By Natalie Lord
Blockchain is revolutionising industries around the world in numerous ways from payment transactions to how money is raised. Whilst it brings a welcome advantage to many sectors, it also risks jeopardizing others. One industry facing a threat is the banking industry. If it doesn’t embrace the technology, it risks being replaced by it.
The situation is such that either blockchain and Decentralized Ledge Technology (DLT) could replace elements of the banking system, or instead revolutionise the industry. There’s been a significant uprising against cryptocurrencies, with banks often at the forefront of the backlash, but they may need to change their stance given the competitive edge the crypto world could give them if embraced.
The success of blockchain technology is that it allows a way for untrusted parties to reach an agreement on a database, without an intermediary. In providing a ledger that noone controls, a blockchain could provide specific financial services, like payments or securitization without the use of a middleman – like a bank.
In addition, blockchain enables the use of tools like “smart contracts,” which offer the potential to automate manual processes from compliance and claims processing to distributing the contents of a will, for example.
DLT technology is a good brother to blockchain, and the two stand strong together, with DLT able to help corporations establish better coordination, governance and standards around data sharing and collaboration.
Together blockchain and DLT could disintermediate key banking services including payments, clearance and settlement systems, fundraising, securities, loans and credit and trade finance.
Blockchain could facilitate faster payments at lower fees than banks by establishing a decentralized ledger for payments.
Distributed ledgers could reduce operational costs and bring us closer to real-time transactions between financial institutions.
Fundraising could be shaken up, with Initial Coin Offerings (ICOs) exploring a new model of financing that unbundles access to capital from traditional capital-raising services and companies.
In the securities arena, blockchain technology could create more efficient, interoperable capital markets by tokenizing traditional securities such as stocks, bonds and alternative assets, and putting them on public blockchains.
In trade finance, blockchain could help to create greater transparency, security and trust among global trade parties, by replacing the cumbersome, paper-heavy process currently in place in the trade finance industry.
By eliminating the need for gatekeepers in the loan and credit sector, blockchain technology can make borrowing money more secure, and enable lower interest rates.
The global banking industry is currently operating at about US$134 trillion, so rather than letting blockchain and DLT impact the market to their detriment, banks should be jumping on the crypto bandwagon and taking stock of the myriad of advantages it could offer the sector.