Technology is one of the most serious challenges to the banking industry today. Whether it’s from huge technological companies like Google Inc. (GOOG), Apple Inc. (AAPL), eBay Inc. (EBAY), or Amazon.com Inc. (AMZN), or from new financial technology (FinTech) start-ups, conventional banks are taking note, and some are now participating.
Applications incorporating blockchain technology—the tamper-proof system of distributed ledgers that underpins cryptocurrencies such as Bitcoin—are one potential disruptor for the banking sector today. To keep ahead of the curve, large financial institutions ranging from investment banks to stock exchanges to central banks are all developing their own blockchain-based solutions.
Banks Are Taking Notice
Before delving into how blockchain technology might disrupt conventional banking, it is important noting some of the major organizations that have openly stated their interest in it (meanwhile, many other banks are doing so without informing the public).
- BNP Paribas, a French investment bank, has stated that it would investigate how blockchain technology might be used to its currency funds and order processing.
- Stock exchange focusing on technology Nasdaq, Inc. (NDAQ) has said that it is collaborating with blockchains in order to “lower the time, costs, and points of friction throughout the capital markets.”
- While Goldman Sachs Group Inc. (GS) has not explicitly said that it is working on anything in-house, it has sparked conjecture after participating in a $50 million financing round in Bitcoinwallet and payments startup Circle, Inc. Circle was recently bought for $4.5 billion by Concord Acquisition Corp., a special purpose acquisition company (SPAC). 1
- Banco Santander (SAN), located in Spain, is working internally to build blockchain-based solutions that will save its expenses by $20 billion per year by the end of the decade.
- Barclays (BCS) considers blockchain technology to be “transformative,” and is experimenting with it both internally and via collaborations with start-ups.
- UBS (UBS) has gone so far as to establish its own separate blockchain lab to perform private research for the company’s purpose.
- Citigroup Inc. (C) has been found to have worked on at least three separate blockchain-based projects, including its own cryptocurrency known as CitiCoin.
- Furthermore, SociétéGénérale, Standard Chartered, The Bank of England, Deutsche Bank, DBS Bank, BBVA (BBVA), LHV Bank, BNY Mellon (BK), CBW Bank, Westpac (WBK), and the Commonwealth Bank of Australia are all racing to develop and use this technology.
Payments and Remittances
The most apparent and fundamental use of blockchain technology is as a payment mechanism. Bitcoin and other cryptocurrencies function as both digital money and a means of sending payments in that currency throughout the world. These transactions are quick and need just an internet connection. While it may take several minutes for a transaction to be 100% verified, the transaction itself occurs in a couple of seconds. These transactions are transnational, safe, and, for the most part, anonymous. Furthermore, transaction charges are low, just a few cents per transaction, making it a considerably cheaper option to move money throughout the globe than wire firms like Western Union (WU) and Wise, or credit card processors like Visa Inc. (V), Mastercard Inc. (MA), or Discover Financial Services (DFS).A retailer that does not want to pay the initial and continuing costs associated with accepting credit cards might instead accept electronic payment through cryptocurrencies for a fraction of the cost.
Remitting money internationally is a challenging task. Fees are costly, processing time is sluggish, money might be intercepted or stolen, and legal and tax concerns must be addressed. These issues would be eliminated with a blockchain-based system. Several firms have already been established to assist transfers in this manner.
Account Balances and Deposits
Banks are primarily used by consumers to keep deposits in checking and savings accounts. However, after you deposit money in a bank account, the bank lends the majority of it out via fractional reserve banking. As a consequence, the majority of the money shown when you check your account balance is not kept by the bank. In actuality, a bank run occurs when too many clients seek to take their money all at once, and the money just isn’t there. As a result, a bank account balance is just an accounting item.
Finally, the blockchain is a ledger that reflects accounting entries. As a result, bank accounts might be represented on blockchains, making them more safe, accessible, and cost-effective to manage. Furthermore, it may assist to reduce the likelihood of bank runs.
Secondary Market Trading and Clearing
From a basic stock purchase to a complicated over-the-counter currency exchange, deals must be cleared and settled. Ownership of the item or contract being exchanged must be verified and documented. Exchange and clearing costs are now added to the cost of each transaction and may mount up over time and with huge quantities of orders.
If share ownership could live on a blockchain and every change in ownership could be certified and confirmed instantly, it would drastically cut transaction costs and clearing costs for all types of asset classes, from stocks to bonds to derivatives to commodities to real estate. It is certainly feasible that renowned institutions such as the New York Stock Exchange or the Chicago Board of Trade may be supplanted one day by a distributed ledger system that is more secure, resilient, and less costly to manage and trade on.
Overstock (OSTK) has announced the creation of T0, a blockchain-based asset market, in order to offer some of its corporate bonds directly to investors. Coinsetter, a bitcoin exchange located in New York, has stated that it would launch a blockchain-based technology to clear over-the-counter transactions in T+10 minutes. To put this in context, purchasing a share of stock on a US market takes T+2 days to settle.
Primary Market Issuance and IPOs
Can primary markets survive on blockchains if secondary market trade is possible? Yes, the answer is yes. Assume you are a firm looking to raise funds by selling new shares to the public via an IPO. Today, this would be an extremely costly venture that would need the underwriting and sale of your shares by an investment bank (or a syndicate of such institutions). This might cost a corporation up to 7% of its overall revenue. 2
Imagine being able to issue shares of your firm straight to the blockchain, where you can subsequently sell them for money. These virtual shares may subsequently be traded on secondary markets, which are also available through the blockchain. If the public accepts this scenario, it might have a significant impact on both asset markets and the investment banking business.
The Bottom Line
The financial sector is taking blockchain technology seriously because it has the potential to disrupt the existing banking business. Because of the blockchain’s tamper-proof, decentralized, and unchangeable character, it is suitable for lowering costs and expediting everything from payments to asset trading, securities issuance, retail banking, and clearing and settlements. It is clear that blockchain technology encompasses much more than Bitcoin or cryptocurrencies. While such implementations as payment and money systems are certainly disruptive, the larger disruption may come from alternate applications of these distinct and strong traits.
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