Contents

  • How can blockchain change the current banking system?

  • What are the main benefits of blockchain for banking and financial services?

  • Fast settlement of funds using blockchain

  • Collect donations directly on the blockchain

  • Issuing tokens for assets on the blockchain

  • Lending money using blockchain

  • The impact of blockchain on global trade finance

  • More secure agreements using smart contracts

  • Activating data integrity and security using blockchain

  • Concluding thoughts

How can blockchain change the current banking system?

Banks often act as intermediaries in the global economy by managing and coordinating the financial system through their internal books. Because these ledgers are not available for the public to inspect and verify their authenticity, they impose confidence in banks and their often outdated infrastructure.

Blockchain technology not only has the potential to make a difference in the world's currency market, but also in the banking sector in general by eliminating these intermediaries and replacing them with a system that does not require a third party, is borderless, and transparent, and is easy for anyone to access.

Blockchain technology is also likely to help facilitate faster and cheaper transactions, facilitate access to capital, create higher data security, enforce trustless agreements through smart contracts, make compliance more seamless, and more.

Additionally, thanks to the innovative nature of blockchain, the ways in which newly available financial blockchains can interact with each other could lead to the provision of entirely new types of financial services.


What are the main benefits of blockchain for banking and financial services?

  • Security: Blockchain-based architecture eliminates single points of failure and reduces the need to put data in the hands of intermediaries.

  • Transparency: Blockchain standardizes common processes and creates a single common source of truth for all network participants.

  • Trust: Transparent ledgers make it easier for different parties to collaborate and reach agreements.

  • Programmability: Blockchain allows reliable automation of business processes through the creation and execution of smart contracts.

  • Privacy: Privacy technologies enabled by blockchain allow selective sharing of data between companies.

  • Performance: Networks are designed to maintain a large number of transactions while supporting interoperability between different chains, creating an integrated, connected network of blockchains.


Fast settlement of funds using blockchain

Sending money in today's banking system can be a long and somewhat complicated process, can come with different fees for both banks and customers and may require more verification and management. In the era of instant communication, the old banking system was not able to keep up with the rest of the technological developments.

Blockchain technology provides a faster payment method with lower fees and is available around the clock without limits or restrictions and with the same security guarantees that the old system can provide.

If you want to learn more about this topic, we recommend you read this article about blockchain use cases: remittances.


Collect donations directly on the blockchain

Historically, entrepreneurs looking to raise money have relied on outside funders such as angel investors, venture capitalists, or bankers. This can be a very rigorous process and requires lengthy negotiations over valuation, stock splits, corporate strategy, and much more.

Initial Coin Offerings (ICO) and Initial Platform Offerings (IEO) offer startups the opportunity to raise funds without the need for banks and other financial institutions. Blockchain-backed ICOs allow companies to sell tokens in exchange for funding with the assumption that the tokens will generate a return for investors. Banks have traditionally charged huge fees to facilitate business securitizations and initial public offerings (IPOs). But blockchain technology can help avoid those fees.

It is important to note that although ICOs have the potential to democratize fundraising, they also come with several problems of their own. The relative ease of setting up ICOs has allowed projects to raise large sums of money without any formal or concrete requirements for actually implementing their promises. The ICO market remains mostly unregulated and as such presents significant financial risks to investors.


Issuing tokens for assets on the blockchain

Buying and selling securities and other assets such as stocks, bonds, commodities, currencies and their derivatives requires a complex and coordinated effort between banks, brokers, clearinghouses and exchanges. This process must not only be efficient but also precise. Adding more complications leads to increased time and cost.

Blockchain technology simplifies this process by providing a technological base layer whose role is to facilitate the conversion of all assets into tokens. Since most financial assets are bought and sold digitally through online intermediaries, tokenizing them on the blockchain seems like a convenient solution for everyone involved.

Some blockchain companies are looking to innovate in tokenizing real-world assets such as real estate, art, and commodities. This would make transferring ownership of assets that carry real world value a cheap and easy process. It will also open new avenues for investors with limited capital by enabling them to purchase partial ownership of expensive assets as investment products that may not have been available to them before.


Lending money using blockchain

Banks and other lending companies monopolized the lending sector, allowing them to offer loans at relatively high interest rates and restricting access to capital due to credit ratios, making the process of borrowing money long and expensive. Although banks have the advantage, the economy depends on banks providing funds for high-cost items such as cars and homes.

Blockchain technology allows anyone in the world to participate in a new type of lending ecosystem that is part of the movement often referred to as decentralized finance (DeFi or Decentralized Finance). DeFi aims to put all financial applications on top of the blockchain to create an accessible financial system.

Blockchain-enabled peer-to-peer financial lending allows anyone to borrow and lend in a simple, secure and inexpensive way without any arbitrary restrictions. With a more competitive lending landscape banks will also be forced to offer better terms to their customers.


The impact of blockchain on global trade finance

Entering into the field of international trade is very inconvenient due to the presence of a large number of international rules and regulations imposed on importers and exporters as tracking and transporting goods through each stage still requires manual processes filled with handwritten documents and ledger (record).

Blockchain technology allows trade finance participants to provide a higher level of transparency through a shared ledger that accurately tracks goods moving around the world and is available for public inspection. Blockchain technology can save importers, exporters and other businesses a great deal of time and money by simplifying and rationalizing the complex world of trade.


More secure agreements using smart contracts

Contracts exist to protect people and companies when they enter into agreements, but this protection comes at a high cost. Due to the complex nature of contracts, the process of creating one requires a lot of manual work by legal experts.

Smart contracts allow agreements to be executed automatically through deterministic, tamper-resistant code running on the blockchain. The funds can remain safely in escrow and are only released when certain conditions of the agreement are met.

Smart contracts greatly reduce the element of trust needed to reach an agreement, reducing the risks of financial agreements and the likelihood of ending up in court.


Activating data integrity and security using blockchain

Sharing data with trusted intermediaries always involves the risk of data theft. In addition, many financial institutions still use paper-based storage methods, which increases recordkeeping costs significantly.

Blockchain technologies enable streamlined processes that automate data verification and reporting, digitize KYC/AML data and transaction history, and allow real-time authentication of financial documents. This helps reduce operational and fraud risks and reduces the cost of data handling for financial institutions.

If you want to learn more about this topic, we recommend that you read this article about blockchain use cases: digital identity.


Concluding thoughts

The banking and financial sector is one of the main sectors that will be affected by blockchain. The potential use cases are numerous, from real-time transactions, tokenization, lending, smoother international trade, more robust digital agreements, and much more.

It is clear that it is only a matter of time before all the technological and regulatory hurdles needed to fully realize the potential of this new financial infrastructure are resolved.

A banking and financial community built on a trustless, transparent, and unfettered backbone is effective in enabling a more open and interconnected economy.