Born in 2008, the blockchain, or distributed ledger technology (DLT) was originally seen as a weird innovation, used by a few libertarian geeks. Most people would have never heard the term in the first place, was it not for the scandals related to Silk Road, the infamous darknet marketplace where users could anonymously buy drugs and other illegal stuff for BTC. Though the Silk Road case made a lot of people aware of the cryptocurrencies and underlying technologies, it also affected their image in a negative way. It was hard to believe that the ‘criminal tool’ could finally go mainstream.
The financial and banking institutions did not take the blockchain seriously until 2015 – neither as a threat, nor as an opportunity. The Wall Street wolves and prominent old-school investors were mostly sceptical about cryptocurrency, their attitude ranging from utter disgust (‘Bitcoin is a rat poison’) to disbelief (‘Bitcoin is a bubble’). It is explicable – the financial sector is one of the most traditional and complicated ones. Though by 2010 most big banks had incorporated internet solutions to their services, DBL was not welcome there due to its anti-establishment image.
A decade later, in 2019, the banking industry is actively exploring new applications for the blockchain. Around 25% of financial CEOs are now well familiar with the innovation and interested in its potential. It’s only logical as the new generation of clients – tech-savvy and impatient – is not ok with costly and complicated banking procedures that sometimes take days to complete.
Let’s explore how the banking sector can benefit in the distributed ledger technology that might be the next big invention after the internet.
Faster and cheaper money transfers
Blockchain solutions integration makes both domestic and cross-border transfers much smoother. Well, in case of domestic transfers banks may still be reluctant to implement the DBT just because they have already massively invested in the existing centralized systems. On the contrary, blockchain-based international payments promise to save them a lot of money and trouble. Cross-border money movement has always been a headache for all the parties involved, because you have to deal only with trusted foreign partners and comply with other countries’ rules and regulations. Also, banks may have incompatible IT systems. These and other factors cause extra work, resulting in added cost and extended delay.
Obviously, peer-to-peer blockchain-based money transfers are capable of solving the problem – they eliminate unnecessary partners and middlemen, making international payments cheap, fast and almost friction-free.
Another advantage of blockchain-based financial solutions is their potential to reach almost any person who has connection to the internet. Currently, many citizens of poor countries cannot meet the requirements for getting a bank account, because banks are not interested in such low-income clients. The beauty of blockchain lies in its better ‘bioavailability’ – the tech is capable of penetrating to the farthest corners of the world, transforming the lives of hundreds of millions of unbanked individuals.
Frauds and money-laundering prevention
It may seem counterintuitive, but the ‘anonymous’ blockchain technology can make things more transparent and clear in the finance industry.
Today, banks have a problem complying with AML (Anti-Money Laundering)/KLC (Know Your Customer) rules that oblige them verify their customers’ identities. Those rules are supposed to detect and prevent illegal practices on the client’s side. The KLC/AML compliance costs are really huge: banks all over the world collectively spend billions of dollars on it, annually. The existing system leaves much to be desired, as the information possessed by different financial institutions is often asymmetrical, and has to be manually validated and reconciled. Again, a lot of paperwork and time-wasting.
DLT is a magic pill to cure this illness – a private blockchain network, accessible to authorized members only, should make it possible to keep and share immutable encrypted records between all the parties. It will greatly reduce compliance costs, save a lot of resources and close the loopholes making frauds possible.
Since blockchain records are unalterable, they cannot be tampered with. Thus, all the financial data will be better protected from frauds and errors. Major banks may have the highest cybersecurity standards, but their centralized databases will always be honeypots for hackers, who evolve very quickly, too. The reports of major data breaches resulting in massive clients’ data loss are not rare.
Distributed ledger systems are harder to hack due to their decentralized nature. To successfully attack a blockchain network you need to compromise the majority of its servers, and it’s not an easy task.
In conclusion, the distributed ledger technology can be a blessing for the finance sector. Satoshi would be surprised to know that his libertarian invention is currently being adopted by the financial giants like Goldman Sachs, JPMorgan, Santander, HSBС and some others.
Besides, more and more banks are joining RippleNet network aimed at making global payments faster and easier than ever before.
Maybe in ten years or less the industry will be transformed beyond recognition.
Originally published in EconoTimes: