If financial services were to be re-invented today from scratch, we would be fine with virtual, online, Internet and blockchain-enabled services. There would be no traditional bricks and mortar branches. Instead of visiting a branch, we would do a video call with a remote service representative who can verify our identity, and it goes from there. Technically speaking, bitcoin, blockchains and their related ecosystem can replicate a bank today without much difficulty, both for consumer retail banking and business-to-business services
Blockchain in banking industry
. Central banks’ interest in blockchain represents further recognition of the technology’s potential to transform many aspects of financial systems worldwide, from international payments solutions to new digital currencies. Notably, though, central banks generally emphasize that the technology is at an early stage and may be years away from widespread use for such applications. They also identify potential hurdles, including technical and legal concerns, that would need to be overcome.
Central banks that are actively investigating and in some cases experimenting with blockchain include those of the United States, Canada, China, U.K., France, the Netherlands, Singapore, South Africa, and Sweden.5,6,7 Though they are generally positive about the technology’s potential for applications such as international payment solutions, they also note technical obstacles such as scalability and other concerns such as privacy, security and legal issues.
What blockchain can do for the financial and banking industry
Blockchain technology can potentially disrupt the financial industry that we know and use today. Here are just a few of the top ways I believe it will transform finance and banking:
Even though blockchain is new technology, its potential to reduce fraud in the financial world is getting a lot of attention since 45% of financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Most banking systems around the world are built on a centralized database that is more vulnerable to cyberattack because it has one point of failure rather than many—once hackers breach the one system they have full access. The blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our financial institutions.
Know your Customer (KYC)
Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomson Reuters Survey. These regulations are intended to help reduce money laundering and terrorism activities by having requirements for businesses to verify and identify their clients. Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant.
Because blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved—delivery of products could signal an invoice to be paid for example.
Blockchain disruption could be highly transformative in the payments process. It would enable higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves. In the current reality, there are a lot of intermediaries in the payment processing system, but blockchain would eliminate the need for a lot of them.
It’s exciting to contemplate the changes that might occur with our trading platforms if they relied on blockchain-based technology. There’s no doubt that the risk of operational errors and fraud would be dramatically reduced. NASDAQ and the Australian Securities Exchange are already exploring blockchain solutions to reduce costs and improve efficiencies.