Blockchain is Changing Banking and Financial Services
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Blockchain technology is going to radically change the financial services sector. Blockchain networks will reduce fees, bring more transparency to the murky world of big finance and dramatically reduce the transfer time for sending money around the world.
In this article we’ll explore what blockchain is, how blockchain in banking will work and a few of the key advantages that blockchains offer versus the existing financial system.
How Blockchain Works
A blockchain is a decentralized network that typically has several qualities:
- Anyone can use the network without having to acquire special permission
- Most blockchain networks are transparent
- Good blockchain networks are immutable, which means that data and transactions cannot be altered
- Blockchains are secured via community participation, rather than via a centralized server
It can be helpful to compare and contrast a blockchain network with a database. Only certain permissioned users can access the information stored on a database. A database is centralized in one location and secured by a single company or organization. Authorized users can easily alter information that’s stored on a database.
Blockchains have many different use cases:
- Blockchain banking is popular right now with DeFi on the Ethereum network. Users can lend, borrow and exchange assets on decentralized platforms that aren’t controlled by a centralized company
- Blockchains can be used to send value, as is the case with Bitcoin and other monetary blockchains like Litecoin or Nano
- When considering blockchain financial services, most blockchain currencies have a limit on the amount of coins that can be created. This makes them suitable as inflation hedges (there will only ever be 21 million Bitcoin)
- Anyone can use a blockchain to timestamp data. Blockchains are fantastic for timestamping because they cannot be modified
- Blockchains will eventually make a majority of accounting and back office jobs redundant, although this could take ten or fifteen years
One downside of blockchains is that they’re not very good at storing data. If a blockchain financial services firm needs to store significant amounts of data, a database is much more suitable. Some blockchain projects (such as Bluzelle, SIA and Filecoin) have been built to address this, however.
Another downside is that many public blockchains have scaling problems. Most blockchain banking networks are not currently fast enough to support the type of traffic that PayPal can process.
A private blockchain is a network that’s controlled by one company, or a consortium of companies. R3 is one of the most well-known private blockchains and it’s been around since 2014. For blockchain in banking, JP Morgan also has a private blockchain that their JPM stablecoin is built on. Only institutional JP Morgan clients can use the JPM coin.
A private blockchain’s key disadvantage is that it’s a closed off system that only a select group of people can access. Private blockchain financial services solutions lack the interoperability of a network like Ethereum.
The major advantage of private blockchain banking is that these networks can scale to thousands of transactions per second. Private blockchain networks are usually faster than public blockchain networks, because they sacrifice security and inclusivity for speed and efficiency.
If private blockchain financial services are faster, does that mean they’ll be the most adopted solution?
It’s unlikely that this will be the case. Public blockchains have such a large network effect that it makes a lot more sense to build on them, versus a private blockchain. The consulting firm EY has spent several million dollars building out infrastructure on top of Ethereum because they believe that businesses will use public blockchains in the future.
Furthermore, there’s a lot of work being done to scale public blockchains so that they can handle enough transactions to make them commercially viable.
How Blockchain Financial Services will Change the World 2
There are quite a few ways that blockchain in banking is going to change the legacy financial system. Here are a few of the best examples:
Faster & Cheaper Remittance
Multinational corporations are going to be one of the largest beneficiaries of blockchain financial services. Corporations can use blockchain based stablecoins to send millions or billions of dollars to anywhere in the world for a negligible fee.
International money transfers with the existing financial system can take days or even a week or more, depending on the location. Blockchain banking will be an exponential improvement over this outdated system.
Smart Contracts to Take Over the Accounting Department
Software is eating the world and blockchain financial services is just the latest example of this phenomenon. Financial smart contracts are going to revolutionize the accounting industry. Here are a few of the services that smart contracts can offer.
- Automatic payments to a distributor once the merchandise is received
- Automatic tax payments
- A more efficient accounting ledger for a business
- Automatic currency exchange between stablecoins
While it’s not a positive sign for employment, the stark truth is that smart contracts are going to make millions of jobs redundant. Many accountants, back office staff and lawyers will be replaced by blockchain banking contracts.
The employment situation is the bad news, but the good news is that smart contracts will lower the costs for businesses all over the world. Some percentage of that saving will be passed on to consumers.
Offering Blockchain Financial Services to Customers
DeFi, which stands for Decentralized Finance, has become an extremely popular part of the cryptocurrency ecosystem. DeFi users can borrow money, deposit money to earn interest or exchange their assets on decentralized exchanges. All of this is groundbreaking technology and the amount of money that’s locked up in DeFi has been growing exponentially since 2020.
The problem is that decentralized applications are not so easy to use. To use DeFi you have to know how to set up a crypto wallet, send money to different addresses and interface with blockchain apps that are not always intuitive.
The legacy financial system could benefit from DeFi by creating a more user friendly interface for some of these decentralized applications. A bank could connect to a DeFi protocol on the backend and then allow their customers to access that application, right though their banking website.
The bank would benefit by taking a small fee for this service and customers would benefit because they could access decentralized protocols without needing a deep understanding of blockchain technology.
Who Will Benefit the Most from Blockchain Banking?
The cool thing about blockchain technology in banking is that everyone is going to benefit from it. Blockchain is like the internet, it’s a universally beneficial technology.
Large corporations will send money all over the world for only a fraction of what it costs today. People who save money can deposit it with DeFi applications to earn a real interest rate, not the 0% rate that’s common for most bank accounts.
Banks that adopt blockchain will be able to offer sophisticated financial products to their customers. These forward-looking banks can charge for the service, and also grow their customer base.
Who will get hurt? Businesses and banks that don’t adopt blockchain. They will become uncompetitive compared to their rivals who keep up with the latest technology.
The Advantages of Blockchain
Here are a few more advantages of blockchain financial services that we haven’t covered yet.
Certain blockchain networks make it financially feasible to send micropayments as small as just ten or twenty cents. Granted, this is not possible with every network. For example, on Bitcoin the typical fee is a few dollars. However, on other networks the fees are so small that micropayments are a possibility.
Full Financial Access
Anyone in the world can access financial services that are built on the blockchain. All you need is a way to get a bit of crypto and then you can participate in these ecosystems.
Blockchain banking is much more inclusive than the traditional banking system which shuts billions of people out because they don’t have the right documents.
Bitcoin is an Independent Currency
Out of all the blockchains, Bitcoin is the most secure. Bitcoin is not controlled by any state, organization or company. It’s a currency outside of the jurisdiction of nation states.
Bitcoin’s supply cannot be inflated and governments cannot take Bitcoin from people who are holding it. This makes Bitcoin an elegant solution for citizens living under repressive regimes.
The Future is Blockchain Banking
Blockchain banking is the way of the future. Building a financial system on top of the blockchain offers so many benefits that there’s no way the legacy system is going to survive.
It might take a decade or two to transition fully to blockchain but the process has already started. We’re currently experiencing mass Bitcoin adoption, DeFi is taking off and multiple countries are talking about creating their own Central Bank Digital Currencies. The future of financial services is coming and it’s coming fast.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.