Blockchain is changing everything from payment transactions to how funds will be raised in private markets. With the recent attention which Bitcoin has got this year in the 2021 bull run, people are wondering how payments will change in conventional banking.
Today, global payments with conventional banking methods take hours or days to get passed through. On the other hand, if we transfer the same using Ethereum or Bitcoin Network, it happens in a matter of seconds. This is the biggest challenge that bankers are facing today. If this keeps happening, soon the banking network will become obsolete.
Blockchain’s role in banking
Blockchain technology provides a way for untrusted parties to come to an agreement on the state of a database, without using any middleman. By having a ledger that’s decentralized with no one central authority having absolute control blockchain can provide specific financial services like payments or securitization without using a middleman like a bank.
More than that, with tools like Smart Contracts, which can potentially automate manual processes like insurance, lending, borrowing, etc without the need of any third party, things will become more transparent.
The Global Banking currently at $134T industry, blockchain technology can avail the following including:
- Payments: By utilizing a global decentralized ledger for payments (eg Bitcoin), blockchain can facilitate faster payments at a much lower fee than banks.
- Loans and Credits: By removing the need for gatekeepers in the loan and credit industry, blockchain technology can make it more secure to borrow money and provide lower interest rates.
- Clearance and Settlement Systems: Distributed ledgers can drastically reduce costs of operation and real-time transactions will be possible between financial institutions.
- Fundraising: Initial Coin Offerings (ICO’s) are experimenting with a new model of financing that unbundled access to capital from traditional capital-raising services and firms.
- Securities: By tokenizing traditional securities such as stocks, bonds, and alternative assets and placing them on public blockchains, blockchain technology could create more efficient, interoperable capital markets.
More Secure Agreements through the use of Smart Contracts.
As I mentioned above, individuals and businesses can enter into agreements through contracts. Due to its complicated nature, the process of creating a contract requires a lot of manual work from legal experts.
Smart Contracts enable the use of automation of agreements through tamper-proof, deterministic code that runs on the blockchain. Money can safely stay in escrow and is only released when the conditions of the agreement are fulfilled.
The banking and financial industry is going to be one of the major sectors which will get impacted by the blockchain. The potential use cases are plenty ranging from real-time payment settlements to tokenization of assets, smoother lending and borrowing, more robust agreements, and more.
A banking and financial system based on a trustless, transparent, and borderless base layer helps in enabling a more open and interconnected economy.