Why Are Banks Adopting Blockchain Technology

A decentralised, distributed ledger that records the provenance of a digital asset is what we define as Blockchain. It is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. A system of recording information, a digital ledger of transactions in a way that makes it difficult or impossible to change, hack, or cheat the system is what blockchain basically defines. Blockchain is mainly combined with three technologies named cryptographic keys, a peer-to-peer network and a digital ledger. A way of not being able to hack or impossible to change any recorded information is what the technology promises. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. If one block in one chain was changed, it would be immediately apparent it had been tempered with. You would require changing every block in the chain across all the distributed versions of the chain in order to corrupt the blockchain system.

The whole point of using a blockchain is to let people — in particular, people who don't trust one another — share valuable data in a secure, tamperproof way.

— MIT Technology Review

Blockchain consists of three important concepts: blocks, nodes and miners.

The new world of connection with the coming of Blockchain

Blocks

Every chain consists of multiple blocks and each block has three basic elements.

1. The data in the block.
2. A nonce, 32-bit whole number which is randomly generated when a block is generated.
3. The hash is a 256-bit number wedded to the nonce.

Miners

New blocks are created on the chain through a process called mining by miners. Miners use special software to solve the incredibly complex maths problem of finding a nonce that generates an accepted hash.

Nodes

No one computer or organisation can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. They can be any kind of electronic device which maintains copies of the blockchain and keeps the network functioning.

Key elements of Blockchain include Distributed ledger technology(all users have access to the distributed ledger and its immutable record of transactions), Immutable records(No can change with a transaction after it’s been recorded to the shared ledger.) and Smart contracts(to speed transactions, a set of rules are made called Smart contracts).

As soon as every transaction occurs, it is recorded as a “block of data”. Each block is connected to the ones before and after it. The transactions are blocked together in an irreversible chain: a blockchain. This is how a blockchain process revolves around.

There are a lot of benefits of blockchain some being namely Greater trust, Greater security and more efficiencies. 

We have seen banks take a lot of steps towards digitalization-driven business models like mobile banking. However with respect to bringing blockchain it has been sidelined and has shown hesitation towards the technology. The technology is poised to grow from $4.9 billion in 2021 to over $67.4 Billion by 2026

Source: internetofbusiness

The hesitation comes from the fact that till now there has not been much mass scale rollouts in the banking industry. But we are seeing the growth of adopting the technology on a smaller scale. We will now be discussing the role of blockchain technology in banking sectors and the real world use cases of the technology.

Blockchain technology is revolutionising the speed and efficiency of transactions all over the globe. The application of the technology is still in the proof of concept stage; it could play a positive role in a diverse range of industries and sectors including banking, healthcare, insurance, and government, and can be the next big thing in our lifetime.

1000 banks did a Survey, a Global blockchain survey that revealed the curiosity of the industry with respect to the blockchain technology. 95% affirmed they would make some level of investment in blockchain or distributed ledger technology. The survey was done in 2018 by Deloitte.

In 2019, bank of england undertook a proof-of-concept examination of how blockchain can evolve real-time gross settlement, has actively researched digitising how it governs the economy, including creating a blockchain-linked version of the British Pound sterling. “Central Bank Digital Currency could present a number of opportunities for the way that the Bank of England achieves its objectives of maintaining monetary and financial stability,” its report says.

The traits of open, or permissionless blockchain includes the ability to provide finality and immutability of transactions, Native tokens maximise on-chain liquidity and the transparency only a distributed and decentralised chain can offer.

The Current day banking system

Banks revolve around a lot of financial activities like lending, trading, transaction settlement etc. adapting to change has always been late as seen in the banking sector. In this current running phase the industry is advancing at a constant speed due to the constant demand it has been witnessing. They still carry a lot of paperwork, face security vulnerabilities and also have multiple time consuming processes in place.

Blockchain use cases in banking

Payment transfer

Trillions of dollars get made and wasted due to the added fees and slow payments. The fee that you pay from one end to another while transferring money gets wasted. Cryptocurrencies like bitcoin and ether are available on public blockchains which anyone can use to receive and send money with no transaction fees. Other than this there are other factors which made this much more valuable like no requirement of verification as the payment happens on a decentralised network making it faster and cheaper.

Settlement and clearance systems

It takes a lot of days to settle an average bank transfer. This creates difficulty for the banks and is problematic for consumers. The newer technology acts as a decentralised ledger that keeps a track of the transactions transparently and publicly which further means that instead of relying on custodial services, the transactions can be settled in the public blockchain. This is one of the key ways blockchain applications in banking make transactions speedy and simplified.

Securities

Banks keep a track of who owns what in order to buy, sell debt or stocks. This information comes from various brokers, connecting with multiple exchanges, clearing houses etc. There is also the presence of an outdated paper ownership system that makes the process slow and prone to inaccuracy and fraud. The latter technology revolutionises by building a decentralised database of digital and unique assets making it easier to transfer the assets through tokens that represent the assets “off-chain”.

There is a probability of 70% cost savings on central finance reporting, 50% cost savings on business operations, 30-50% cost savings on compliance and 50% on centralised operations.

On 12th April, 2021, J.P. Morgan stated that they are using blockchain for improving money transfers and using the technology for lowering the payment processing and the verification time needed for large payments and The Swedish central bank is experimenting with a release of its own digital currency known as e-krona. Based on R3 Corda distributed technology, the bank has taken a bold step towards the creation of a country-wide usable cryptocurrency.

Source: ledgerinsights

The technology is bringing a lot of innovations in the sector around lowered transaction cost, expedited transaction processing, and better data verification. Understand the framework of how blockchain works with the mentioned detailed article.

Disclaimer: This blog has opinionated information which does not make us liable for anything.