Blockchain, the technology on which cryptocurrencies exist, is simply a digital database for storing and recording transactions securely. Data in a blockchain is collected in blocks with limited storage capabilities, and all blocks are linked to each other to create a chain. Hence, the name blockchain. This makes it difficult to hack or alter the information in a blockchain. This ledger of transactions is recreated and distributed across a network of computers on the blockchain. With increasing interest from financial institutions, here are a few ways blockchain can make banking more effective:
Payments
The most important function of banks and financial systems is payment. Fast and secure payment processing has commercial and central banks looking into this technology. By employing a decentralized network, financial institutions can process faster payments, and circumvent the high fees of processing transactions. Blockchain offers bans high security and cost-effectiveness, and third party verification also becomes obsolete.
International payments are also made faster and less expensive with bank blockchain, as payments with the traditional banking system are much slowerand incur more fees. Blockchain is a global ledger, and is not restricted by borders or distance. Be it local or international, most transactions are completed in seconds/minutes.
Stock Trading
Trading transactions that are blockchain based can help to reduce overflow of data associated with traditional stock exchange. Stock and shares trading involves a lot of paperwork, and intermediaries. The process can take up to three days, due to the many stages involved in the process of stock exchange. Blockchain technology is decentralized in nature, and has no need for third parties. The use of blockchain technology in banking helps in improving performance, and getting rid of information redundancy. Trading with blockchain technology can be run on computers globally.
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Accounting and Auditing
Accounting and Auditing in bank and other financial institutions is usually challenging, as the validity and integrity of recorded transactions and data are sometimes questionable. This segment of banking can undergo transformation with the introduction of blockchain technology to banking. Blockchain will simplify the traditional data entry and bookkeeping method. Transactions can be added directly into a joint ledger, instead of having different records of transaction receipts. All the data recorded in the joint ledger will be distributed across as many systems as desired. This makes accounting and record keeping more transparent and secure as blockchain would be used to verify all transactions, all while saving time and costs.
Hedge Funds
A hedge fund is a partnership on an investment involving a fund manager and a number of investors (or partners). Decentralized hedge funds working on blockchain technology provide a platform that allow more cryptocurrency investors to take part in the investment, compared to traditional hedge funds controlled by a fund manager, usually a single entity. Hedge funds trading cryptocurrencies maximizes investors’ returns and minimize risks. The transparency and security of the blockchain network will also help in reducing fraud and cyber-attacks on investments. This offers great potential to increase effectiveness in the banking industry.
Identity Verification
The verification processes required by banks to carry out transactions can be very exhausting for customers. These processes are also repeated for every log in and new service provider. Blockchain allows for secure reuse of identity verification for different services, giving customers and institutions the benefit of accelerated verification. Users also get to be in control and choose their means of identity, and who to share it with. Identity verification will only be done once, and registered when blockchain technology is used.Repetition of registration will not be required for a new service provider as long as the service providers also use blockchain technology. Storage of information on the blockchain also ensures maximum security.
Adoption of blockchain technology will enable banking institutions improve effectiveness, process payments with more accuracy and speed, and put traditional banking institutions on par with fintech startups