Updated: Dec 22, 2020
There's no question that blockchain-based technologies are drivers of transformation across many industries. Solutions stemming from blockchain offer benefits such as enhanced security, traceability, and greater transparency, that are proving to reshape sectors such as healthcare, communications, logistics, and finance.
Recently, we wrote a post exploring how blockchain could protect against cargo theft, and in this article, we want to zoom in on the implementations currently being tested in the financial sector.
When blockchain launched in 2008, the finance industry was skeptical and vigilant. Today, financial institutions are actively researching the technology and the many ways it could be used to change products and transactions.
However, the actual deployment of blockchain solutions in central banks, for example, still has a long way to go.
According to a white paper by the World Economic Forum titled: "Central Banks and Distributed Ledger Technology: How are Central Banks Exploring Blockchain Today?", "While research and innovation with blockchain technology have been underway for the past several years, few organizations have actually deployed the technology. Although central banks are among the most cautious and prudent institutions in the world, they are, perhaps surprisingly, among the first to implement blockchain technology."
Curious to know more, we surfaced the various blockchain solutions that banks consider feasible for their operations and services.
How are banks and financial institutions taking advantage of blockchain?
Blockchain offers a wide array of new possibilities and development options for fintech companies. In the WEF report, they listed several use cases currently being researched by central banks, including the following:
Central bank digital currency
We've been hearing recent conversations coming from Germany's finance minister, Olaf Scholz, about the creation of national digital currency. How would a cryptocurrency backed by the state work? A digital currency issued by a central bank and backed by its funds would operate in a decentralized peer-to-peer network, with no need for middlemen. The research sees this option as an alternative to traditional cash and regular deposits. It could also replace traditional bank accounts.
Interbank securities settlement
Some international transactions still take several days to be completed. Using a blockchain-based digital currency made to operate in the wholesale interbank market will not only remove the intermediaries –lowering the costs of a transaction–, but will also make it possible to conduct any operation immediately.
Information exchange and data sharing
While in a public blockchain every participant has access to the record of transactions between two public keys in the chain, the development of a private blockchain allows a bank to establish different levels of access and permissions. This characteristic aids in keeping customer data even more secure, and allowing banks to enhance transactions by keeping track of all the data needed for any operation.
Know-your-customer and anti-money-laundering
Faster and reliable access to every data will make much easier to track suspicious activities, leading to a more efficient fight against money laundering and financial fraud.
According to the Asian Development Bank (ADB), it is estimated that there is a US$1.5 trillion global trade finance gap - a problem that unfortunately affects mostly small and medium-sized enterprises. One of the most recent news we can gather from international trade is the announcement by world-renowned bank UBS starting transactions on we.trade, a blockchain-based trade finance platform.
The use of a decentralized, blockchain-based database in trade finance will certainly disrupt a sector that it's still time-consuming and expensive, making it much more efficient and secure. Transactions histories and customer data will be transferred almost immediately, while the use of private blockchains will warrant confidentiality where it's needed, and smart contracts will ensure that agreements are fulfilled.
These are just a few of the solutions being researched and implemented, but there are certainly many other benefits that yield from blockchain technology when paired with other solutions.
Now, applying blockchain-based technologies to transactions is not an easy fix. It all comes to empowering people and processes to move forward. Full implementation of blockchain in finance will not come without challenges, but it is a logical move in updating frameworks and transactions.
What are your thoughts about blockchain in the financial sector?