Blockchain entrepreneurs are working overtime to see how blockchain technology can massively simplify banking – a critical component of the global financial system that supports a global economy worth over $74 trillion. Unfortunately, traditional banking is centralized, vulnerable to systems’ failure, data breaches and terrorist attacks. Exclusion is the order of the day, leaving billions of people without access to basic financial tools. Worse still, the system is monopolistic, stifling disruptive innovation and lobbying for status quo. On the other hand, blockchain is a vast distributed ledger open to everybody where all kinds of financial assets such as money, titles, equities and bonds can be stored securely with trust established through mass collaboration. The following are some of the ways in which blockchain technology is expected to simplify banking.
Today, the banking sector heavily relies on financial data analytics firms and rating agencies to verify identity and determine those who should be allowed access to the system. Blockchain technology has the potential to lower the need for trust in all transactions because every record is available on the public ledger.
Money transfer service providers and payment card networks have had to work together to prevent double spending. Blockchain technology can simplify this by ensuring that movement of money is approved by consensus. This can reduce friction and democratize economic growth.
Bankers are sometimes forced to rely on credit scoring firms to determine who should be issued with credit card debts, mortgages, corporate bonds and asset backed securities. Blockchain technology can simplify the entire system by making it possible for anyone to check creditworthiness. This can increase transparency and allow both the unbanked and entrepreneurs to access credit from their peers.
Trading involves the exchange of financial instruments for the purpose of speculating, investing and hedging and includes post trade clearance and settlement. Blockchain reduces settlement time from weeks to minutes, creating an opportunity for the unbanked to participate in wealth creation.
Accounting involves the systemic recording and reporting of financial transactions. The multi-billion dollar industry is controlled by a few audit firms. Unfortunately, the traditional accounting practices are not able to keep pace with complexity and velocity of modern finance. Blockchain’s distributed ledger can enable transparent and real-time auditing while at the same time allowing regulators to scrutinize a company’s financial actions.
Banks, asset management firms and brokerage houses have dominated the savings sector for a long time. The average person uses a savings or a checking account while rich corporations use risk-free investments such as treasury bills or money market funds. Blockchain technology can simplify saving by replicating all these instruments through its peer-to-peer model which is more transparent, simple and accessible.
Due to the potential of blockchain technology to simplify banking, many banks are making significant investments in this frontier. The technology is expected to reduce many costs that banks are currently incurring and make it easier for them to offer affordable products and services to a global clientele.