The blockchain is rapidly proving itself to be the ideal platform for experiments in the finance and banking sector. The current wave of innovation and experimentation that is occurring in the fintech sector is opening up a limitless range of opportunities that could potentially solve the issues that plague the current banking system.
It’s no secret that blockchain is set to revolutionize the banking. Most of the major banking organizations in the world are fervently working on their own blockchain solutions, or operating in a hand-in-glove relationship with platforms that aim to limit the freedom that blockchain technology offers to further their own ends.
The 2008 global financial crisis significantly destabilized the international capital markets industry, which was forced to deal with a never-ending barrage of cash absorption issues that stemmed from the tightening of the regulatory noose. The capital markets industry also suffered from an increase in the cost of liquidity and an increased need for the distribution of capital in an economic climate in which the average income had dramatically declined.
According to finance analysts, more than 60% of the IT budgets of major banks are dedicated to the maintenance of legacy software systems and infrastructure, with billions of dollars more lost on attempts to minimize the costs of these systems. As a result, banks are unable to divert funds away to develop innovative new solutions and are stuck in a paradigm that invests a significant amount of time and capital in processes that are unable to guarantee profits.
The unique properties of blockchain technology, however, provide banks with a unique exit strategy. Clearing organizations and exchanges see the blockchain as a powerful and highly effective tool that could be used to influence the fundamentals of expenditure.
Banking on the Blockchain
Banks are facing a host of new issues as they plan to migrate their main operating systems and financial processes to a new form of technology. This includes a significant investment into risk assessment systems that can function with the data sharing program that operates as the foundation of the blockchain.
This development process will allow banks to simplify and streamline their main processes by abandoning redundant legacy systems and unnecessary elements of IT infrastructure.
Distributing databases across the blockchain offers a range of different benefits for banking institutions:
- The ability to store reliable and accurate information on all transactions that have ever been performed not only allows individuals to store value with confidence, but also ensures that all transactions are completely transparent. This ultimately enables parties to trust each other without the need for an intermediary, facilitating “trustless” agreements.
- Advanced encryption technologies are highly relevant to the payment industry, as they are able to speed up transactions while at the same time lowering transaction costs. This could potentially result in the improvement of online trading infrastructure, as well as enhance overall reliability.
- The blockchain makes it possible to create corporate distributed databases that can be customized to meet the needs of individual organizations. It’s also possible to ensure that these databases are interoperable with the databases of other organizations, delivering the security and confidentially required for cross-corporation information trade.
- As an engine for the transmission of data, blockchain technology allows for real-time monitoring of transactions. One of the most relevant elements of blockchain technology is the nature of the distributed registry, which can provide heightened efficiency in areas such as credit and REPO transactions- or the purchase of securities with a reverse sale obligation.
These factors and more make the blockchain the ideal platform for the next generation of banking systems. A number of well known international banking organizations are already benefiting from the blockchain, such as Axis Bank, Union Credit, NBAD, UBS, Santander, Yes Bank and Westpac, who are already working on integrating the Ripple blockchain solution into their services.
According to fintech analysts, incorporating Ripple into their service systems could save these institutions more than $3.76 per transaction. Given the fact that these institutions perform hundreds of millions of transactions annually, this is a significant saving.
While the financial service sector may appear to be a hotbed of innovation, the vast majority of financial institutions keep their research and development departments behind tightly closed doors. The security associated with innovation in the financial sector is understandable- security is the number one priority of all banks, and as such most banks choose to trust only themselves.
This approach significantly reduces the threat of hacking attacks, but can stifle development opportunities. As a result, blockchain based solutions that have universal proposals that can rapidly adapt to a wide variety of use cases have gathered the most attention in the sector. In addition to the Ripple solution, another platform- the Credits platform- is about to dramatically disrupt the fintech market.
Eliminating Existing Bank Problems With the CREDITS System
The Credits platform aims to solve possible bank failures and address a range of existing banking institution issues:
- CREDITS offers smaller commissions for cross-border payments than the current SWIFT interbank system: CREDITS aims to offer its platform to facilitate payments across borders, charging only minimal commissions. CREDITS transactions occur within seconds, and at cost of operation below 0.0001%
- Interbank transfers can often become stuck, or lock accounts: It’s impossible to interfere with or halt blockchain-based transfers, as transactions are calculated in seconds on the blockchain without any human interaction. The CREDITS platform is capable of issuing up to 1 million transactions per second, which completely eliminates the issue of payment delays.
- High security protocols virtually eliminates hacking attacks: The CREDITS system uses an encryption algorithm based on asymmetric cryptosystems. As a result, it’s highly secure and virtually invulnerable to hacking attacks.
- Data security: The blockchain is completely immutable, meaning nothing can be removed from it.
- Completely immutable transactions and information: The immutable nature of the blockchain means it’s impossible to alter information or transactions that have been stored on it, yielding maximum transaction protection.
Ultimately, the blockchain offers banking institutions the ability to dramatically restructure and optimize the processes that are used to confirm transactions, manage cash, reconcile ledgers, optimize assets, and many other systems that are currently the focus of billions of dollars of investment every year.