There is no doubt that cryptocurrencies were an ingenious invention at the time of their launch. Originally created to take on the role of digital currency, cryptocurrencies have gone a step further into becoming one of the most sought-after investment assets globally. However, it’s the cryptocurrencies’ underlying technology, blockchain technology, which has changed into something greater than it was originally created for. It’s largely attributed to helping pave the way for people to step away from conventional banking systems and traditions by restoring power and control to the people themselves. Banks were initially not amused by this and were very skeptical of the adoption and use of blockchain technology (some still are).
However, as the popularity of cryptocurrencies grew, so did the interest of the banking sector in blockchain technology. Despite ICO fundraising campaigns receiving intense regulatory scrutiny, banks have backed up and financed major blockchain-based projects in a bid to carry out proof of concepts to test the potential of blockchain technology in the banking sector. Currently, announcements of how more and more banks are starting to adopt the technology, and in various ways citing the many potential benefits that they can accrue from the technology’s use, often come across the wire.
Use Cases of Blockchain Technology for Banks
There are numerous potential use cases of blockchain technology in the banking industry. Below we take a look at some of the potential use cases of blockchain technology for banks.
1. Fraud Reduction
One of the biggest challenges that affect the banking industry is the growth of fraud and cyber-attacks. Historically, banks have created their ledgers on centralized and outdated IT database systems which have become increasingly susceptible to hackers and cyber-attacks. The fact that all the information is located in one place, makes them even more susceptible to hacker’s criminal activities. Cyber-criminals have become extremely intelligent and are well-aware of changing digital technology which they use to bypass security systems to commit fraud and data breaches. Judging by the payment and banking systems used by banks, there is room not only for error but for fraud.
Through the adoption of blockchain technology, banking systems would be less prone to attacks and fraud as there would be a real-time execution of payments along with transparency that would subsequently allow for real-time fraud analysis and prevention. The blockchain ledger is also decentralized, meaning that all data on it remains public and is visible to all users for verification. Therefore, if a transaction occurs on the blockchain, a consensus approval must take place whereby all participants verify and analyze data pertaining to the transaction. Any malicious attempts to change or manipulate the data is automatically and immediately discovered.
2. Identity Verification
Banks usually have to conduct customer verification processes (KYC – Know Your Customer) that always delay banking transactions, taking about 30-50 days to reach a completely satisfactory level. The process usually gets further burdened by substantial duplication of efforts between banks and other third-party institutions. Failing to follow KYC procedures and guidelines properly usually attract a large penalty. Ever-changing regulatory standards, with no internationally agreed upon standard, makes it increasingly hard for banks to remain compliant. At the same time, lengthy KYC procedures end up creating a bad experience for new customers which has a negative effect on banks’ businesses.
Through the use of blockchain technology, one bank that manages to verify the identity of a customer, can put all the KYC details and statements on a blockchain, which can then be accessed by other banks and financial institutions such as insurers, loan providers, etc. This will eliminate the need for the customer to go through the KYC verification process again. Also, other banks and institutions will not need to conduct their own KYC checks, thus reducing their administrative burdens and costs. The verification process will also be customer friendly as a customer only need to verify their identity once.
Payment systems are set to gain immensely from the adoption of blockchain technology by banks. There has always been great pressure to modernize payment methods to address safety and security concerns, along with speeding up the transaction process. Blockchain technology offers the ability to speed up money transfers, to make them secure, and at the same time allow for 24-hour banking services to become possible. Customers who are in need of accessing bank services either day or night will find this as a better, quicker, and easier way to make payments.
Some banks are set to make use of Ripple Lab’s Blockchain Ripple Protocol as a decentralized approach towards payments to replace many of the intermediaries in the payments industry, thus, passing on savings to partner institutions and their customers as well. According to Ripple, it’s estimated that they could help banks have an up to 33% reduction in operational costs and at the same time help international transfers to take place in minutes. Through the adoption of blockchain, payments can be made real-time globally, under real-time execution, offering complete transparency, fraud prevention, and analysis all at a reasonable price.
Banks Adopting Blockchain Technology
Goldman Sachs has been involved in a number of blockchain technology-based companies. These include the likes of blockchain-based payments startup Circle Internet Financial and blockchain-based startup Digital Asset Holdings. Last February, the Wall Street bank joined Digital Asset Holdings funding round, helping to push the amount raised above $60 million.
Fintech firm R3 has announced that it and 22 other banks have created an international payment system that is blockchain-based. The other banks involved in the project include Barclays Bank, DNB, HSBC, Intesa, KCB, BBVA, Natixis, and Sinhan Banks, among others. According to the firm R3, the main goal of the international system is to deliver a safe and secure way to speed up international payments while at the same time improving on cross-border business.
Blockchain technology is set to make a mark in the finance and banking industry. From solving major problems to eradicating small operational inefficiencies, there is no doubt that blockchain technology is a major solution to many problems. The overall influence of blockchain technology on banks, governments, and individuals will most likely grow as more and more sectors adapt to using this technology. At DinarDirham, we have made use of blockchain technology in the creation of our blockchain and gold-based crypto-assets. You can find more information regarding our gold price-backed token, the DinarCoin, here.