When blockchain first burst onto the world stage in the form of decentralized cryptocurrency, it was meant as a direct assault on the monopoly and control that banks have over finance. As blockchain was born from a counterculture that saw a future where people controlled their assets and didn’t have to rely on institutions, you can imagine that the first reaction of banks was to reject the technology.
From high-profile financial executives and experts calling it a hoax or professing it had no future, there wasn’t a lot of love at first. But the meteoric rise of cryptocurrencies like bitcoin and the transactional power of systems like Ripple have made banks stand up and take notice. Now we see major financial institutions around the world starting to integrate blockchain into their own systems, and regulators scrambling to define and monitor them.
Leaders in the banking industry are reversing course, walking back earlier negative statements.
J.P. Morgan Chase CEO Jamie Dimon said that he regretted calling bitcoin a ‘fraud’ as his company works on integrating blockchain solutions into their business systems.
As banks work on their own proprietary blockchain solutions after initial resistance, what does that mean for business and banking moving forward?
Regulation and Decentralization
The banking industry is one of the most highly regulated all around the world. The requirements for reporting, auditing and compliance are considerable, adding cost and complexity to the industry. Blockchain-based cryptocurrency solutions sidestepped that regulation, at least initially.
But blockchain wasn’t created simply to sidestep regulation:
- It takes control away from central authorities (banks, corporations, and governments) and puts that control back into the hands of the people who use the systems.
- Its transparent, open-source nature and consensus architecture mean that less regulation will be necessary altogether.
As banks realized that this transparency and public trust could lower their compliance costs, they became interested in blockchain technology in banking. Now banks all around the world are embracing blockchain as well.
Blockchain and the Swift System
Most electronic bank transfers are done using an antiquated system called Swift. The Society for Worldwide Interbank Financial Telecommunication was founded in 1973 to create standards for interbank communication. The need for interoperability between different banks around the world is filled by the system, but high-profile theft and fraud has occurred on the system, and transactions are slow and unreliable overall.
Many banks see blockchain as a better alternative to Swift, creating much faster, more secure and certainly more transparent transactions. Blockchain in the banking industry can dramatically improve the efficiency and security of global transfers.
Blockchain and Know Your Customer
Banks are required by regulation to verify the identity of customers to prevent money laundering and terrorist activity. Designed to streamline ‘Know your Customer’ (KYC), blockchain can further enhance efficiency for both the bank and the customer. Currently, it can take weeks for identity to be verified, but with blockchain-based KYC protocols, that could be done almost instantaneously.
Here’s the breakdown of the process:
- Instead of providing a group of documents, such as passport, birth certificate, etc., each time you work with a new bank, you simply provide your digital identity with all the documents stored and verified via a blockchain.
- Your supplied documents can only be viewed or unlocked when specific access is given to a bank that is onboarding you as a customer.
- The secure blockchain will be verified by a sufficiently large pool of users so that it ensures that your data cannot be tampered with or altered.
Blockchain and Loans
Similarly to KYC, your credit history can be stored on blockchain and made available when you apply for a loan. Any other pertinent information to your credit decisions — income, expenses, etc. — can all be stored in your credit ‘profile.’ This lowers the risk for banks in making loans because the credit information is more robust and trusted.
Eventually, solutions like this are becoming attractive to banks because they reduce the amount of resources banks need to retain for credit decisions.
Blockchain and Transactions
Payment processing is where blockchain in banks will be seeing widespread adoption and daily use. Imagine a mobile-based payment application where you can pay with funds from your bank account, but convert them into a blockchain-based cryptocurrency of your choice before purchase.
Banks may even eventually allow cryptocurrency accounts as well.
One large bank embracing blockchain-based transactions is Spanish giant Santander Group. They recently released the first banking blockchain solution with their One Pay FX app, allowing international money transfers.
The Future is Now
While banks and blockchain started out at odds with each other, we’re already seeing that wall torn down. As blockchain systems get critical regulation, and the technology matures to be more trusted and robust, we will see a blurring of lines between the two industries.