How Banks Can Use Blockchain Technology
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Blockchain technology is worth investing in banking sector, the same way it has been disrupting in other domains such as healthcare, energy and retail. Various features of blockchain such as decentralization, immutability, and transparency make it appealing for business sectors and domains across the world. Banking and finance industry are leading the way in exploring the potential of blockchain in different use cases across industry.
Blockchain technology provides a way for untrusted third parties to come to an agreement on the state of a shared database, without using a middleman. By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments, remittance or securitization — without using a middleman, like a bank. Blockchain is developed to resolve the trade-offs of data partitioning and promises to preserve both consistency and availability using different consensus protocols.
Further, blockchain allows for the use of “smart contracts,” which could potentially automate manual processes, from compliance and claims processing, to distributing the contents of a will.
Distributed Ledger Technology (DLT) could help corporates establish better governance and standards around data sharing and collaboration.
With global banking currently a $134 trillion industry, blockchain technology and DLT could dis-intermediate key services that banks provide, including:
Trade Finance: By replacing the cumbersome, paper-heavy bills of lading process in the trade finance industry, blockchain technology can create more transparency, security, and trust among trade parties globally.
Payments: By establishing a decentralized ledger for payments (e.g. Bitcoin), blockchain technology could facilitate faster payments at lower fees than banks.
Clearance and settlement Systems: Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions.
Fundraising: Initial Coin Offerings (ICOs) are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms.
Securities: By tokenizing traditional securities such as stocks, bonds, and alternative assets — and placing them on public blockchains — blockchain technology could create more efficient, interoperable capital markets.
Loans and Credit: By removing the need for gatekeepers in the loan and credit industry, blockchain technology can make it more secure to borrow money and provide lower interest rates.
Although blockchain is a fascinating technology with some unique properties, this technology is in initial phases of development and rapid developments is under way around different blockchain platforms to make them more stable. We also have identified a few challenges while implementing blockchain with our existing processes and use cases in Bank of Baroda, such as -
Interoperability challenge: At the moment, different DLT consensus mechanisms do not work with each other. This makes application of DLT in the financial ecosystems less effective because one platform or system cannot exchange data with another financial system if they do not adopt the same form of DLT technology. Although this interoperability challenge can be overcome by using APIs among systems, it may raise a few concerns while using the financial system.
Scalability Challenge: Blockchain technology is not capable of handling the scale of financial transactions that occur each day since multiple nodes are necessary to validate each transaction. Even the leading blockchain networks have encountered a decrease in transaction speed and increased fee per transaction. Hence, it remains crucial to research before the blockchain is adopted on a wide scale. Although there are rapid developments across popular blockchain platforms to increase the transactional speed, that may take some time to get resolved.
Cost and efficiency: Blockchain is quite competent in cost reduction. But it still faces specific challenges while implementing the legacy systems. Setting up an initial blockchain infrastructure is expensive and it will take lot of efforts to integrate blockchain with existing legacy systems.
Blockchain is a new technology and it will take some time for blockchain platforms to get fully functional in the banking and financial services sectors. To explore the potential of blockchain, global banks are doing pilot projects around different financial use cases. For example, the Jasper Ubin project where Monetary Authority of Singapore (MAS) and Bank of Canada (BOC) were able to do a cross border payment between the two banks using Corda and Quorum as DLT platform.
In near future, Banks and NBFCs will aggressively adopt blockchain technology for different use cases in financial sectors like Trade Finance, Invoice Discounting, Warehouse lending, Treasury and Financing, cross border payment, e-KYC, Insurance, etc. Global banks are already joining hands with technology leaders to establish consortium like Marco Polo, Voltron, We Trade, HKMA etc for financial use cases.
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