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 financial 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 and the first one under this technology is Bitcoin which was created in the year 2009.
The cryptocurrency is a concept where blocks of data are accepted as currency or as a monetary unit. The creation of units and verification of fund transfers is done with encryption. This technology ensures that the users are able to edit only the parts of the blockchain which they “own” by owing the private keys that are required to write the file.
Although the technology sounds to be a game changer, however, there are still many obstacles to overcome before it completely transforms the present banking and finance. Many big financial institutions are willing to invest millions to research on ways to implement it. It has been said that the blockchain technology has a potential to disrupt the financial industry.
Some real-world examples of blockchain being used 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 payment with instant verification of the transaction.
How Santander bank used blockchain technology?
This renowned bank of U.K has become the first major bank in the country to use blockchain for international payments. The bank has created an app provided by Ripple which is based on blockchain technology that facilitates international payments. Once the app is downloaded the user just needs to complete the profile details and can start transacting. The app connects you to Apple Pay, where payments can be confirmed securely by using touch ID. The payments can be made between 10 GBP to 10000 GBP any time of the day. The transfers can be made from Sterling to US dollars and Euros and the funds start reflecting in the recipient’s account on the next working day. Thus saving a lot of time on transaction processing and it is secured too!
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. This way all the banks had one standard document 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.
KYC (Know Your Customer)
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.
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 definitely spike its demand in future thus making it as the new buzzword in the financial sector.