Contents
How could blockchain change the current banking world?
What are the main benefits of blockchain for banking and finance?
Quickly agreeing on funds using Blockchain
Direct fundraising on blockchain
Asset tokenization on blockchain
Lending using blockchain
Blockchain's impact on global trade finance
Safer agreements through smart contracts
Data integrity and security provided by blockchain
latest ideas
How could blockchain change the current banking world?
Within the global economy, banks act as intermediaries that manage and coordinate the financial system, often through the use of internal ledgers. Since these ledgers are not open for anyone to examine, there is a need to trust banks and their often outdated infrastructures.
Blockchain technology has the potential to transform not only the world's money markets but also the banking industry as a whole by eliminating intermediaries and replacing them with a trustless, borderless and transparent system that is easily accessible to everyone.
Blockchain is likely to help support faster and lower-cost transactions, increase access to capital, provide greater data security, enable trustless agreements through smart contracts, facilitate regulatory compliance, and many other things.
Additionally, thanks to the innovative nature of blockchain, the ways in which emerging financial building blocks interact with each other have the potential to create entirely new types of financial services.
What are the main benefits of blockchain for banking and finance?
Transparency: Blockchain standardizes common processes and creates a single source of accurate information shared by all network participants.
Trust: Transparent ledgers make it easier for different parties to collaborate and reach agreement.
Programmability: Blockchain enables the reliable automation of business processes through the creation and use of smart contracts.
Privacy: Privacy technologies enabled by blockchain enable businesses to share only the data they prefer with each other.
Performance: Networks are designed to handle high numbers of transactions while supporting interoperability between different chains, creating an interconnected blockchain network.
Quickly agreeing on funds using Blockchain
Sending money in the current banking system can be a lengthy process, create transaction costs for both banks and customers, and require additional verifications and registration processes. In the age of instant connectivity, the traditional banking system fails to keep up with technological advances.
Blockchain technology can offer a lower-cost and faster payment method that is available 24 hours a day, knows no borders, and guarantees the same security offered by traditional systems.
If you want to learn more about this topic, we recommend you read the article Blockchain Uses: Currency Remittance.
Direct fundraising on blockchain
In the past, entrepreneurs looking to raise funds were dependent on external financiers such as angel investors, venture capitalists or bankers. This process can be a difficult process that requires long negotiations on valuation, share allocation, company strategy and many other issues.
ICOs have the potential to democratize fundraising processes, but they too can present their own problems. The relative ease of doing an ICO allows projects to raise large amounts of funds without any formal or real obligation to actually deliver on their promises. The ICO market is still generally unregulated and poses a serious financial risk for future investors.
Asset tokenization on blockchain
Buying and selling securities and other assets such as stocks, bonds, commodities, currencies or derivatives requires a complex and coordinated effort among banks, brokers, clearinghouses and exchanges. This process needs to be not only efficient but also error-free. Increasing complexity is also directly linked to higher time and expense.
Blockchain technology facilitates this process by providing a technological base layer that enables the easy tokenization of assets of all types. Since many financial assets are bought and sold digitally through online brokers, tokenizing them on the blockchain provides an easy solution for all parties involved.
Some innovative blockchain companies are working on tokenizing real-life assets such as real estate, works of art, and commodities. Thus, transferring ownership of valuable assets in real life can become a cheap and easy process. It can also create new investment avenues for investors with limited capital by enabling them to purchase partial ownership of expensive assets and investment products that were previously unavailable to them.
Lending using blockchain
Because banks and other lending companies monopolize the lending industry, they are able to provide loans at extremely high interest rates and limit access to capital based on credit scores. This makes the borrowing process cumbersome and costly. Although banks gain an advantage, the economy relies on banks providing the necessary funds for more expensive items such as cars and homes.
Blockchain allows anyone in the tech world to participate in a new type of lending ecosystem that is part of the movement commonly known as Decentralized Finance (DeFi). DeFi aims to place all financial applications on blockchains to create a more accessible financial system.
Peer-to-peer lending enabled by blockchain ensures that anyone can borrow and lend in a simple, secure and inexpensive way, without artificial limitations. In a more competitive lending environment, banks may also have to offer better conditions for their customers.
Blockchain's impact on global trade finance
Doing business internationally is extremely difficult due to the multitude of international rules and regulations imposed on importers and exporters. Tracking products and moving them through different stages still requires manual processes such as hand-written documents and logbooks.
Blockchain technology allows trade finance participants to demonstrate a higher level of transparency through a shared ledger that accurately tracks the movement of products around the world. Blockchain technology simplifies and streamlines the complex world of trade finance, enabling exporters, importers and other businesses to save significant money and time.
Safer agreements through smart contracts
The purpose of contracts is to protect the people and businesses involved in an agreement, but the cost of this protection is high. By its nature, creating a contract requires a lot of manual work by legal experts.
Smart contracts enable these contracts to be automated with a deterministic, tamper-proof code that runs on the blockchain. The money is held safely as collateral and is only released if certain requirements of the contract are met.
Smart contracts significantly reduce the trust element required to reach an agreement, minimizing the risks of financial agreements and the possibility of ending in court.
Data integrity and security provided by blockchain
Sharing data with reliable intermediaries always carries the risk of this data being intercepted by others. Additionally, many financial institutions still use paper-based storage methods that significantly increase record keeping costs.
Blockchain technologies enable streamlined processes that automate data verification and reporting, digitize KYC and AML data and transaction history, and enable real-time verification of financial documents. Thus, operational risks, the possibility of fraud and the cost of data management for financial institutions are reduced.
If you would like to learn more about this subject, we recommend you read our article Blockchain Uses: Digital Identity.
Latest Ideas
Banking and finance will be among the major sectors impacted by blockchain. The potential use cases are vast, from real-time transactions to asset tokenization, lending, international trade facilitation, more robust digital agreements, and many others.
It is only a matter of time before all the technological and legal challenges required to unlock the full potential of this new financial infrastructure are resolved.
A banking and financial system based on a foundation layer that is trustless, transparent and borderless has the potential to enable a more open and interconnected economy.
