Advantages of blockchain for the banking system
The modern banking system is not perfect. Customers pay high fees to banks and do not understand exactly where their money is going. Banks must maintain a large staff and use the SWIFT interbank transfer system, which is not always reliable. States bear the risks of falling under sanctions and finding themselves in a financial blockade in the event of a SWIFT shutdown, as was the case with Iran and the DPRK.
The use of blockchain allows you to exclude intermediaries when performing banking operations and automate many processes. The efficiency of the banking system is also improved by reducing costs. Banks can get additional sources of income due to the emergence of new business models and blockchain-based products.
The main scope of blockchain application in the banking sector:
- Conducting fast and cheap transfers. This is especially true for cross-border transfers and micropayments, where the bank commission may be comparable to the transfer amount. While in banks, such transactions take a long time (up to 3-5 working days) and are expensive (from 1% of the amount). On a global scale, this is a huge expense. In cryptocurrency networks, transfers take several minutes and are significantly cheaper. So, a transaction for 45.5 thousand bitcoins (about $ 280 million) in the summer of 2018 in the blockchain cost only $ 0.04 and took place in a few minutes. The transaction in the Litecoin network in the amount of $ 100 million in the spring of 2018 cost the same amount.
- The ability to automate processes and quickly process operations. This allows you to reduce costs and reduce the staff. Blockchain makes it possible to get rid of complex document flow, because any operation can be traced. The technology itself serves as a guarantee of data immutability, the human factor is excluded. There are already projects on the blockchain in the field of issuing loans, customer identification, and corporate financing.
-Ensuring the profitability of transactions. That is, the inability to make changes retroactively and falsify reports. The banking system is not transparent. Blockchain will make all operations transparent and increase the level of trust between all participants.
Blockchain vs. SWIFT
SWIFT is a system of worldwide interbank financial communication channels that has been operating since 1973 and works with 11,000 banks and other financial institutions.
Transactions through a computer terminal get into a universal computer, are collected in the processor and processed in the operation center, after which the sender receives a notification of a positive or negative result. The system is often criticized for insufficient protection of customer data, besides the payment processing time reaches 5 days.
Transactions in blockchain networks are much faster and cheaper, and in recent years SWIFT has begun to have competitors. One of the first was the Ripple blockchain platform, created specifically for work in the banking sector. Its principle of operation is similar to the principle of SWIFT, the main difference is decentralization. Over several years of operation, the company's products have been used by more than 200 financial institutions.
But SWIFT offered its solution: a few years ago, the company introduced GPI (Global Payments Innovation), a cloud computing system that allows corporate clients of the bank to make and track payments faster. In response, the head of Ripple, Brad Garlinghouse, said that it resembles a race of a car against a horse and cart. If the servers with the software are disconnected, GPI will become unavailable, and Ripple will continue to work as long as it is supported by at least one of the many servers.
Banks' Attitude to Blockchain
The attitude of financial corporations and banks to cryptocurrencies has changed from sharply negative to cautiously distrustful, but blockchain technology is highly appreciated even by many cryptocurrency haters.
Soon after the appearance of bitcoin, developers and financiers began to pay attention to this technology and look for new application opportunities for it. The idea of an open, decentralized and anonymous system did not suit them, but the idea of creating a controlled version of the blockchain appeared. In 2014, Barclays, Goldman Sachs, JP Morgan and a number of other financial institutions created the R3 consortium to explore the possibilities of using blockchain in the financial sector.
Bank tokens as a trend
The trend was the launch by banks of their own tokens on the blockchain. Such projects were launched by JPMorgan and Swiss Dukascopy.
The JPM Coin cryptocurrency has three areas of application: international payments, instant secure transactions and ordinary payments between corporations, which in 2018 brought the bank $9 billion. Tokens are used for instant transactions between customers of the bank, which makes transfers worth over $6 billion every day. The cost of JPM Coin is fixed and is $1.
Customers can receive tokens after transferring fiat money (dollars, euros or any national currency) to the account. After making a transfer or purchase, the tokens are burned, and the client receives an equivalent amount in fiat to the account. So far, these transfers take up a small share of the total volume of bank transactions.
In March 2019, the Swiss Dukascopy Bank launched its own cryptocurrency Dukascoin. This is an Ethereum-based token of the ERC-20 format: first of all, they were available as a reward for using the Connect 911 bank messenger and accounts linked to it.
It is obvious that the creation of their own local regulated blockchain networks for banks is a more promising direction than the use of blockchain in its traditional sense. But this approach is often criticized: for example, the famous bitcoin developer Peter Todd believes that he takes away from the blockchain all the best that is in this technology.
Blockchain Prospects
Despite the absence of a blockchain revolution, banks have not abandoned research on this technology. Financial institutions are actively registering blockchain patents: the People's Bank of China has 40 such patents, Bank of America has more than 50. Western Union, Visa and MasterCard payment systems have patents
The introduction of blockchain into the banking sector is a paradox. The essence of blockchain is decentralization, the essence of the banking system is complete centralization and total control. Bitcoin (as the main example of the use of blockchain technologies) it was created as an alternative to the traditional payment system, that is, as opposed to banks. In other words, now they are trying to integrate into the banking system what was intended to destroy it.
Investments in blockchain can destroy the existing business model of banks. If the blockchain meets expectations, banks will be able to provide services faster, cheaper and easier, which will lead to a drop in their income — and it is not profitable for them. In addition, millions of jobs could be at risk.
Despite the serious shortcomings of the existing banking system, it has its advantages: there is a developed regulatory framework, deposit insurance. the ability to cancel an erroneous transaction and receive a refund in the event of a hacker attack. Blockchain networks don't have all this yet, but there are many problems that need to be solved: these are problems with scalability, bandwidth, and security.
There are two main approaches to using blockchain in finance:
Niche use for a specific task, whether it's a cheap transaction, the ability to conclude a contract automatically or something else. In the future, banks will be able to use blockchain both for settlements in fiat currencies and for transactional products in cryptocurrency. Now this is a "blind spot" for banks, where a lot depends on regulators and customers.
The idea is to make a revolution in banking, and in the future - to push governments into the background and give people the opportunity to freely transfer money without the participation of intermediaries. In the case of mass adoption, the blockchain can make such a revolution, but it's too early to talk about it.
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