By Shama Shafiq
Hailed as the “new internet”, Blockchain technology, though best known for digital currencies, is redefining transparency in the financial sphere. With all the commotion and technical jargon surrounding blockchain, the question that interjects itself into most of our minds is “what is blockchain?”. Simply put, it is a unique way of recording a set of information. Instead of storing the data in one central location, blockchain makes multiple copies and distributes them across a specific network. The power of blockchain’s appeal lies in its ability to independently record data with multiple sources of verification and prompt access to the up-to-date version of the ledger.
Highly regulated industries such as the financial sector, which needs to have a paper trail of changes, are well equipped to harness the benefits of the blockchain. Moreover, due to its incorruptible nature, the banking system will get the added benefit of boosting its credibility.
Blockchain technology is gaining momentum in the financial sector due to its ability to make the banking process quick and efficient. For example, with the aid of blockchain, Ripple – a cryptocurrency which doubles as a payment platform – has revolutionized global money transfers by reducing the transaction time from seven days on average to mere four seconds. Global banks, such as UBS, Morgan Stanley, and Goldman Sachs, are researching the implications of blockchain in their banking system. However, other multinational banks such as Barclays, and Standard Chartered have already begun to put the theory into practice. While Citi Bank is taking a head-start, by creating their own digital currency called “Citicoin”.
The cumbersome trade finance, still dominated by faxes of credit letters and lading bills, is in dire need of modernity. By adopting the Blockchain Technology, these outdated processes are likely to undergo a considerable transformation in terms of cost and efficiency. According to a report by Santander, blockchain based banking systems could potentially reduce banks’ yearly infrastructural costs by a whopping $20bn. The FinTech 2.0 Paper further elaborates that by eliminating central authorities and bypassing slow, expensive payment networks, blockchain can immensely curtail banks’ expenses and increase efficiency.
Ease of Verification
As the safe keeper of people’s money, banks need to verify the identity of customers and counterparties. However, digital identity management has always been a lengthy procedure. The long-drawn-out process is comprised of three steps: firstly, verification – checking official government identity documents; next is authentication – users need to prove that they are whom they claim to be each time they log into a service; and lastly, authorization – there needs to be proof that users are permitted to carry out their intended actions. This tedious process can be made more bearable by employing blockchain. By eliminating the go-between, blockchain can save time, increase efficiency, and make the interface more user-friendly. With blockchain in the game, users have the power to choose how they identify themselves and with whom their identity is shared. Registration is still compulsory, but once they register through blockchain, there is no need for further registrations in the case of new service providers, given that those providers are also connected to the blockchain.
Cashing in for a Cashless Economy
To address the emergence of digital currencies, like Bitcoin, and their implications on the monetary policy, Central Banks across the world are exploring the potential for shifting parts of their payment systems on to the blockchain. Some are even employing the blockchain to launch their own cryptocurrency. These courses of actions, go far to show that central bankers are no strangers to the possibilities and the benefits that blockchain can offer.
Having said that, it will be years before central banks are in the position of issuing their own cryptocurrencies. And even so, there are various complexities associated with creating a completely new payment infrastructure. Getting the public on board with the applications of the blockchain, where currencies are not physical, may prove to be the biggest challenge.
FinTech is a new industry, which aims to challenge and improve the traditional methods of finance. Although FinTech companies mostly provide the same services as other financial institutions, they are giving banks a run for their money. FinTechs are using blockchain based solutions to offer services, such as remittances and international payments, at reduced costs, with greater speed, and with more user-friendly interfaces than major banks. As a result, the demand for FinTechs has increased rapidly. The proliferation of FinTechs may mark the potential fall of banks.
In response to the threat the FinTechs pose in the financial market, banks have started to fabricate their own blockchain-based solutions to ensure their survival. As a result, there will be healthy competition, fostering efficiency in a market with high entry barriers. And in this competitive financial environment, the consumers will reap the rewards.
Sources: Accenture Mobility: Blockchain Technology & The FinTech 2.0 Paper