10 Ways Blockchain Improves Banks (and Makes Them Less Important)
Banker and long-time cryptocurrency critic JPMorgan Chase CEO Jamie Dimon recently made news by announcing the launch of his company’s own cryptocurrency, JPM Coin. It is interesting that Dimon, who claimed that Bitcoin is a fraud, would back such a move. But in the bigger scheme of things, this move is just one step in the long transition of several banking companies towards blockchain technology.
While many people connect blockchain technology to cryptocurrencies and watch Bitcoin price fluctuations religiously, an increasing number of banks have at least explored the use of blockchain for banking services. This transition is quite paradoxical in a way because banks -- the avatars of centralized transactions -- are increasingly shifting to decentralized solutions like blockchain. We’re a long way away from seeing whether this trend leads to greater heights for financial institutions or an upending of the overall ecosystem.
Here are some of the ways blockchain and distributed ledger technology can help the cause of banks. This is in no way an exhaustive list, as a further dive into these items can unearth specific use cases for blockchain’s significance in improving financial services. Here’s a caveat though; some of these solutions may end up diminishing the importance of banks’ centralized systems.
Blockchain can straighten up the financial books
The core of banking is accounting, and it involves lots of paperwork and interconnected data that will take significant effort to secure. Further complicating matters are various requirements audits to maintain the integrity of the books. A blockchain solution, perhaps like a system that records transactions in a cryptography-protected joint register, can provide a more streamlined accounting system that comes with its own verification process.
Blockchain supports advanced e-money efforts by banks
In recent months, we saw the rise of stablecoins in the cryptocurrency world. Having seen the use case of blockchain-based fiat substitutes, it will only be a matter of time before banks get into the action. In fact, in March, Japan’s Mizuho Financial Group is set to launch J-Coin, which is pegged to the Japanese yen.
Blockchain automates the loan issuance process
Right now, getting a loan involves a lot of verification processes that require documents and other information. All loan requests are then coursed through an intermediating body that will assess if you’re worthy of a loan. Blockchain technology has shown efficiency gains by implementing this technology, such as the Agricultural Bank of China has done with blockchain technology with their e-commerce supply chain financing and other parts of their business. Right now, the Agricultural Bank of China uses a decentralized network for its loan issuance process, making approval times quicker.
Blockchain saves huge costs for investment banking
Institutional services, like clearing houses and settlement systems, stand to save a huge amount of money by harnessing the power of blockchain technology. How much? Around $10 billion yearly, according to Accenture. This is achieved by shifting the current investment banking procedures from the current set-up of manual messaging and recordkeeping to a blockchain-centric system.
Blockchain makes cross-border transactions more efficient
Speaking of institutional services, the traditional systems of transferring money across borders have faced a serious challenger in blockchain technology. As a result, a lot of banking institutions have started working with crypto startups to improve their own cross-border transactions. Of course, people can always go to the blockchain startups themselves, as has been the case with those who have ditched banks in favor of pure blockchain services.
Blockchain allows for faster, more direct remittances
On a related note, a lot of retail users have ended up taking matters to their own hands by using cryptocurrencies to remit their hard-earned money to their loved ones across countries. With all the talk about banks using blockchain technology to make cross-border transfers more efficient, it has yet to trickle down to retail, where lower fees play a bigger role in choosing a provider.
Blockchain streamlines identity verification processes
Aside from money matters, another avenue for blockchain’s enhancement of banking services can be through a more streamlined verification process. Right now, dealing with multiple banks involve repetitions in confirming your identity, which becomes a pain point for many customers. A blockchain-powered system for confirming identities can make it easier for banks and their users to verify identities, while also protecting personal information.
Blockchain helps in the fight against money laundering
The identity verification process is an important step in the fight against bad actors who may seek to make dirty money clean. Blockchain also helps institutions come up with a more efficient system for cross-checking transactions and the origins of certain funds. Nevertheless, it remains to be seen how this use of blockchain fares in light of the use of blockchain for privacy-centric assets.
Blockchain opens up more avenues for storing wealth more securely
In the field of value storage, blockchain is a double-edged sword for banks. On one hand, banks using blockchain to digitally secure assets it holds for its clients will result in cost efficiencies and a value-added service on wealth storage. On the other hand, blockchain has enabled the rise of digital wallets, not just bitcoin wallets but a whole range of cryptocurrency wallet offerings that securely store assets for people without needing to divulge information to banks. In this age, when data is money, this can be an emerging threat to the worth of banks.
Blockchain lowers energy costs of financial services
By now, a lot of people think that the cryptocurrency system consumes a lot of energy from mining and other activities. But the bigger-picture outlook is that crypto’s energy consumption is actually three times greener or more compared with the energy consumption involved with maintaining the current global banking system across banks and ATMs. In addition, blockchain systems constantly seeking ways to be more energy efficient, while traditional banking systems may have marginal opportunity for further energy saving.