“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transa...
In our previous blog, we have seen that the banking and financial sector is one of the most vulnerable sectors when it comes to security. Many technologies are deployed to make this sector secure and solve all the challenges related to it.
We are very well aware of the fact that Blockchain can help eliminate all the threats and risks associated with the banking sector. Furthermore, Blockchain can also address issues such as operational risks, administrative risks to make the sector more immutable and transparent.
Blockchain has so much potential and there are numerous case studies and applications of Blockchain to back-up this fact. Let us check out how Blockchain is providing reasonability and efficiency in the above-said sector.
1. Reduction of fraudulent activities
One of the major challenges faced by banks these days is the growth of fraud and cyber-attacks. The traditional methods of ledger creation for banks included the creation of a centralized database. The centralized database model is more prone to hackers and cyber-attacks, as the information is stored in one place. This majorly includes outdated legacy IT systems. Hackers are very well aware of these systems and are easily able to bypass these security systems.
Whereas, Blockchain technology works on the decentralized database and is very less prone to data security breaches. Blockchain allows real-time execution of payments and also provides complete transparency for fraud-analysis and prevention.
For example, the data that is stored on Blockchain is checked at every node, enabling real-time analysis and verification of documents during each transaction. Malicious attempts to alter or tamper data become a part of the data itself, making the frauds obvious. Subject to the provisions of the data protection, the data within it can be analyzed pointing directly to the criminal activity.
Real-life use case: In August 2016, nearly 120,000 units of digital currency Bitcoin worth US$72 million was stolen from the exchange platform Bitfinex in Hong Kong. After this incident, Bitfinex has taken steps to reimburse the account holders with “‘BFX tokens”, which are cryptographic tokens to further reduce the fraud.
Various applications and solutions of blockchain in finance industry are being built to completely shift the centralized database to the digital ledger. Nasdaq, on 30 December 2015, announced that it made its first-ever trading platform using Blockchain. As Nasdaq has pointed-out, within the multi-step manual process used in banks there is plenty of room for error. Blockchain here can use reduce risk and administrative burden while saving time and money.
2. Know your customer
The KYC process is very time-consuming and cumbersome. It has been noted that the KYC process can cause a delay of up to 30 to 50 days to complete a process to a satisfactory level. The current KYC process also leads to duplication of effort between banks, and the annual compliance costs associated with the KYC process are also high. Moreover, this process also puts up large penalties for people failing to follow the KYC guidelines.
According to a report by Thomson Reuters Survey, the average bank spends up to 40 million euros on the KYC compliance process, Anti-Money laundering (AML) checks, and customer due diligence (CDD).
Apart from the above-mentioned drawback, the KYC process also takes a long time when onboarding new customers, which has an increasingly negative effect on the customer experience.
Real-life use case: KYC statements can be stored on the digital ledger provided by Blockchain, which would reduce the unnecessary burden of added penalties and long-documentation process. With Blockchain, once a bank has KYC’d a customer, they can easily put a statement including the summary of KYC documents on the Blockchain, which can be easily accessed by other organizations without any need of asking the customers to submit the KYC documents all over again.
SWIFT has been working on establishing a KYC registry with 1,125 member banks participating in the KYC documentation process. However, this is only 16 percent of 7,000 banks on their network. The KYC registry meets the need for a more efficient platform for managing and exchanging the KYC data and it is free to upload the documents to the registry and share it with other institutions.
3. Trading platform
Blockchain technology offers a new platform to exchange assets without the presence of a third party, and without the risk of double-spending. For example, when a high-value item is first created, a digital token is issued for the same by a central authority to authenticate the product.
[Source: BusinessInsider ]
The digital token acts as a “certificate of authenticity” and has the advantage of the security and is far harder to steal than a piece of paper. Upon the issuance of a digital token, the final recipient of the product would be able to identify its authenticity back from the point of its creation.
Real-life Use Case: The Blockchain provides the benefit of distributed and verifiable trust that was missing with other traditional databases. As a non-banking example, Everledger has been using Blockchain to trace and track the diamonds and act as a permanent ledger for diamond certification. Everledger has adopted cryptocurrency as a mark of authenticity providing transparency to all the parties involved.
From Blythe Masters’ Digital Asset Holdings with the Hyperledger to Overstock many organizations are gearing up for Blockchain tech to takeover their settlement structures.
There are different use-cases for Blockchain technology in the financial sector. Each of these applications when implemented properly should result in an immutable, and more transparent system for the financial sector. Most of the applications are quite evident, showing the financial sector’s appetite to make Blockchain one of the biggest revolutions to happen in the banking sector.