Blockchain and cryptocurrency have had a significant impact on the banking industry, introducing new opportunities and challenges. Blockchain and cryptocurrency are two closely related concepts, but they serve distinct purposes.
Let’s explore their roles separately;
Blockchain in banking:
Blockchain technology is a distributed and decentralized ledger system that allows secure and transparent recording of transactions across a network of computers. In the banking sector, blockchain has several potential applications;
a. Faster and more efficient cross-border payments:
Traditional international payments often involve multiple intermediaries and can take several days to settle. Blockchain enables near-instant cross-border transfers, reducing settlement times and lowering costs.
b. Smart contracts:
Blockchain-based smart contracts are self-executing agreements with the terms directly written into code. They can automate processes like loan disbursements, trade finance, and compliance, improving efficiency and reducing the need for intermediaries.
c. Identity verification:
Blockchain can be used to create a secure and tamper-proof digital identity for customers, simplifying the KYC (Know Your Customer) process for banks.
d. Supply chain finance:
Blockchain can improve transparency and traceability in supply chains, helping banks monitor transactions and mitigate risks in financing trade activities.
e. Fraud prevention:
The immutability and transparency of blockchain can be leveraged by banks to detect and prevent fraud by tracking and validating transactions more effectively.
However, despite these advantages, the widespread adoption of blockchain in the banking industry has been relatively slow due to regulatory concerns, scalability issues, and the need for industry-wide collaboration.
Cryptocurrency in banking:
Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate independently of a central authority. While some banks have been hesitant to embrace cryptocurrencies due to their inherent volatility and regulatory uncertainties, others have started to explore their potential benefits:
a. Digital asset services:
Some banks have begun offering custodial and trading services for cryptocurrencies to meet the growing demand from customers interested in investing in digital assets.
b. Remittances and cross-border transactions:
Cryptocurrencies can facilitate low-cost and rapid cross-border transfers, allowing banks to provide improved remittance services to their customers.
c. Decentralized finance (DeFi):
Banks are exploring how they can incorporate DeFi protocols into their offerings, enabling customers to access decentralized lending, borrowing, and other financial services.
d. Central bank digital currencies (CBDCs):
Some countries are considering the issuance of CBDCs, which are digital versions of their national currencies. Banks would play a crucial role in the distribution and management of CBDCs.
Key characteristics of cryptocurrencies include:
a. Decentralization:
Most cryptocurrencies are decentralized, meaning they are not controlled by any single entity. Instead, their issuance and validation are managed collectively by the network participants.
b. Anonymity:
Cryptocurrency transactions are often pseudonymous, meaning they are not directly linked to real-world identities. However, transaction details are publicly recorded on the blockchain.
c. Digital nature:
Cryptocurrencies exist purely in digital form and are not physical like coins or banknotes.
d. Limited supply:
Many cryptocurrencies, like Bitcoin, have a capped supply, meaning there is a maximum number of coins that can ever be created. This scarcity can influence their value.
e. Borderless transactions:
Cryptocurrencies enable easy and relatively quick cross-border transactions, often with lower fees compared to traditional financial systems.
Overall, while blockchain and cryptocurrencies offer exciting possibilities for the banking sector, the industry is still in the early stages of adopting and integrating these technologies. Banks must carefully navigate regulatory concerns, security challenges, and the evolving market dynamics to fully harness the potential benefits of blockchain and cryptocurrency in their operations.
The writer is having vast experience in Banking and Finance sector for over one and half decade, where during his period of work he has experienced different economic and development initiatives taken for the wellbeing of the public masses through the banking channel.
He has worked for the Microfinance banks which are offering community based services among the under developed segment of the society.
The major work done in Financial Inclusion where several hundreds of people were brought to Banking channel to improve their businesses.
The under served segment of society like woman were given the chances to change their lives through credit facilities to grow their home based businesses which is also an imitative of Women Empowerment.
The Writer has also worked against different social issues and highlighting them for positive change in the society through public awareness and their active involvement to reach to the solution.
This journey of empowering people is on going and is never lasting till the time last person remains underserved.
