Banks And Blockchain: Why Financial Institutions Adopt The Technology?

October 25, 2019
Banks and blockchain: why banks adopt blockchain

We’ve heard a lot of news about major banks expressing interest in the distributed ledger technology. Furthermore, JPMorgan launched their own digital coin, representing fiat currency.

But Why Do Banks Adopt Blockchain?

There are reports about central banks (including Bank of Canada, Goldman Sachs and Bank of America) looing to hire professionals with blockchain-related experience. These peaple will be responsible for ‘overseeing the development of new initiatives that result in innovative offerings.” 

Though banks are often reluctant to comment on this issue, these are clear indicators that centralized financial institutions are trying to adopt blockchain. Actually, the Bank of America has 78 blockchain-related patents filed or won.

It may seem counterintuitive that banks are investing in blockchain solutions. After all, it’s one of the industries that should be the most opposed to disruptive innovation.

Just think about it. Bitcoin aims to remove control from banks and handing it over to individuals!

Nevertheless, there are solid reasons why banks are trying to leverage ‘the Bitcoin technology’.

Let’s have a look at major points of blockchain applications in the industry.

First, adoption of blockchain would allow banks to increase payment processing speed and accuracy. It will also reduce the related costs. Hypothetically, it could help banks penetrate to the previously unbanked areas.

What Are Blockchain Use-Cases For Banks?

The primary use-case is intra-bank cross-border transfers. However, blockchain is expected to positively affect other services. It can create new banking products and revenue opportunities. The biggest challenge on the way to this goal is the collaboration among the banks.

The collaboration is nessecery to create a global financial network. Such a network must be capable of supporting the new payment format. As one of the experts put it ‘the technology only works when everyone adopts it’. No bank is an island, no matter how big it is.

The second reason is security. It’s natural that banks, despite their up-tp-date security systems, stay very attackable. Their centralized databases are honeypots for hackers. Hackers evolve very quickly and update their methods all the time. Blockchain integration could help solving this problem. It would  greatly reduce the possibility of data breaches and fraud.

It could also optimize administrative and legal costs. Today, the KYC (Know Your Customer) procedures delays bank transactions, as it normally takes up to 1 month to process a request. The system is imperfect, and many efforts are doubled. Thus, if a client changes banks, he must start the KYC procedure anew.

It’s apparent that a single source of truth, available to all the authorized parties, could make things lots easier and save a lot of time and money. According to surveys, an average bank spends over $50 mln annually to comply with the KYC, AML, and CDD regulations.

Failing to comply incurs huge penalties. But imageine that all the KYC-related documents are stored in the blockchain. Theye are checked on-chain, verified and immutable. It will take a big financial and administrative burden off the banks.

Why Do Banks Adopt Blockchain: Conclusion

As we see, the inherent DLT benefits that appeal to most crypto users, also seem attractive to banks. At a closer look, their enthusiasm is not really surprising.

Of course, it’s too early to speak about re-configuration of the established system. Banks are at the early stage of shaping their blockchain strategy and testing related solutions. 

We will be watching this process with great interest.

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