Over the past decade, Blockchain technology received a lot of attention, driving the praise of niche Bitcoin fanatics and the mainstream discussion of banking experts and investors.
In 2017, Jamie Dimon, CEO of JPMorgan Chase, mocked Bitcoin in a statement, claiming that it was “worse than tulip bulbs” due to the seventeenth-century Dutch tulip market bubble.
Senior Chairman of Goldman Sachs, Lloyd Blankfein, agreed that it wouldn’t end well as something that moves 20% does not feel like a currency.
Despite the criticism, whether blockchain and decentralized ledger technology (DLT) will replace or revolutionize elements of the banking system remains a question.
Banks speculate that transactions involving these tokens present heightened risk and require lengthy due diligence, making them wary of cryptocurrency. In truth, banks need to leap as digital currencies offer many benefits to financial institutions and their clients.
DLT’s Role in Financial Services
Blockchain technology provides a way for unreliable parties to agree on the state of a database without using an intermediary. By giving a ledger that nobody manages, a blockchain could provide specific financial services without the need for a bank, like payments or security.
Furthermore, blockchain allows for utilizing tools like smart contracts that are self-executing contracts based on the blockchain. This automates manual processes from conformance and claims processing to distributing the contents of a will.
Distributed Ledger Technology (DLT) could help corporations initiate better governance and standards around data sharing and collaboration.
Blockchain technology and DLT have a great opportunity in disrupting the banking industry by disintermediating the essential services that banks provide, including:
By founding a decentralized ledger for expenses, blockchain technology could facilitate faster payments at lower fees than banks. Blockchain technology offers a secure and affordable way of sending payments that reduce the need for verification from third parties and exceed processing times for traditional bank transfers.
Clearance and Settlement Systems:
Distributed ledgers could reduce operational costs and bring users immediate real-time transactions between financial institutions. DLTs could allow transactions to be settled directly and keep an eye on transactions better than existing protocols.
Initial Coin Offerings (ICO) are investigating a new model of financing that distributes access to capital from traditional capital-raising services and businesses. Entrepreneurs inflate money by selling tokens or coins, allowing them to fundraise without a conventional investor. Raising money through venture capital is a grueling process, after all.
Blockchain technology removes the middleman in asset rights transfers, lowering asset exchange fees, giving access to broader global markets, and reducing the unpredictability of the traditional securities market. Investors need to keep track of who owns what to buy or sell assets like stocks, debt, and commodities.
Current Financial markets accomplish this through a complex chain of brokers, custodian banks, exchanges, clearinghouses, and central security depositories. These establishments have been built around an outdated paper ownership system that is slow but possibly inaccurate and deception-prone.
Loans and Credit:
Blockchain technology makes it more secure to borrow money and provides lower interest rates by removing the need for gatekeepers in the loan and credit industry. Blockchain-enabled lending offers a more secure way of giving personal loans to a larger pool of consumers and would make the loan process less expensive, more efficient, and more secure.
Traditional banks and lenders underwrite loans based on a credit reporting system. At the same time, Blockchain technology opens up the possibility of peer-to-peer (P2P) loans, complex programmed loans that can approximate a mortgage or loan structure for a faster and more secure loan process.
Blockchain can create more transparency, security, and trust among trade parties globally by replacing the cumbersome, paper-heavy bills of lading process in the trade finance industry. Blockchain and distributed ledger technology can support cross-border trade transactions that would otherwise be uneconomical because of costs related to trade and documentation processes.
With approximately 80-90% of world trade relying on trade finance, the influence of blockchain on the market would be felt globally throughout all industries that use cross-border trading. Trade finance exists to mitigate risks, extend credit, and ensure international trade engagement for exporters and importers.
Customer KYC and Fraud Prevention:
Blockchain technology can make it easier and safer to share information between financial institutions by storing customer information on decentralized blocks.
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