One of the main threats to the banking systems today is technology. Whether coming from large firms, such as Amazon or startups, banks are taking note and joining.
One of the high-potential disruptors is the rapidly evolving blockchain technology, a tamper-proof system of public distributed ledger that is used for assets like cryptocurrencies. Large banks and exchanges are now working on their own blockchain-based solutions to stay on top of this innovation.
Banks are Taking Notice and Joining
Before looking at the disruptions from the blockchain, here is a peep into some of the financial institutions that have indicated an interest in it.
- The French investment bank, BNP Paribas, has indicated it will look at how blockchain can be employed for order processing and currency funds.
- NASDAQ has said it is working on a blockchain to help reduce cost, time, and points of friction in the capital markets.
- Barclays is considering blockchain as a transformative application. Therefore, it is experimenting both internally and with partners.
- Others, such as UBS (a Swiss investment bank), Citigroup Inc, and Spain-Based Banco Santander are all working on blockchain-based solutions.
- Investment Bank Cowen Opens a Digital Unit, Plans to Offer DeFi, NFTs, and Derivatives
Payment and Remittance
The most notable, say, basic use for blockchain technology is in the payment system. Already, Bitcoin and other cryptocurrencies are used as digital money and means of sending payments. These transactions are borderless, fast, secure, and to a great extent, anonymous. They are also cheaper compared to the standard methods, such as swift transfers.
A blockchain-based method of processing transactions can help eliminate the high transaction fees and cut down the time required. Already, dozens of companies have started using this method of sending funds.
Accounts Deposits and Balances
Most customers use banks to hold their deposits and check balances. After depositing funds, banks mainly loan the money to other clients, which means that the balances that show on inquiry is not what is in the bank reserve. Indeed, banks can land into a major challenge if too many clients try withdrawing their money at once.
A blockchain is a public ledger that captures all the transactions that happen therein. Therefore, banks could take advantage of the blockchain to hold user data and transaction information in a more secure, cheaper, and accessible manner. It could also eliminate the danger of bank runs.
Market Trading and Clearing
The simplest purchase of a stock to an over-the-counter currency swap would need clearing and settling of trades. The asset ownership or contract has to be verified and recorded. On top of that, there are clearing and exchange fees, which can be pretty significant because of the order volumes.
If this ownership could be put on a blockchain, any change would be immediate. This would not only cut down the time required but also the cost involved in trading bonds, stocks, and derivatives. This is why people are looking forward to the possibility of the New York Stock Exchange or other stock markets being on the blockchain.
Already, Overstock has announced that it is creating T0, a blockchain-based asset exchange for the issuance of corporate bonds.
The finance industry is now taking blockchain technology seriously because it is proving to be a huge disruptor. The tamper-proof, immutable, and decentralized nature of public ledgers makes them ideal for sending funds, cutting down costs, and streamlining everything, from retail banking and settlements.
