Farwah Jafri | July 12 2023
Have you ever wondered how blockchain technology revolutionizes banking, financial services, and FinTech industries?
With its potential to enhance the digital customer experience, reduce costs, and mitigate data risks in a secure environment, blockchain is poised to transform how we conduct financial transactions.
In this article, we delve into the future of blockchain and explore how financial service providers are investing in this cutting-edge technology and are positioning themselves for long-term success.
By the end of the article, we will see if financial services and blockchain will work together.
In 2018, the BFSI market’s blockchain size reached a value of $277.1 million, and it is estimated to expand to $22.46 billion by 2026, with a compound annual growth rate (CAGR) of 73.8% from 2019 to 2026.
The history of blockchain in financial services is an intriguing journey that has revolutionized transactions and financial activities. Let’s briefly summarize key events and milestones in developing blockchain technology within the financial sector.
In 2008, an individual or group using Satoshi Nakamoto‘s pseudonym published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper introduced the concept of blockchain technology as the underlying framework for a decentralized digital currency called Bitcoin. The blockchain was a public ledger to record all Bitcoin transactions, ensuring transparency, security, and immutability.
Central banks worldwide started exploring the concept of Central Bank Digital Currencies (CBDCs) built on blockchain technology. The potential benefits, such as faster and more secure transactions, financial inclusion, and reduced costs, attracted significant attention from governments and financial institutions.
Decentralized Finance (DeFi) emerged as a prominent use case for blockchain in the financial sector. DeFi projects enabled traditional financial services, such as lending, borrowing, and trading, on decentralized platforms, eliminating intermediaries and offering increased accessibility and transparency.
Blockchain technology continues to gain momentum, with increased adoption and integration in various financial services from 2021 and beyond. Governments and regulatory bodies are working to establish clear frameworks to govern blockchain-based activities. Traditional financial institutions are exploring blockchain for cross-border payments, supply chain finance, and asset tokenization, among other use cases.
The history of blockchain in financial services showcases a rapid evolution, from its humble beginnings with Bitcoin to its expansion into enterprise solutions and decentralized finance. As technology matures and regulatory frameworks develop further, blockchain has the potential to reshape the financial landscape, offering enhanced efficiency, security, and inclusivity.
Eric Emerson Schmidt, a former American business executive and software engineer who is also an Ex-CEO of Google, said:
“Bitcoin is a remarkable cryptographic achievement…
The ability to create something which is not duplicable in the digital world has enormous value… Lots of people will build businesses on top of that.”
– Eric Schmidt
The banking industry can experience significant enhancements across various crucial aspects through the utilization of blockchain technology, as exemplified in the following points.
Utilizing blockchain technology enables banks to streamline transaction processing, resulting in faster processing times and the elimination of intermediaries who charge fees for their services. This efficient approach reduces the expenses associated with transaction processing and ultimately leads to decreased operational costs.
Blockchain revolutionizes transparency within organizations by providing real-time records of all transactions conducted. This technology establishes an immutable and traceable ledger through a series of interconnected blocks containing information about previous blocks.
Furthermore, implementing blockchain ensures that only authorized users can access the distributed ledger. The ledger administrator assigns users specific permissions, allowing them to perform designated functions and authenticate their identity for any changes made.
The user experience holds the utmost importance in the realm of banking applications. The interface must be intuitive and user-friendly, enabling customers to conduct transactions swiftly and effortlessly. To achieve this, integrating blockchain technology, particularly in decentralized applications (DApps) that facilitate peer-to-peer interactions, can significantly enhance the overall user experience.
Implementing a distributed ledger powered by cryptography plays a vital role in ensuring the authenticity and integrity of data. It eliminates the possibility of a single point of failure in manipulating or falsifying records. Traditional banking systems often rely on intermediaries who may possess authority over sensitive financial information without adequate expertise, leading to potential risks of material misstatements. In contrast, blockchain technology eliminates such risks by providing a secure and tamper-proof environment, enhancing fraud prevention measures.
Beyond its fraud prevention capabilities, blockchain technology offers significant security benefits for banks, particularly in tracking asset ownership during transfers between different financial institutions. This seamless tracking capability allows banks to exert better control over access to assets during the transfer process, mitigating the risk of fraudulent activities.
By verifying the legitimacy of any changes made before granting access to the new account holder, blockchain ensures higher security and prevents unauthorized alterations. This fortified security framework fosters trust and confidence among customers while safeguarding their assets throughout the transfer process.
There needs to be more comprehension and trust in blockchain technology and uncertainties regarding regulations, cost savings, and security, which are significant barriers to its implementation within banks. Overcoming these hurdles will require considerable time and effort.
Another challenge stems from the potential impact of blockchain on existing systems and processes. A lack of expertise and compatibility issues may hinder the seamless integration of blockchain technology.
Scalability is also a concern that needs to be addressed. Although blockchain has the potential to handle numerous transactions, banks must ensure that it can effectively scale up to meet their specific requirements. If a blockchain platform cannot handle the volume of transactions, its utility diminishes.
Furthermore, standardization poses a crucial challenge. As blockchain technology is still in its early stages, a universal solution has yet to apply to all banks. Each financial institution will need to develop its system, which can be a time-consuming and expensive endeavor.
The answer is YES!
Finance and blockchain are already working together and are poised to have an even stronger collaboration in the future. Blockchain technology has the potential to revolutionize the finance industry by enhancing security, improving transparency, reducing costs, and increasing efficiency. Let’s witness by ourselves with statistics:
Blockchain technology provides a decentralized and immutable ledger, making it highly secure against fraudulent activities and tampering.
According to a survey by PwC, 84% of financial services executives believe blockchain technology can enhance security measures in their organizations.
Blockchain enables transparent and auditable transactions, creating a trustworthy environment for financial activities.
The World Economic Forum estimates that by 2025, over 10% of global GDP will be stored on blockchain technology, fostering transparency and accountability.
Blockchain has the potential to significantly reduce costs in the financial sector by eliminating intermediaries and streamlining processes.
A report by Santander estimates that blockchain technology could save banks up to $20 billion per year by 2022 in infrastructure costs.
The decentralized nature of blockchain eliminates the need for intermediaries, resulting in faster and more efficient transactions. According to a study by Accenture,
Blockchain technology could reduce banks’ infrastructure costs for cross-border payments, securities trading, and regulatory compliance by 30%.
Numerous financial use cases have emerged for blockchain technology, such as cross-border payments, smart contracts, supply chain finance, and identity verification. For example, in 2021,
The total value locked in decentralized finance (DeFi) applications exceeded $80 billion, showcasing the growing adoption of blockchain in finance.
Major financial institutions have recognized the potential of blockchain and are actively exploring its implementation. For instance, JPMorgan Chase launched its blockchain-based platform, Quorum, to streamline interbank transactions, while Bank of America holds over 100 blockchain-related patents.
These statistics and trends demonstrate the strong and growing relationship between finance and blockchain, indicating a promising future for their collaboration.
As the world continues to evolve, integrating blockchain technology and finance seems inevitable and promising. The immutable and transparent nature of blockchain has the potential to revolutionize traditional financial systems, enhancing security, efficiency, and trust. With ongoing developments and increasing adoption, blockchain and finance are destined to collaborate, forging a path toward a more inclusive and decentralized financial future.
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.