Blockchain is changing the Banking Industry: Pros & Cons

#blockchain #banking #finance #cryptocurrency

Ridhi Khurana Feb 09 2021 · 3 min read
Share this

The financial system of India has also been captured by Blockchain, one of the fastest developing technologies that has garnered the world's attention. Blockchain originally came into being, for financial transactions but it was later found to be useful in different business domains.

Banking institutions were formed to link groups of individuals together and facilitate all kinds of exchange and trade between them. Blockchain is a method that can do the same but on a worldwide scale. It's also, secure and transparent.

By providing the various possibilities of how people deal with money and values, Blockchain technology has the ability to fully transform the universal financial industry. The speed is only one of many possible advantages that blockchain brings to banking. This is not only about more productivity, but also about a new level of transparency and security.

The history of immutable transactions is one of the key benefits of the blockchain. It is not possible to delete any transactions that were made already. This will help decrease much of the crimes being committed against financial institutions. The Smart Contracts principle is used by blockchain. It requires a collection of laws by which the parties to the arrangement agree to negotiate with each other. It permits the storage of any kind of digital information and allows the party to view or change the data in compliance with a set of predefined rules only.

To maintain all their customer records, many financial institutions spend millions of dollars a year. But blockchain allows all the data to be stored in one place. This ensures the confidentiality and non-repudiation of the data stored. It helps organisations to access the verification details of a particular client of another organisation and therefore prevents data duplication.

Why is a transition to Blockchain necessary for banks?

The use of Blockchain technology in leading banks across the globe demonstrates that banking sector processes will change drastically.

  • Faster payments
  • Higher Security and Fraud Reduction
  • Decentralized trust
  • Low cost of sending payments
  • Digital Identity Verification
  • Smart Contracts
  • Decentralized database for digital assets enabling faster buying and selling off assets like stocks, commodities, or debts
  • The method of trade settlement, third-party verification is removed, leading to faster delivery times decreased operating costs and reduced real-time transaction costs.
  • Secured transactions in capital markets with high efficiency.
  • Accelerates the fundraising process
  • Safest way to combat fraud, promises, and money laundering
  • Enabling secured loan and credit bowering at a lower rate of interest
  • Trade finance deals involving processing of LC (Letter of credit) and bills of lading.
  • Pay invoices automatically using blockchain smart contracts
  • Speeding up the accounting and auditing process
  • Peer – to – peer (P2P) real-time transfers.
  • Crypto hedge funds will provide an open forum to allow the involvement of more investors and strategists.
  • Monitoring accounts in order to minimize non-performing assets (NPA)
  • Servicing of trade and securities with stored KYC (Know Your Customer) data on a real-time basis allowing transparency, lowering credit exposures for fast, risk-proof and prompt settlement.
  • Blockchain in Banking

    That's just the half-side of blockchain technology, though. It comes with its own drawbacks, i.e., disadvantages, just like any other technology.

    Blockchain is inexperienced in the financial field, despite being successfully implemented in a variety of ways through distinct industries. Efficient risk management, scalability, and compliance are the key issues relevant to the adoption of blockchain by financial institutions. In particular, permissionless blockchain systems, unless substantially reworked, would not be able to meet these requirements. Moreover, because of its decentralised nature, it's necessary for regulators to find a different approach to this new technology.

  • Limitations associated with Governance
  • Scalability issues
  • Lack of clarification on policies and regulations
  • Excessive energy is used by blockchain
  • Possibility of tax evasion
  • Blockchain can generate complexity
  • Manual data entry mistakes, such as inserting an extra digit by mistake, can prove devastating since transactions are immutable.
  • Hostility of the industry - issues such as cybersecurity and the risk of banks using a common transactional network to spy on each other.
  • Limited block size restricts the number of transactions per second.
  • Highly volatile
  • No uniformity in laws regarding cryptocurrencies
  • Lot of anonymity
  • Excessive security threats (Attack of 51%, Double-spending, Sybil’s attack, DDos’s attack, Cracking of the cryptographic)
  • Banking managers suggest that before becoming a common technology in banking, blockchain would have to satisfy several requirements. Banks need to first build the infrastructure needed to run a global network using matching solutions to make the most of the blockchain. This technology would only change the industry with the widespread adoption of blockchain.

    But with significant returns, the investment will come. Blockchain is expected to enable financial institutions to process payments faster and more efficiently once fully implemented, all while reducing the cost of transaction processing. All in all, blockchain-enabled banking institutions will provide a better customer experience and help the conventional banks compete with fintech startups.

    Die-hard crypto-currency believers claim it can eventually replace banks. Others claim that blockchain technology, making it more effective, would complement conventional financial infrastructure. However, one thing is obvious: blockchain technology can indeed change the banking sector.

    Comments
    Read next