The 2008 global financial crisis exposed vulnerabilities in the traditional financial system. In response, blockchain technology emerged, offering a solution.
With its ability to address these weaknesses, blockchain holds significant potential to transform the banking industry. This article will explore how blockchain can be used in banking and the benefits it offers for a more secure and efficient financial industry.
Introduction to Blockchain in Banking
Blockchain technology is changing the way data is stored and shared. It’s a digital record spread across a network of computers. This system uses cryptography for security, allowing authorised participants to update the records without needing a central authority.
Once information is added to the blockchain, it’s impossible to alter or erase. To add new entries, network participants verify transactions using complex algorithms.
Traditionally, banks and payment systems rely on intermediaries to facilitate transactions. However, blockchain’s distributed network allows for direct consensus and verification between participants, streamlining the entire process.
Blockchain Case Study: Payment Processing
Central and commercial banks around the world are exploring blockchain for payment processing. This interest extends to cross-border payments, traditionally dominated by companies like SWIFT and Western Union.
Several successful blockchain implementations in banking serve as case studies. In 2015, Commonwealth Bank of Australia (CBA) teamed up with Ripple, a fintech company specialising in blockchain solutions for international payments. Their goal was to build a system using blockchain to speed up settlement processes between CBA’s different branches.
Westpac, another major Australian bank, followed suit in 2016 by partnering with Ripple to create a cost-effective system for cross-border payments using blockchain.
Blockchain Case Study: Trade Finance
Trade finance, handling all aspects of domestic and international commerce, relies heavily on banks to facilitate transactions. Traditionally, this involves managing risk, providing credit, and allowing both exporters and importers to participate. However, the system often suffers from slow and outdated paper-based documentation.
Recognising this need for improvement, leading institutions like Standard Chartered and HSBC have joined groups exploring blockchain technology for trade finance. One example is Voltron, a platform designed by R3 and CryptoBLK to digitise letters of credit.
Pilot projects across 14 countries with over 50 companies and banks participating yielded notable results, reducing letter of credit processing time from five days to less than 24 hours. Building on this success, Voltron rebranded as Contour in 2020, launching a digital trade finance network with R3 and other banks as supporters.
Blockchain Case Study: KYC
Know Your Customer (KYC) processes are a slow hurdle in banking as they can take weeks to complete. The system also suffers from wasted effort, as each bank asks new clients for the same information.
This inefficiency creates high costs for banks. Compliance burdens are heavy, and penalties for not following the rules are significant. The constant changes in regulations make it difficult for banks to stay compliant.
Chris Huls of Rabobank proposed a solution—storing KYC information on a blockchain. This secure and transparent technology acts as a shared platform for customer data. Once a bank completes KYC, a summary can be uploaded to the blockchain. Authorised institutions can then access this information, eliminating repetitive checks.
Benefits Realised
Blockchain technology offers a new way to store and manage data. Unlike traditional databases, blockchain spreads data across a network of computers and creates a public record that’s difficult to tamper with.
Any attempt to change a record in one place would be caught by other computers in the network. This system eliminates the possibility of any single entity manipulating information.
Furthermore, blockchain promotes transparency. Transactions are visible to anyone who wants to see them, with tools allowing real-time tracking. This can lead to faster processing times for consumers, potentially reducing transaction completion to minutes, regardless of location or time.
Inter-bank transfers can also benefit from blockchain’s efficiency and security. Large sums involved in these transactions come with risk and cost during the current multi-day settlement process.
Lessons Learned and Future Outlook
These case studies demonstrate the technology’s ability to streamline transactions, reduce friction, and enhance security. The technology also promotes transparency and immutability of data.
However, a major challenge remains—ensuring customer data privacy. Public blockchains, with their inherent openness, create obstacles. Permissioned blockchains with strong encryption offer some solutions, but cybersecurity concerns still exist. Building trust and widespread adoption requires addressing these data privacy issues.
Regulatory uncertainty presents another hurdle. Currently, there’s no central authority overseeing and regulating blockchain protocols. The need for some form of governance is apparent, but careful consideration will need to be given to the distribution of power within such a system.
- Blockchain
