How blockchain is changing the current banking landscape?
The banking industry plays the role of intermediary in the global economy by managing and coordinating the financial system through its internal bookkeeping system. Since that type of bookkeeping data is not made available to the general public, it only forces the public to trust the banking system and its aging infrastructure.
Blockchain technology has the potential to disrupt the global money markets and even reshape the entire banking industry by outlawing middlemen, and can replace traditional banking with systems that are easily accessible, borderless and transparent without the need for trust.
Blockchain has the advantage of enabling faster and less costly transactions, setting access to capital, establishing greater data security, and smoothing compliance by executing trust-less protocols through smart contracts.
In addition, given the innovative nature of blockchain, entirely new ways of interacting between financial components have the potential to give rise to entirely new types of financial services.
· What are the main advantages of blockchain in the development of banking and finance?
· Security: Blockchain-based architecture completely eliminates single points of failure and removes the need to put data in the hands of an intermediary.
· Transparency: Blockchain standardizes the sharing process and creates an authentic source of sharing for all network participants.
· Trust: A fully transparent ledger makes it easier for parties to collaborate.
· Programmability: Blockchain automates business processes by creating and executing smart contracts.
· Privacy: Blockchain’s privacy technology supports selective sharing of data between organizations.
· High performance: Blockchain networks are designed to support large numbers of transactions while supporting interactivity between different chains to create interconnected networks.
Fast money settlement using blockchain technology
Making money transfers in the current banking system can be a lengthy process, incurring various fees for both the bank and the customer, and requiring cumbersome verification and administration. In the age of the Internet of Everything, the traditional banking system is no longer able to keep pace with other technological developments.
Blockchain technology offers a more convenient way to make payments at a much lower cost, which is available 24/7, has no borders, and has the same security guarantees as traditional systems.
Raising Funds Through Blockchain
Traditionally, entrepreneurs who want to raise capital usually seek external financiers, such as angel investors, venture capital or bankers. This can be a very complex and rigorous process, requiring a lengthy negotiation process for valuation, equity splits, company strategy, and more.
Initial Token Offerings (ICOs) and Initial Exchange Offerings (IEOs) offer emerging projects the opportunity to raise capital without the need for banks and other financial institutions. Backed by the blockchain, companies can sell tokens in exchange for funds through an ICO, and the tokens will generate returns for investors. In the traditional model, banks usually charge huge fees to facilitate business securitization and initial public offerings (IPOs), but blockchain technology eliminates these fees.
It’s important to note that while ICOs are more democratizing in terms of raising capital, they do pose some problems. The relative ease of issuing an ICO allows a project to raise large amounts of money, and the company doesn’t have to provide any formal contracts to fulfill its promises. The ICO market remains largely unregulated, and as a result, there is significant financial risk for investors.
Asset tokenization on the blockchain
Buying and selling securities and other assets (e.g., stocks, bonds, commodities, currencies and derivatives) requires a complex synergy between bank brokers, note exchanges and stock exchanges. The process must not only be efficient, but also accurate. As complexity continues to grow, so does the corresponding time and cost.
Blockchain technology simplifies the process by providing a technological base layer that enables easy tokenization of all types of assets. Most financial assets are bought and sold digitally online through traders, so tokenizing them on the blockchain seems even more of a convenient solution for all participants.
At this stage, certain blockchain innovators are working on ways to tokenize real assets in reality, such as real estate, art and commodities. This could be a cost-effective and more convenient way to transfer assets with real value. In this way, it could also open up new ways for investors to break out of the limitations of their previous investments and gain access to more valuable assets (which may have been previously unavailable to them).
Lending through blockchain technology
Banks and other lending companies have monopolized the lending business, and these companies usually offer loans to users at relatively high interest rates and will limit access to loans based on the user’s credit score. This makes the loan process very long and costly for users. When it comes to lending, the banking industry has a natural advantage in that they can provide the necessary financial backing for high-cost items such as cars and real estate.
Blockchain technology allows anyone in the world to participate in a new type of lending ecosystem, which is also known as part of the Decentralized Finance (DeFi) campaign. In order to create a more accessible financial system, DeFi aims to put all financial applications on top of the blockchain.
Peer-to-peer lending enabled through blockchain allows anyone to take out unlimited loans through an easy, secure and inexpensive way. Through the competitive lending environment created by blockchain technology, banks will also be forced to offer more favorable lending terms to their customers.
The impact of blockchain on global trade finance
In international trade, a large number of international rules and regulations are imposed on importers and exporters, making it extremely inconvenient for both parties to engage in international trade. They usually need to track every aspect of the shipment and need to manually handle the processes involved, which includes a lot of paper documents and ledgers.
Blockchain technology allows trade finance participants to gain greater transparency through a shared ledger that accurately tracks shipments across the globe. Blockchain technology saves importers, exporters and other businesses significant time and money by streamlining the trade finance process.
Sign more secure contractual agreements through smart contracts
When businessmen and businesses are in the process of reaching an agreement, contracts are usually needed for protection, but this type of protection can be costly. Due to the complex nature of contracts, the process of creating them usually requires a lot of work from legal experts.
However, smart contracts can automate the signing of agreements through the tamper-proof, deterministic and other code features of the blockchain network. Funds can be securely held in escrow in a third-party system and released only when the conditions of the agreement are met.
Smart contracts greatly reduce the element of trust required to reach an agreement, thereby minimizing the risk of financial agreements and the likelihood of disputes.
Blockchain Enables Data Integrity and Security
Centralized institutions are often at risk of being compromised in the process of sharing data. On top of that, many financial institutions still use paper-based storage, which significantly increases record-keeping costs.
Blockchain technology can streamline the processes involved, which include automating data-driven validation and reporting, digitizing KYC/AML, and recording transaction history, and supporting real-time authentication of financial documents. This helps reduce operational and fraud risks, and reduces the cost of processing data for financial institutions.
Summarize
Banking and finance is one of the key industries affected by blockchain technology. There are many potential cases, ranging from real-time transactions to asset tokenization and lending, as well as smoother international trade and stronger digital contracts, to name a few.
All technical and regulatory impediments can be addressed, and it seems only a matter of time before this new financial infrastructure is realized through blockchain technology.
Banking and finance based on the characteristics of trustlessness, transparency and borderlessness will play an important role in realizing a more open and connected economy.
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