The most well-known application of blockchain technology among its numerous possible uses is undoubtedly banking. The worldwide economic collapse caused by the 2008 financial crisis served as the impetus for the invention of the technology, which took the shape of Bitcoin. Governments were forced to enact substantial stimulus packages to support economies and save failing banks as the old banking system collapsed. Blockchain attempts to fix many of the flaws that the global financial crisis exposed.
Blockchain technology is causing disruption in a number of industries, including banking. Because it offers a safe and decentralised way to transfer assets, blockchain technology, which is commonly linked to cryptocurrencies, is becoming more and more popular. Since this technology has the potential to totally revolutionise current financial services, the banking sector is paying attention to it.
In this article, we’ll talk about mechanism blockchain technology use, impact of blockchain in banking sector and the downsides of blockchain in the banking sector.
What Mechanisms Does Blockchain Technology Use?
A secure, public, and transparent digital ledger for recording transactions is produced by blockchain technology using a decentralised network of computers. A timestamp, a cryptographic hash of the block preceding it, and transaction data are included in each block of the chain. Without the assistance of intermediaries like banks or other financial organisations, participants can conduct transactions directly utilising this technology.
The underlying principle of blockchain technology is decentralisation, or the lack of a central authority overseeing the network. Instead, a group of users who are driven to preserve the network’s accuracy and security do so. As a result, the system is more open and safe than typical centralised systems.
The Impact of blockchain inthe banking sector
1.More efficient and secure transactions: One of the key benefits of blockchain technology is that it can facilitate faster and more secure transactions. The usage of intermediaries in traditional banking systems, such as clearinghouses, can cause transactions to take longer and increase the risk of error or fraud Transactions using blockchain technology can be completed in a couple of seconds and are almost immune to alteration or manipulation due to the network’s decentralised structure.
2. Transactions at a Lower Cost: Additionally, blockchain technology has the capacity to significantly reduce transaction costs for banks and customers. By doing away with middlemen like clearinghouses, the transaction process can be made more cost-effective and efficient.
3.Greater Transparency: Furthermore, the banking sector is more transparent thanks to blockchain technology’s decentralised structure. Given that they are recorded in a public ledger that is accessible to all participants, financial transactions are simpler to follow and keep track of. The danger of fraud may be reduced and public confidence in the banking system may increase as a result of increased openness.
4.Improved Identity Verification: Due to its role in combating fraud and ensuring that only individuals with authorization can access financial accounts, identity verification is a significant part of the banking business. Blockchain technology can improve identity verification by developing a decentralised identity system that is more dependable and safe than current practises. This can reduce the likelihood of identity theft and boost the overall security of the banking system.
5.Improved Customer Experience: Blockchain technology has the potential to enhance the customer experience in the banking sector. By enabling speedier, safer, and more transparent transactions, the financial system may gain the trust of its users. In addition, new services like peer-to-peer lending or microfinance that can help improve underprivileged groups’ access to financial services are made possible by blockchain technology.
Blockchain Technology Implementation Challenges in the Banking Sector
Although blockchain technology has the potential to completely transform the financial sector, a number of problems need to be fixed before it can be extensively used. These challenges include:
1.Regulational Concerns: Regulators are still working hard to keep up with the rapid rate of technology innovation in the financial sector. Due to the decentralised nature of blockchain technology, it may be difficult for regulators to monitor and enforce conformity to existing regulations. Clear legal frameworks are required to ensure that blockchain technology is utilised responsibly and transparently.
2.Interoperability: Blockchain technology is still a relatively new field of research, and there are several different blockchain platforms in use. Interoperability between these platforms may be challenging due to the potential for various blockchain platforms to use various protocols or standards. This could make it difficult and ineffective for multiple systems to communicate with one another.
3.Scalability: Blockchain technology has the potential to be slower and less efficient than traditional systems for handling large volumes of transactions. Because of this, the amount of transactions required by the banking sector may be too much for blockchain technology to handle.
4.Security Problems: Despite the built-in security of blockchain technology, there is still a chance of security breaches, particularly at the endpoints where transactions begin or conclude. Banks will need to implement additional security measures in order to lower these risks and ensure that client funds and data are kept secure.
Conclusively, blockchain technology has the potential to completely transform the banking sector by enabling quicker, more secure, and more transparent transactions, reducing costs, boosting identity verification, automating back-office procedures, and enhancing the client experience overall. Wider acceptance is hampered by regulatory concerns, interoperability issues, scalability issues, and security issues, although these issues can be resolved with careful planning and implementation. As blockchain technology advances, more and more use cases in the financial sector and elsewhere are likely to appear. Therefore, it is essential for banks to stay current with these rapidly evolving technologies and to be equipped to adapt to the changing environment.