It would not be wrong to say that the financial sector has entered into a new digital era with the advent of “blockchain.” This new technology is poised enough to redefine how we think about monetary transactions and has a scope to revolutionize the economy as a whole.
Of all the new technologies that have surfaced in the financial sector in recent years, blockchain technology stands out to be the most promising one. It powers decentralized cryptocurrencies, and the most famous (or infamous) and the flagship cryptocurrency ever invented is called Bitcoin which came into existence in the year 2009.
Cryptocurrency is a digital currency based on BlockChain technology. Encrypted blocks of data are accepted as currency or as a monetary unit. The creation of units and verification of funds transfer is done with the help of advanced encryption techniques. The underlying BlockChain infrastructure ensures that the users can edit only the parts of the blockchain which they “own” by virtue of owning the private keys that are required to write to the file.
Although the technology sounds to be a game changer, however, there are still many obstacles to overcome before it completely transforms the modern banking and finance. Many big financial institutions are willing to invest millions in research on ways to implement it. It has said that the blockchain technology has a potential to disrupt the financial industry.
Let us look at some real-world examples of blockchain which have started to make some serious headway in the financial sector.
Speeding up international payments
There was an announcement by Ripple couple of years back that some banks such as CIBC, Santander, UBS, UniCredit, National Bank of Abu Dhabi have made a breakthrough by moving real money across borders with the use of blockchain technology.
Ripple is a blockchain startup which focuses on providing this technology to financial institutions so that international payments can be made more efficiently. The company offers a solution that provides a cryptographically secure end-to-end flow of cash with instant verification of the transaction.
How Santander bank used blockchain technology?
This renowned UK bank has become the first major bank in the country to use blockchain for international payments. The bank has created an app (powered by Ripple technology) which is based on blockchain technology that facilitates global payments. Once the user downloads and installs the app – all he/she needs to do is to complete their profile details. And immediately they can start transacting internationally in a secure and completely private manner. The app connects you to Apple Pay, where payments can be confirmed securely by using touch ID. The transactions can be as small as 10 GBP to 10000 GBP any time of the day. It supports major currencies like US Dollar, British Pounds, and Euros. No matter what amount or currency is used – the funds are transferred between the transacting parties within one business day. Thus saving a lot of time on transaction processing!
Smart Contracts to trade derivatives
The Smart contract is one of the most promising applications of blockchain technology. It allows execution of commercial agreements and transactions automatically. These smart contracts are secure than the traditional contract and can also reduce the transaction costs since blockchain cuts out the middlemen.
Barclays bank tested a way to trade derivatives by using smart contract. The bank created a smart contract, in simple words an electronic document where fields could be pre-filled with values as agreed by ISDA. In a way they attempted to standardize the documentation needed for these type of transactions – thus reducing delays and human intervention. So the banks involved were able to fill the fields with the terms as defined in derivatives agreement and were able to view online. This helped in speeding up the process as banks earlier used to search for an old version of the draft in their inbox or piles of documents to make a new one.
Barclays used Corda blockchain for this trial which was developed by a consortium of big banks including Citigroup and JP Morgan. It was the first time that the Corda blockchain was used in a public trial.
The scope of Blockchain in the financial sector
Though the current use of blockchain technology is mostly seen in the Bitcoins, however, many banks are willing to experiment with this new technology. The initial focus is on payment settlements, trade finance, and reconciliation. Here, are just a few ways in which we feel that Blockchain has a scope to flourish.
Despite being a new technology, blockchain’s potential to reduce the fraud in the financial sector is gaining a lot of attention. Most of the banking systems are prone to cyber attacks since they are built on a centralized database which makes it more vulnerable. Whereas blockchain is a distributed ledger where there is a timestamp on each block and the batches of individual transactions are held with a link to a previous block.
Financial institutions spend huge amounts on the upkeep of the Know Your Customer regulations. The KYC intends to reduce money laundering and other criminal activities by giving banks a means to identify their customers. Blockchain aims to allow independent verification of a single customer by one organization which further can be accessed by all other organizations. This saves the hassle to the consumer of going all over again with the KYC process.
Blockchain-based technology can definitely help in reducing the risk of fraud and operational errors. The Australian Securities Exchange and NASDAQ are already looking out for blockchain based solutions to improve efficiencies and reduce costs.
Insurance is a binding contract between two parties which involves number steps such as premium payments, the filing of a claim, investigation, and settlement of claims. Blockchain technology may change the way of insurance business runs by replacing legal contracts with smart contract and by using the distributed ledger system. Another way it can help is in settling unclaimed files since the blockchain registry will help in connecting the dots.
Banks have to deal with numerous transactions every day and Blockchain technology has the potential to bring in more security and genuineness in these day to day banking transactions. It can give an opportunity to the financial institutions to win the confidence of customers since it can make the processes simplified and transparent. We can easily say that Blockchain’s capability to reduce the risks and frauds will spike its demand in future thus making it as the new buzz word in the financial sector.