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Blockchain in banking: buzzword or big deal?

By Connor Freitas

Experts believe blockchain in banking could save time, money and reduce the risk of fraud. But there’s a mountain to climb before it goes mainstream.

Although many financial institutions have been openly sceptical about cryptocurrencies, blockchain in banking is becoming increasingly prolific.

Some of the world’s biggest brands have been exploring blockchain technology in banking for several months now – often teaming up with specialist companies to put distributed ledgers to the test in a real-world environment.

Banks and blockchain ought to go hand in hand. Payments that used to take several business days to clear could be implemented far faster. The costs associated with cross-border transactions could reduce substantially. Paperwork could also be streamlined substantially to make businesses more efficient.

One of the biggest hurdles that stands in the way is infrastructure. For blockchain banking to thrive, institutions need to work together to build a global network – and some executives believe that this technology is destined to fail unless it is enthusiastically embraced by everyone.

Yet there seems to be widespread interest when it comes to blockchain in banking. A recent Accenture survey revealed that nine in ten executives at major banks are exploring whether this technology is right for them.

Putting their money where their mouth is

Work is already well under way to develop a global framework for the development of distributed ledger technology. In April, big banking names including Barclays, Deutsche Börse and BBVA became involved in a new group aiming to build a predictable and transparent set of standards. The International Association for Trusted Blockchain Applications is set to serve as a conduit between regulators and governments.

There are even some collaborations which throw cryptocurrency into the mix. More than a dozen firms – including internationally renowned institutions such as Nasdaq, Credit Suisse, Lloyds, Santander and UBS – are developing their very own token. Tens of millions of dollars have been invested in the so-called utility settlement coin (USC). Some officials have even drawn parallels between “USC” and Bitcoin.

The rationale behind USC is simple: eliminating the risks associated with cross-border payments by ensuring that the token delivers all the information required to complete a trade. Inefficiencies are surprisingly common in this industry and the costs associated with mistakes can be astronomical. Reports suggest USC could launch in 2020 and, if successful, it would be one of the most ambitious applications of blockchain in banking used so far.

Making life easier

Blockchain banking may seem like a very dry financial story, one that’s only of interest to those working on Wall Street or in the City of London. However, some of the trials that have taken place so far have the potential to completely transform the experience for everyday consumers too, especially when it comes to things like real estate transactions.

Barclays and the Royal Bank of Scotland in the UK recently managed to successfully test a blockchain project that is designed to speed up the process of buying a house. The stressful process tends to involve a lot of paperwork and interaction with a number of organisations – and the sheer number of documents, databases and systems involved means that mistakes are common, further delaying what is already a time-sensitive process. Research has suggested that this could ultimately result in savings of $160bn (£123bn, €144bn).

One company that has been at the heart of many trials is R3, which has developed an open-source enterprise platform known as Corda. It allows applications to be developed that reduce the costs associated with transactions and keeping records – with data kept secure on a “need-to-know basis”. Other trials have seen $18bn of simulation tokens transferred between a network of banks, while French banks have been exploring a blockchain-based loans platform which allows banks to immediately share details of credit agreements with lenders.

Is blockchain banking the future?

Well, it’s too early to say. None of these daring trials have been rolled out at scale yet – and educating hardened banking executives and consumers about the promise of blockchain technology may take some time. Likewise, it will take a while to assuage the fears of regulators. To illustrate the long journey that lies ahead, look at the adamant opposition that has been mounted to Facebook’s upcoming cryptocurrency Libra.

The future of blockchain technology in banking could dramatically reduce the cost of remittances, which are worth hundreds of billions of dollars a year. The infrastructure currently used to orchestrate these international payments is clunky to say the least, and as a result fees are high – often eating into the earnings of those on low incomes. If blockchain banking achieves adequate levels of scalability, it could become the industry standard, enabling money to flow more freely and cheaply.

Blockchain could also provide a much-needed solution to the perennial issue of identity fraud, which costs banks billions of dollars annually. The management consulting firm McKinsey estimates that banks could save up to $9bn a year by embracing this technology fully, be spared up to $3bn in regulatory fines and save as much as $1bn on the cost of onboarding new customers.

A key step will likely involve consumer identities being established on the blockchain – a process not unlike reports generated by credit referencing agencies. The data this generates could help banks to make more informed decisions when deciding whether to lend money, and give the unbanked access to financial services for the first time. Dubai, which is pursuing the creation of a smart city that would be underpinned by blockchain technology, is exploring such an initiative.

The biggest drawback when it comes to blockchain technology in banking is the eye-watering cost associated with building a fully fledged network in the short term. For this futuristic approach to achieve its potential, banking executives will need to be long-sighted and think of the benefits it could deliver several years down the line.

FURTHER READING: What is blockchain technology and how does the blockchain work?

FURTHER READING: Five key pointers to the long-term future of cryptocurrency and Bitcoin

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