Blockchain is not just disrupting the world. It is transforming it from all corners. The finance industry is one of the areas that this technology has been applied extensively. From the way payments are made to the manner in which investments are selected, blockchain is being felt in many corners of the financial world.
It is because of blockchain that digital assets are classified as a class. The most popular blockchain, bitcoin started it all. It created a digital code that cannot be copied. For the first time since the invention of bits and bytes, bitcoin made it possible to own something digital. Digital coin developers have introduced colored coins to act as company stock.
The story of blockchain has extended to appcoins’ and initial coin offerings’ (ICOs). Major efforts have been paid toward making digital assets a bearer instrument. But these are just a part of the blockchain story. Blockchain is driving major changes in finance and banking.
HSBC’s Blockchain Project 2019
Recently, HSBC, one of the world’s biggest banks portrayed heavy application of blockchain-based tools in foreign exchange trades. According to Financial Times, the Forex dealing heavy hitter has used blockchain technology to process 3 million FX transactions (worth $250 billion). Although $250 billion is just a little portion of the Forex market, HSBC’s initiative suggests that banks have started looking for solid applications of blockchain and cryptocurrencies.
Investors are diversifying their investment portfolios with high growth bank stocks eyeing incredible capital growth and dividends to be yielded by adoption of blockchain.
Let’s explore some of the areas in finance and banking that blockchain is under serious application.
- Global payments: Global payments attract transaction fees. A survey done in 2016 showed that the average fee then was 7.6 per cent of the transaction value. Blockchain and smart contracts have the potential to reduce these transaction fees by reducing the number of people needed to manage global payment transactions.
- Trade finance: Often, importers, and exporters require transaction verifications for them to complete global trade transactions. This makes global trade, and thus the practice of trade finance complicated. Blockchain technology has been used to speed up the process by allowing easier access to records and documents by all parties involved.
- Syndicated loans: Large loans taken by single borrowers have a higher risk profile and are a big concern for banks. Tracking capital, identities, and risks in the blockchain can help to mitigate the risks associated with these types of loans. Combined with smart contracts, blockchain could become an integral part of credit underwriting and decision-making.
- Insurance claims processing: The insurance claims function of insurance firms can be and has been subject to fraud. Information in smart contracts and the blockchain can enable agents to submit claims faster, and improve the speed at which the claims are reviewed. Since much of this work can be automated using machines, reviewers will not need to take a lot of time on each case.
- Clearing and settlement: Before blockchain and other efficiency-focused technologies, the time frame for transaction clearing and settlement was T+3, or three days after the transaction. Things have now changed, in that everything that happens in the lifecycle of a trade (execution, clearing, and settlement) all happen at the trading stage. When operating with a digital asset, trade is a settlement. Additionally, digital ownership and cryptographic keys mean lower counterparty risk and post-trade latency.
Can Blockchain Replace Banks?
Evidently, the applications of blockchain in banking are increasing every day. But there is a concern that continued adoption of blockchain could eventually make banks redundant. Governments and many users in the general public support the decentralization of blockchain. This would mean that we can securely make/receive payments and store money without having to involve a bank. The big question is why then would we need the traditional bank.
A report by Deloitte on how blockchain is transforming the banking sector indicated that the technology will significantly impact how financial services companies work but it will not entirely replace banks. Banks may become more efficient and less powerful. But they still have a role to play considering that there are other banking and investment solutions blockchain cannot provide.
Blockchain Adoption Is Not All The Way Smooth
There are some bumps along the way of adoption of blockchain in the financial services industry. The technology is exciting and believed to offer better, more efficient and more resilient solutions for the finance and banking sectors.
However, using blockchain is something more complicated than buying a new software application and running it immediately. At its core, blockchain is group recordkeeping that requires all group members to join the system. Collaborations within and across businesses (which is a hurdle already) are imperative for a successful application.
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