The government, investment banks, and other providers are counting on this technology to help them cut costs and bring transparency. Investment banks seek perfection, where execution, post-trade processing, and settlement should be instant. Eliminating the nth number of middle and back-office processes. They also want to focus on smart contracts to increase the automation process.
Blockchain is receiving large investment from all industries. Venture capital funding for blockchains reached $1 Billion in the year 2017.
Blockchain technology received early enthusiasm among capital markets, infrastructure firms, and wholesale banks has not been mirrored in retail banks. Here are mentioned pro and cons of using blockchain technology in banking:
Payments are the basic functioning provided by any bank. In terms of blockchain finance, both central and commercial banks are using this technology in terms of payment processing. And also for potential issuing of their own digital currencies. This trend also embraces the cross-border payments, which have been powered mostly by Swift or Western Union until now.
Pros: Cross-border payments are faster and less expensive with bank blockchain than with traditional systems. For example, remittance costs within the blockchain are 2-3% of the total amount, as compared with 5-20% withheld by other third parties. Besides, as we have already mentioned, blockchain does not require a third-party authorization, thus significantly speeding up the cross-border payment process.
Selling and purchasing of stocks and shares involve third parties like brokers, traders, etc.
The process of trading works as:
- Buyer or seller starts the trade
- The broker sends the transaction to the stock exchange
- Another party checks the transactions
- Then the transaction is sent to the central counterparty clearing house risks evaluation
- The transaction is recorded by the representatives of the buyer or seller.
- The transaction is again sent to the Transfer agent of the initial trade to update the list of shareholders.
However, the use of blockchain technology in banking can remove these time-consuming steps. And can be run on all the other servers around the world.
Pros: Trading transactions in blockchain reduce the requirement of information and hence improve performance. As a result of which smaller transactions between traders are managed and only final trade is recorded in the blockchain. The intermediary steps are eliminated.
Blockchain plays a major role in the trade finance sector. It benefits financial activities related to commerce and international trade. Even in today’s time, many financial activities require log hours of paperwork. Such as billing, processing, tax invoices, letter of credit or debit, etc. However, many management systems now let the financial work done online, but still a long way to go completely paper-free.
Pros: Blockchain-based trade finance can streamline the process of trading by removing paperwork and bureaucracy. For example, in the financial trade system, all participants should maintain their own databases on all documents transaction-related. The transaction-related database has to be maintained against each other in a single error-free document. Blockchain technology cuts the need to have several copies of the same document.
Trading with blockchain can impose risks such as “private keys” – variables that are used for digital signatures that can be potentially stolen or lost. Those keys prove the ownership of specific assets, thus allowing the hackers to change the ownership. However, there is a way out – multi-signature transactions that can be integrated into the asset trading applications running on blockchain technology. Signatures of all parties before agreeing upon a transaction can prevent the keys from being stolen and the ownership from being changed.
Digital verification for Identity:
Online financial transactions are almost impossible without the identity verification of the customer. However, these steps of verification require a lot of steps to follow:
- Face-to-face meetup through skype, if not possible in person.
- Authentication: every time the customer logs into the service needs to prove his identity.
- A proof of the client’s purpose to log in also needed.
All of these steps are accesses by each service provider. However, blockchain makes it possible to safely re-use identity verification for other services.
Accounting and auditing:
we all know how much paperwork is required in accounting. And digitalizing it, is not so easy either. Therefore, accounting can be a domain that can simplify the compliance of streamlining the old school process of book-keeping. Instead of making receipts of each and every transaction, blockchain will record the final transaction. As a result, the records will be more transparent with the users and any attempt to forging will be impossible. Additionally, you can use smart contracts in blockchain to automatically pay the invoices.
Pros: Standardization with the use of blockchain would provide the most important data to focus on to the auditors. This will result in saving time and be cost-effective. Blockchain easily provides integrity to electronic files. The main aim is to create a hash key representing the digital fingerprint.
Frequently Asked Questions FAQs
- How Blockchain is changing the banking industry?
Ans: Blockchain technology has transformed the banking sector by combining shared databases with cryptography, smart contracts, and digital payments. Learn use cases of blockchain technology in the banking system that allows multiple parties to secure transactions.
Blockchain technology is built on cryptography principles of public keys, private keys and hash functions. Moreover, they are built on a shared ledger system which means there is no total dependence on just one entity, unlike traditional banks. This helps banks in securing transaction information and avoiding attacks from fraudsters and hackers. Blockchain technology solutions enable faster transactions which means there is less time for attackers to intervene. Additionally, once any ledger entry is verified and stored, it is almost impossible to tamper with it because of the decentralized and shared ledger system.
2. How is Blockchain used in finance?
Ans: Financial inclusion
Blockchain’s low costs give startups a chance to compete with major banks, promoting financial inclusion. Many people are looking for an alternative to banks because of restrictions like minimum balance requirements, low access, and banking fees. Blockchain can provide an alternative that uses digital identification and mobile devices, free from the hassle of traditional banking.
Blockchain stores information in a ledger with transaction information within each block, along with a unique hash that refers to the previous block. Every person within the network receives a copy of the transactions as well. Because of these features, blockchain technology is resistant to distributed denial-of-service attacks, hackers, and other types of fraud.
Without the threat of cyber attacks, the expense of conducting business is reduced, helping all parties involved save money and stress.
3. How transactions are done in Blockchain?
Ans: The ledger is distributed across several nodes, meaning the data is replicated and stored instantaneously on each node across the system. When a transaction is recorded in the blockchain, details of the transaction such as price, asset, and ownership, are recorded, verified, and settled within seconds across all nodes.
4. In what steps Blockchain technology works?
A blockchain is a digital concept to store data. This data comes in blocks, so imagine blocks of digital data. These blocks are chained together, and this makes their data immutable. When a block of data is chained to the other blocks, its data can never be changed again. So — Blockchain is a way to save data and make it immutable. That sounds great, but the big question of course is: how does that work? Following are steps that involve the work.
- Transaction data
- Chaining the blocks
- How the hash key is created
- When does the signature qualify, and who signs a block?
- How does this make the blockchain immutable?
5. How do I deploy Blockchain to the cloud?
Ans: Getting started. Build a network. …
- Deploy a smart contract. Deploy a smart contract. …
- Creating applications.
- Certificate Authority (CA) options. Creating an intermediate Certificate Authority (CA).
- Hardware Security Module (HSM) IBM Cloud Hardware Security Module (HSM)
- Ansible Playbooks.
Also Read Blockchain technology in healthcare.