time.
A blockchain integrated financial ecosystem could have prevented money laundering such as the Danske scandal from happening. This bank headquartered out of Copenhagen was caught laundering money from customers of questionable intent to the tune of €200 billion.
- Unmatched efficiency-
As blockchain provides an immutable record of all economic transactions on its network it has the potential to drive down costs while at the same time increasing efficiency by automating various stages of the process. Imagine the incredible benefits blockchain could bring to the auditing process or credit score process, which could help customers secure loans faster. What if blockchain could help the process of cross-border payments become almost instantaneous, instead of the roughly three days time it takes currently? A similar platform is being designed by Ripple and it could bring great economic benefit to various entities including customers.
While there are many more specific applications of blockchain technology in the financial ecosystem like in clearance and settlement systems, fundraising and payments, the aforementioned reasons are aimed to give a broad perspective on the blockchain benefits. But these changes alone are significant enough to radically transform the financial ecosystem, so much so that in the future cumbersome, stifling and complex will not be the adjectives used to describe the industry.
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