Introduction
As a reader of this article, you are probably aware of blockchain and all its benefits and side effects on our daily life. But in case you are not, then let us tell you about it.
Blockchain is a type of decentralized ledger system that is used to keep a record of all the transactions made on that blockchain network. First emerging in 2008, the bitcoin blockchain started a silent revolution in the world of record-keeping, and that revolution has now touched all kinds of industries today.
Since blockchain tech was used to keep a record of all the transaction made on the bitcoin network from the very first, it is only natural that it will slowly but surely enter the Banking industry as well. Blockchain is changing banking in various ways, but are they for good or bad, that depends on perception.
Blockchain And Banking Uses And Their Pros And Cons
From the very beginning, blockchain has been used to keep a track of all the transaction done with bitcoins, Litecoins, etc. which is why very soon the banking sector as well adopted the blockchain tech.
But the technology is not only used to keep track of transactions anymore. There are many different use cases for blockchain in banking sectors. Below are some of the important ones and the pros and cons they come with.
Cross Border Payments
I think we can all agree when we talk about the inconveniences of cross-border payments. Sending money from one country to another is a complicated process. With complicated bank policies and hundreds of other problems, the traditional cross border payment system is anything but convenient.
Enter the blockchain development services. With the help of blockchain, we can easily send money from one country to another without any hassle. There are no third parties to go through, no additional fees to pay, and no delay in sending and receiving payments. It is probably the most convenient way to send money to people in a different country.
In case you want to send money to someone through blockchain, you need to know their public address. Once you have their public address, you can easily sen them money without any involvement from a third party and at a lower transaction cost. However, it may not be as amazing as it seems. There are definite pros and cons of this technology.
- Pros:
The top advantage of blockchain in banking is definitely the speed along with affordability with which you can send money. There is less paperwork, and zero requirements of a third party authorization. While the remittance cost of traditional cash transfer is somewhere around 5-20% of the amount, the cost of sending money over the blockchain is around 2-3%. In brief, blockchain tech has revolutionized the cross-border payments today.
- Cons:
However, blockchain is not making everything easy. Sending payments through cryptocurrencies can impose certain issues. Firstly, not every country accepts cryptocurrency as a legitimate way of payment. Along with that comes the security risks. In case of a hacker attack, you can lose all authority of the funds on the blockchain network and no central authority like the bank would be able to reimburse your loss. The fluctuating exchange rates of cryptocurrencies also pose a certain threat to cash transferring through Blockchains.
Stock Exchange And Share Trading
If you have been a part of the stock exchange and share trading then you know that there are a lot of third parties involved in the entire process. And in case you don’t know about the process of trading, then here is a brief rundown for you.
- Step 1: the trade is initiated by the buyer or the seller.
- Step 2: Broker sends the transaction to the stock exchange
- Step 3: the transaction is matched with a counterparty
- Step 4: the transaction is sent to Central Counterparty Clearing House for risk evaluation
- Step 5: buyer’s/seller’s representative work with Central Securities Depository to record the transfer
- Step 6: the Registrar or Transfer Agent of initial trade update their list of shareholders after receiving the transaction
So you see that the stock exchange process includes too many third parties, stages, and bureaucracy and takes up as many as 3-4 days. But with a decentralized blockchain system removes all the unnecessary third parties. It also enables trading to run on computers all around the world.
- Pros:
The use of blockchain in trading removes the intermediary steps and improves performance. Which is how smaller trading transactions between groups of traders can be performed outside the blockchain and the final transactions can be recorded on the blockchain.
- Cons:
Despite the ease and convenience promised by blockchain tech in matters of trading, it still has its own risks. Your private keys can be stolen. The private keys are used for the digital signatures proving the ownership of specific assets. If the private key is stolen from you, you can lose your funds and the ownership of the asset can change easily.
But thankfully enough, there is an easy way to solve it with multi-signature transactions integrated into the trading applications running on blockchain technology. Signatures by all parties before agreeing on trade can also prevent the key-theft and unauthorized change of ownership.
Digital Identity Verification
When it comes to online transactions through banks, you can’t do it without identity verifications. Whether by a manual face to face checking or through unique passwords every time they are logging into the platform, the proof of identity is important for banks. And every time you are signing up for a new service, you have to repeat all the steps of identity verifications.
And this is where blockchain is making it more convenient for us. With blockchain, integrated into the banking system, you don’t have to repeat the identity verification process with every new service you sign up for. You can just go on and re-use identity verification for other services.
- Pros:
Blockchain application in fintech is giving the users a chance to be selective about who they want to share their identity with. They do need to register their identity on the blockchain network, but they don’t have to repeat it to each new service provider in case the service providers are also using the same blockchain network.
- Cons:
Even though it is super convenient to verify identity through the blockchain network, it is still a new concept and is still in its development phase. And once you have recorded all your identity information on the blockchain network, anyone and everyone can see it, so there is a strict need to be careful with what kind of information you are putting on the blockchain network.
Crowdfunding's (ICOs And IEOs)
Crowdfunding is raising money with the help of a large crowd, where each person donates a small amount of money. This is mostly done online. With the help of methods such as ICOs (Initial Coin Offering) and IEOs (Initial Exchange Offerings), new cryptocurrency startups can easily raise ample amount of funds to kickstart their business venture.
Tokens sold through ICOs and IEOs are similar to shares in a company, only without any equity exchange. The investor buys the tokens with existing bitcoins of or with fiat currencies. In case of success, the investor can exchange the token with any service provided by the startup, or just sell the tokens on cryptocurrency markets.
- Pros:
The cryptocurrency crowdfunding has its own advantages, such as an international reach for investors and decentralization of fundings. The startups can raise funds anytime anywhere. It is also a transparent crowdfunding system with high ROI.
- Cons:
Even though it seems advantageous, the crypto-crowdfunding techniques are sketchy at best. This can be proven by the high number of ICO scams in the year of 2017. However, with the emergence of a new method of crowdfunding called Initial Exchange Offering, the number of scams have decreased, but it is still not enough to convince the investors who have already been scammed.
Peer To Peer (p2p)
The concept of money transfer with P2P apps is easy enough to understand; with this, the customer can transfer money straight to another person’s bank account. There are numerous P2P apps in the market, but they all have their own limitations, such as location-based limitations. Many of these P2P services also require large commissions for their services and don’t have enough security to store sensitive user data. With blockchain based P2P applications these problems can easily be solved.
- Pros:
There are no geographical limitations when it comes to blockchain. Which is why it is the most convenient technology option for P2P applications. Not to mention that blockchain based P2P transactions happen in real time, meaning that people don’t have to wait for days to receive money. In brief, with these P2P apps and crypto wallet apps, you can send and receive money in a better and faster way.
- Cons:
Everyone may require a fast enough transaction method but not all of them understand the blockchain tech, cryptocurrency and money transaction using blockchain. On top of that, people may lose some money when converting crypto coins to traditional currency. And last but not the least, if the transaction involves both fiat currencies in addition to cryptocurrencies like bitcoins or others, the transaction process is definitely going to get slowed down.
Conclusion
So blockchain and banking, is it going to be good or is it going to be bad?
The truth is that it is too early to tell. Even though blockchain technology has been available to us for the last 10 years, we are still pretty much in the dark about its vast potential. Many people out there are still not aware of the existence of blockchains, let alone all the ways they can use it.
Which is why, until it’s uses spread to a large population globally, we can’t create a solid opinion on whether blockchain is good for the banking sector or bad for it. But from what we can see until now, the broad range of possibilities and conveniences presented by blockchain tech only makes it seem like a blessing for the banking sector.