Banks adopting blockchain technology: Why, and which banks are leading the way?

1. Quicker payments

There are enormous numbers of transactions going on in banks every single second. Returning to the current situation, trillions of dollars are wasted during banking transactions. It is primarily because of some added fees and slow payments.

Digital currencies like Ether and Bitcoin are public blockchains that facilitate people to receive money digitally without any extra transaction fees and in real-time. Banks can achieve greater customer satisfaction by using these decentralized payment channels. It eases the complex levels by offering more security, faster payments, and quick processing.

2. KYC and AML compliance

In banks, under certain circumstances, it takes at least three months to execute all the KYC proceedings. It includes general information about the customer; also, it costs banks a lot to perform KYC. On the contrary, blockchain technology helps to ease the KYC process.

Blockchain technology creates a more secure and efficient way to manage KYC. It facilitates banks to store the customer’s information on the blockchain. Keeping customers’ data on the blockchain reduces the risk of fraud and identity theft.

3. Cross-border transactions

The movement of money across global borders becomes complex to deal with lengthy proceedings. Even if the international bank transfer is done, it takes several days to settle. It goes through various chains of intermediaries before reaching its receiver. The procedures also include lots of cost and time.

Blockchain technology can ease by creating a more efficient and cost-effective way to conduct cross-border payments. With blockchain, cross-border payments can be settled in near real-time, reducing transaction times and costs.

4. Buying or selling securities

Buying and selling assets, like shares and stocks, involves lengthy procedures. It involves third parties, such as the stock exchange, custodian banks, and personal brokers. The involvement includes outdated system procedures, making the process slow and prone to inaccuracy and fraud.

Blockchain technology in the banking system brings a decentralized database of digital and unique assets. It creates a tokenized security that carries the potential of cutting out the middlemen and reducing the asset exchange fees.

1. JPMorgan

JPMorgan Chase has implemented blockchain technology to streamline and optimize financial processes, creating Quorum, a permissioned blockchain that provides privacy, security, and scalability. It has also developed the Interbank Information Network, which allows banks to share information and resolve compliance issues more efficiently. In 2019, JPMorgan Chase conducted a repo transaction using blockchain technology, reducing settlement time from three days to just a few hours while reducing counterparty risk and increasing transparency. Cost savings and efficiency gains have been achieved by reducing the time to settle payment and KYC process by up to 75%.

2. Goldman Sachs

Goldman Sachs has been utilizing blockchain technology to quickly settle securities transactions, lower counterparty risk, and boost liquidity. The Komgo blockchain-based trade finance platform is designed to reduce fraud and mistakes. Goldman Sachs has been investigating the use of blockchain technology in futures trading, joining the R3 consortium, and exploring the prospect of providing cryptocurrency trading services to its clients. However, these plans were put on hold due to the regulatory framework governing cryptocurrency trading. With investments in 10 startups since 2013 and submitting patents pertaining to the technology, Goldman Sachs is one of the most active investors in blockchain technology. Blockchain technology has been used by Goldman Sachs to boost efficiency, lower risk, and promote transparency.

3. HSBC

HSBC implemented blockchain technology to improve efficiency, and transparency and reduce costs. Voltron, a platform based on the Corda blockchain, enables banks to share trade information in real-time, reducing the need for physical documents and manual processes. FX Everywhere, a blockchain platform, enables the bank to settle FX trades in real-time, resulting in faster transactions, lower transaction costs, and greater efficiencies for all parties involved. As of 2021, HSBC is exploring new areas of improvement in blockchain development, such as supply chain finance and digital identity verification. The bank is exploring new use cases for blockchain technology, which could lead to further adoption in the future.

4. Swedish Central Bank and E-Krona

The Swedish central bank is experimenting with releasing its own digital currency, the e-krona, using the Corda distributed ledger technology solution developed by R3. The project includes Riksbank and Handelsbanken, giving them the opportunity to participate in what may be the first digital central bank-issued money in the world to be available to the public. China is the first to issue a digital currency, handing out $6.2 million in digital currency to Beijing residents as part of a trial. The bank is looking forward to the adoption of new versions and improvements in the future.

These are just a few examples of major banks that have adopted or are exploring blockchain technology. Many other banks worldwide also leverage blockchain technology for various applications.

1. Security

The financial sector has a higher vulnerability to dealing with hacking. The surfaces of hackers are broad; while managing the bank as a centralized system, a small point of failure brings the whole system into people’s limelight.

On the other hand, it becomes impossible for hackers to encode the code when it comes to blockchain. Every blockchain transaction is subjected to complex encryptions interconnected with the next. Due to this, an immutable series of coded data “blocks” depending on the rest of the ledger series. It offers the most effective cyber defenses against hacking and fraud in today’s IT ecosystem.

2. Enhanced data quality

Improved and upgraded versions of blockchain store any type of data securely. Even if someone tries to access the information, they must perform predefined rules and regulations. Blockchain has a technology known as smart contracts that outperforms automatically to verify and enforce contracts.

By moving the banking information into these digitally shared ledgers, the data is inherited with the vast benefits of the blockchain.

3. Maintains accountability

Accountability is the prior most benefit of blockchain. It will protect the bank in all possible ways by reducing fraud and misuse of company assets. This is possible, as the digitally generated transactions are made error-free. Banks don’t have to worry about important information being fabricated as well.

Blockchain technology makes all the transactions easy to check and verify, ensuring that banks accurately process transactions more consistently.

4) Reduced cost-benefit

One of the key benefits of blockchain technology for banks is reduced costs. According to recent statistical research, banks learned that implementing blockchain technology can reduce infrastructural costs by up to $20 billion by 2022.

By implementing smart contracts platform, banks can significantly reduce the interactions with counterparties and intermediaries. They can also reduce the cost of maintaining and executing contracts as well.

5. Increased efficiency

Blockchain transcends efficiency because it removes the risk of error and duplication. It eliminates intermediaries and conducts the process in seconds and the transaction time to minutes. It enables transactions to be processed 24/7, allowing the bank to store data in blocks using a tamper-proof format.

It features the mobility of data reducing the time taken for KYC effort. Blockchain technology is accurate and reliable for banks. Its facility of adding all the transactions to a single publically used ledger eliminates the disorder and complexity associated with multiple ledgers.

6. Maintains decentralised trust

The prime benefit of blockchain technology is that it enables individuals and organizations to process transactions without needing a third party or central bank. It features an excellent method of verifying and tracking transactions.

Instead of being a platform controlled by a single central authority, it produces a shared infrastructure by distributing control amongst all the peers in the transaction chain. This reduces the counterparty risks. It assures that the transactions are implemented per protocol, eliminating the need for a third party.

7. Digital currencies

Blockchain technology benefits banks in multiple ways, but the primary one is using digital currencies. Now, banks can accept digital currency to complete various transactions.

Digitalized cryptocurrency facilitates banks to move towards easier, more transparent, faster, and more secure transactions. Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple.

8. Financial solutions during crisis

The necessity for financial solutions in times of crisis increased the need for digitalized currencies in the form of crypto or tokens. Banks can use blockchain technology in several ways to help mitigate the impact and ensure financial continuity.

Some examples are cross-border payments, supply chain financing, digital identity verification, smart contracts, and real-time data analysis. Blockchain technology can help increase efficiency, security, and transparency and reduce costs during financial crises.

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