Last updated on October 10th, 2023
Using distributed ledgers, blockchain development technology records information across peer-to-peer networks securely. Despite its origins as a trading platform for Bitcoin, Blockchain’s capabilities extend far beyond cryptocurrencies.
Blockchain development technology offers several key characteristics: decentralization, immutability, efficiency, cost-efficiency, and security. This, in turn, is bringing increasing support for the technology’s adoption across the entire spectrum of financial services; as a result, the industry is now expected to undergo extensive disruption in the next few years.
Banks are developing systems that eliminate the need for as many participants as possible in transactions. International banks have invested more than others in building and researching large-scale projects in recent years. Several banks are investing in Blockchain startups. Several are partnering with companies of Blockchain development technology, and a few are patenting their systems based on Blockchains or the technologies that support them.
What are the Problems with the current banking system?
Banking has been around for centuries, facilitating multiple economic-financial activities such as lending, trading, settlement of transactions, payment processing, etc. However, the industry’s longevity has caused it to become stagnant, resulting in a slow response to change.
According to its current state, the industry is experiencing constant growth due to the steady demand, but it is too slow to innovate. Their process is time-consuming, expensive, and requires a lot of paperwork and security vulnerabilities.
After establishing the need for a change in banking systems, it is time to look at blockchain applications in the banking industry.
Blockchain Development Technology in banking: 10 essential use cases
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A faster payment system
Decentralized payment channels (such as cryptography) allow banking institutions to process payments faster and at lower costs. Banks could introduce new products to the market and compete with innovative startups by introducing a higher level of security and lower costs of sending payments.
Banks will eliminate the need for third-party verification through blockchain development technology and reduce their time to process traditional bank transfers. 90% of the European Payments Council members believe that blockchain will fundamentally change the industry by 2025.
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Settlement and clearance systems
A distributed ledger technology like blockchain could facilitate bank transactions directly and keep track of them more efficiently than existing protocols like SWIFT. It takes, on average, a few days for a bank transfer to settle due to limitations in our financial infrastructure.
For many banks, it isn’t easy to move money around the world logistically. Getting a simple bank transfer to its destination involves navigating a complicated network of intermediaries such as custodial services. Furthermore, it’s important to reconcile the bank accounts across the global financial network, consisting of a vast array of fund systems, asset managers, traders, and many more.
For example, you will use SWIFT (society for worldwide interbank financial communications) if you want to transfer money from a German account to one in the United States. Twenty-four million SWIFT messages are sent to more than 10,000 different institutions every day!
SWIFT is only used to process payment orders, and the actual money is transferred through an intermediary system. All of them are costly and time-consuming.
Blockchain technology could enable banks to maintain a public, transparent ledger of all transactions. It will allow banks to rely less on custodial services and regulatory bodies such as SWIFT, and transactions can be settled directly on the blockchain.
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Assets can be bought and sold.
Blockchain reduces the volatility of traditional securities markets by removing the middleman and transferring asset rights. An industry source estimates that moving securities on a blockchain could save $17 to $24 million in international trade processing costs each year.
Stocks, commodities, and debt are all bought and sold based on tracking who owns them. This is accomplished in the financial markets through different exchanges, brokers, clearinghouses, centralized security depositories, and custodian banks. It is a system of paper ownership that has been the basis for all of these different parties. As you can imagine, there are several errors and frauds in the system.
Electronically executing such transactions is complicated because buyers and sellers will not rely on the same custodian bank to hold all the certificates. Custodian banks do not always depend on trusted third parties to take care of this.
Germany’s government now permits banking institutions to provide cryptocurrency-related services.
You will be relaying the order through numerous third parties when you buy or sell an asset. It’s for this reason that ownership transfers are so complex. It should be noted that each party keeps a separate record of the truth. The system is both inefficient and inaccurate.
Through blockchain development technology, financial markets will be revolutionized by creating a decentralized database of digital assets. Cryptographic tokens representing assets off-chain can transfer assets through a distributed ledger. Even though Bitcoin and Ethereum are purely digital assets, several Blockchain companies are currently developing tokenization solutions for real-world assets like gold and property. A reduction in asset exchange fees will also cut out the middleman.
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Fundraising
The process of raising capital through venture capital is complex today. In general, it goes like this:
Entrepreneurs put together decks, attend countless meetings with partners, negotiate equity values and valuations – and, in the end, hope to exchange their company for cash.
Blockchain companies are using several ways to raise funds. The initial exchange offerings (IEOs), security token offerings (STOs), and equity token offerings (ETOs) fall into this category. Security token offerings are the most popular option since they are protected by law, and projects must pass due diligence to benefit from this model. The Swiss and Malta were pioneers of STOs, with companies like Scerri & Concise Ltd offering STOs. Currently, Neufund is the leading ETO platform.
ICOs (Initial Coin Offerings) were once more widespread, but they are now viewed as scams and unreliable.
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Credit and loans
Traditional banks use credit reporting to underwrite loans. As a result of blockchain, we may expect peer-to-peer loans to become faster and safer, as well as complex loan programs that can approximate syndicated loans.
The banks that process loan applications assess risk by considering credit scores, homeownership status, or debt to income ratios. Your credit report from specialized credit agencies will provide all of that information, and US consumers have three credit bureaus to choose from.
In many cases, centralized systems contain erroneous information that harms consumers. Additionally, severely vulnerable information is concentrated in a limited number of institutions. The credit information of over 145 million Americans was exposed last year due to a hack by one of them, Equifax. With blockchain, loan applications are more secure, efficient, and affordable.
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Trade finance
In addition to trade finance, blockchain technology is poised to revolutionize. Trade finance refers to the financial activities relating to international trade and commerce. Nevertheless, many trade finance activities in today’s market still rely on paper documents, such as bills, letters of credit, and invoices. This process can be performed online through many order management systems, but it takes quite a bit of time.
Blockchain-based trade finance streamlines the trading process by automating time-consuming manual processes, paperwork, and bureaucracy.
Here is an example:
All trade finance participants maintain their databases for documents related to transactions in traditional systems. It is equally essential that all of these databases are continuously reconciled, and papers in other databases may carry the same error as those in one database.
How does blockchain development technology help? There is no need to keep multiple copies of the same document with blockchain. Due to the integration of information, the digital document is updated in real-time and available to all network members.
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Blockchain as a digital identity verification in banking
If banks couldn’t verify their customers’ identities, they couldn’t process online financial transactions. However, consumers dislike the verification process because it involves so many steps. This may be accomplished by face-to-face verification, authentication (for example, logging into the service every time), or authorization. Each new service provider should undergo all these steps to ensure their security.
Blockchain technology will speed up the verification process for consumers and businesses. Due to the blockchain, identity verification can be reused by other services securely.
Zero-Knowledge Proof is the most popular innovation in this field, and several countries and major corporations are using ZKP.
As a result of blockchain, users will have the option of identifying themselves in any way they wish and sharing their identity with whomever they want. Only one registration of identity will be required. Providing all service providers use the blockchain, there is no need to repeat that registration process. Furthermore, the security of this information is enhanced by storing it on a blockchain.
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Accounting and auditing with blockchain in banking
It has taken a while for the accounting industry to digitize, and data integrity and validity must meet strict regulatory requirements for this to happen. Due to this, blockchain has the potential to transform accounting as well.
In addition to simplifying compliance, the technology streamlines traditional double-entry bookkeeping. Businesses can add transactions directly into a joint register instead of keeping separate records based on transaction receipts, and every entry will be distributed to all parties.
This will increase the transparency and security of records. As a digital notary, a blockchain would verify all transactions. In such applications, smart contracts can also be used to automate the payment of invoices.
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Hedge funds
An investment partnership involving a fund manager and a group of limited partners is a hedge fund. These participants tend to be traders rather than ordinary investors. The purpose of hedge funds is to maximize returns and minimize risks for investors.
According to Autonomous NEXT, from October 2017 to February 2018, the number of hedge funds trading cryptocurrencies doubled.
Crypto hedge funds provide a decentralized platform that facilitates participation by a wide range of investors and strategists. Hedge funds are traditionally managed by fund managers who work for one firm. Such decentralization is an excellent example of how blockchain can improve financial services.
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Peer-to-peer (P2P) transfers
Customers can transfer money between bank accounts and credit cards through peer-to-peer transfers. Several P2P transfer applications are currently available in the market. However, they all have certain limitations.
Some of them only allow you to transfer money within specific geographic regions, and others don’t allow you to transfer money from one country to another. As well as charging high commissions, P2P services may not be secure enough to store sensitive customer information.
Blockchain can solve all of these problems. Peer-to-peer transfers will become more decentralized with this technology. Blockchain technology enables money transfer via peer-to-peer networks across the globe, regardless of location. The recipient will not have to wait four days to receive money because blockchain-based transactions occur in real-time.
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Blockchain and the future of banking
Several conditions need to be met before blockchain can become a mainstream technology in banking. Banks must first develop the infrastructure required to run a global network using matching solutions for blockchain development technology. For blockchain to disrupt the financial sector, it needs to be widely adopted.
However, the investment will yield significant returns. Banking institutions can process payments faster and more accurately with blockchain once it is fully adopted and at the same time reduce transaction costs. It is estimated that as a result of blockchain-enabled banking applications, customers will get a better experience, and institutional banks can compete against fintech startups.
