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How Can Banks Utilize Blockchain Technology?

Fleta | 11.20| 24

From its inception, Bitcoin was considered a powerful weapon to end the monopoly of fiat currencies. And when we say fiat currencies, they are centralized and under the control of commercial banks. Therefore, we cannot entirely own money. To begin with, and the idea that Satoshi Nakamoto has conceived was to create one such money that would be indeed ours, no strings attached.

However, banks are not just the opposite of blockchain technology. Banks obtain potential benefits and advantages from it, which is why blockchain technology is considered an important technology that can improve our lives.

What Exactly Do Banks Do?

To better understand how blockchain can be utilized in the banking sector, we should first look into what banks are doing in real life: what services they offer to both people and businesses. After that, we can analyze these services and see whether the blockchain technology can be deployed to make them better, and to what degree. With that in mind, let’s now see what banks typically do.

Commercial banks are the pillars of any financial system based on fiat. As it turns out, cashless payments that don’t involve hand-to-hand exchange of coins and banknotes would be impossible without banks. In short, processing payments is the first and foremost activity that banks are engaged in daily.

Also, banks play a vital role in financial activities related to commerce and international trade. These activities, as a whole, are known as the trade finance sector. The term “trade finance” refers to financial resources that a buyer of goods or services needs to procure for making a large-scale trade. Banks often facilitate these transactions by financing the trade.

And we can’t leave unmentioned another activity for which banks are best known and most familiar to us. It is, indeed, money lending. If you need money, you will probably go to a bank for it. The bank looks into your credit history, evaluates the collateral you can provide, and then either issue a loan to you or sends you home.

So how can blockchain help banks?

Historically, cross-border remittances have been one of the first uses for Bitcoin, and they remain an important source of capital flows for many developing countries. They primarily use Bitcoin or another cryptocurrency as a value transfer medium.

Can banks use blockchain in the same way? Absolutely. Moreover, such a use fits banks like a glove as sending money and processing payments are what they have been doing for ages. So it is not that they lack the capacity, but they are just not allowed to by the law and their governing bodies. If they were, we would, without doubt, see them taking advantage of the blockchain technology for both domestic and international money transfers.

The trade finance sector, which we already referred to, is a vast thing in global commerce. Banks are active participants in this market by issuing all kinds of bank guarantees and letters of credit. Blockchain could help here tremendously by streamlining the entire process by eliminating the need to keep several copies of a bank guarantee, which now exist in digital form, cryptographically signed by the interested parties and updated immediately whenever a change to it has been made.

Earlier this year, two banks from Singapore, DBS Bank and OCBC Bank, rolled out blockchain-based solutions that allowed them to reduce the trade document turnaround times from four working days to less than 24 hours as provide real-time access to updates at each step of the transaction. A few months later, DBS Bank partnered with Contour, the blockchain trade finance network, to streamline the issuance of its letters of credit.

Now, you want to get a loan, and the bank checks your credit history. It may feel like a breeze to you. However, it can take up to a few days or longer for the bank. Banks have to go through a lengthy procedure that includes looking into stuff like your credit score, property, and debt to income ratio. Credit agencies collect the information, but it can also be stolen, as was the case with Equifax. In this case, credit histories of over 147 million Americans were hacked and exposed to everyone. But it only wouldn’t be possible with a blockchain-based solution, with credit histories fully encrypted and invulnerable to hacks and forgery.

Conclusion

Banks would eagerly embrace the blockchain tech for simple reasons; it can be quite useful to them as the use cases reveal. Furthermore, we could expect them to drive innovation in this field, as had often been the case in the past, before banking became overly centralized.


How Can Banks Utilize Blockchain Technology? was originally published in FLETA on Medium, where people are continuing the conversation by highlighting and responding to this story.

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