Bitcoin was the main thing that opened up the eyes of the world to blockchain technology. Many people saw the benefits this technology had on Bitcoin and wondered what other applications it could also have.
In recent years, many industries have been trying to identify ways in which they can implement this technology into how they do things. In the coming years, many sectors will be transformed thanks to blockchain technology. Processes will become quicker, safer, easier, more cost effective and so much more.
One of the first sectors that has been adopting blockchain technology is in the world of banking and finance. There are many ways in which transactions can be made quicker and for cheaper thanks to blockchain technology.
While recent research says that under 10% of the top 100 biggest banks in the world will have core systems in place for blockchain by 2021, it is still the sector that looks set to benefit the most from deploying this technology.
Here are some of the ways that the finance and banking sector can be disrupted thanks to this technology.
Payments
With trillions of dollars going through the financial system on a regular basis, even the smallest of savings in time and costs will be massive. At the moment, the system is old and has a lot of fees and is very slow.
Just taking a simple bank transfer, you could be paying about $30 to conduct this transfer in addition to the likes of currency exchange fees that have high premiums built into them by the bank.
Both the sending bank and the receiving bank will get their cuts. It can take up to a week then for this money to transfer to the receiver’s account. As this is profitable for banks, they have not had much of an incentive to find ways to change it. However, a blockchain is able to get rid of the need for third parties to process transactions, people can now send money across borders for pennies and very quickly.
These transaction methods also are decentralized. This means that government bodies or regulators cannot easily close or control these networks. Banks will have to adopt the likes of blockchain technology if they are not to be overtaken as major transferers of currency.
Raising money
Traditionally, if a company wanted to raise money, they would have to go down the venture capital route. This was full of uncertainty and they would often get poor deals. Not getting much bang for their book in comparison to the equity and control they give up.
The advent of crowd funding began to have bit of an impact on this traditional space, but not too much. However, blockchain technology has been allowing for the explosion of initial coin offerings (ICOs). This is a form of fundraising which can be controlled by the company raising the funds.
They issue tokens in return for funding from investors. This is a form of crowd funding. Some companies have raised billions of dollars through ICOs. It gives these companies access to investors across the world and gives them a lot better access to liquidity than ever before.
Securities
When it comes to buying and selling investment products such as equities, commodities and debt, it is important that all transactions are kept track of. This is currently done through a complex chain involving the likes of custodian banks, clearinghouses, security depositories, exchanges and brokers.
It is a slow process that is not very accurate and can be abused. Through the use of blockchain technology, the middleman in these transactions can be eliminated. It also allows assets to be recorded on a ledger which cannot be tampered with.
Smart contracts can also be used in order to carry out the payment of dividends and conducting buybacks of stock in a very simple way.
Extension of loans
Blockchain technology can change the way banks extend loans to consumers. This technology can allow for a lot more peer to peer lending. It can also speed up the entire loan process and make it more secure. This could take into account global credit scores also, making it much easier for banks to assess the credit worthiness of applicants.
Real-life example – JP Morgan’s cryptocurrency
While the CEO of JP Morgan Jamie Dimon was critical of Bitcoin, he is bullish about the improvements that blockchain technology can make to the space.
It was in February 2019 that the investment bank announced that they had created their own cryptocurrency. This is called the JPM Coin and is not your normal type of cryptocurrency.
It is going to be used as a tool for settling transactions across borders between different financial institutions. This coin will be paired with the US dollar. It is currently still in the prototype phase. JP Morgan has already gotten positive results from their testing of the coin. This means that they are the first bank which has created their own coin.
Competition for Ripple?
Ripple is the blockchain based payment system that has been embraced by many leading banking and financial institutions in the world. It can process transactions across borders in as little as four seconds using their XRP cryptocurrency.
This is in comparison with average transaction times of at least two minutes for Ethereum transactions, at least an hour for significant Bitcoin transactions and three to five working days for traditional banking systems.
It is very scalable, something with the Ethereum and Bitcoin networks have issues with. It is also very secure and already has a five year track record in this space.
Currently, there are more than 200 banks globally using the Ripple payment system. It will be interesting to see how the JPM coin performs. If it is a success, then many other banks may follow suit and create their own cons, no longer needing the services of Ripple.