The blockchain promises to connect previously disparate data sources and bring transparency to a sector sorely in need of it. Buy and sell bitcoin using the Bitcoin Profit app for competitive market rates. The blockchain will transform finance by replacing outdated business practices with better technology that always maintains data integrity.
In other words, it will automate back-office functions and allow banks to move on to more innovative business models. Traditional banks came into being to meet the needs of the financial services sector and currently serve as a well-oiled machine that satisfies market demands.
It is in sharp contrast to the potential of Blockchain technology which experts believe could upend the established banking system and transform it from a single entity into a networked set of competing entities, each with its role.
The way it works is that multiple parties share information on all transactions that take place on their respective ledgers. In the below mentioned, we explore the potential of Blockchain technology, compare it against traditional banks, and explain some potential issues that could arise.
Clearance and Settlement Systems: Blockchain vs. traditional banks
There are two functions where Blockchain technology might be instrumental: clearing and settlement systems. These are the financial services sector processes to ensure that transactions are correctly monitored and settled. Blockchain could significantly impact these processes if it cleverly takes over some of their functions while leaving others to traditional banks. Here’s a look at how each of these sectors works:
Clearing and Settlement Systems in Traditional Banking
A clearing system aims to ensure that payments are safe, reliable, and convenient. Various types of goods and services, such as securities, loans, commodities, or insurance contracts, require intermediaries like banks or clearinghouses, which charge a small fee to ensure everything is in order.
Different parties will have information on their respective ledgers, updated by the banks or clearinghouses. Further, the parties maintain different mutual clearing balances. The clearing and settlement systems ensure that all transactions are correctly monitored and settled, ensuring financial security for everyone involved.
Security and settlement systems are critical components of any economy and are based on confidentiality, security, reliability, availability, and speed principles. Confidentiality is essential because it helps ensure that no one can access any information they are not authorized to view. In addition, it protects financial markets by providing secure trading platforms that enable efficient exchanges between buyers and sellers.
Security is essential because it ensures that all participants in a market have equal access to information and that their transactions are recorded accurately and promptly. In addition, the system must be reliable for banks to participate confidently in securities trading, transfers, investments, and pension schemes.
Blockchain technology can help in this area by reducing the risk of fraud. Some other requirements for a market to function smoothly are speed and accessibility. These are similar to confidentiality requirements but refer mainly to the large volume of data that people at high speeds must process.
Blockchain vs. Traditional banks: Which is better?
Several things need to happen from the perspectives of both blockchain and traditional banks. First, the banks must devise efficient transaction processes, and people must verify transactions quickly by any means possible.
Data integrity is essential in both cases, but it’s crucial for blockchain technology, and that’s why many banks will likely continue working with blockchain technology shortly. Similarly, clearing and settlement systems must remain active and secure without stopping trade or damaging the financial system.
There are many concerns over whether blockchain can meet these requirements with honor. In addition, there are concerns over how some of the existing Blockchain applications could be entirely redesigned by companies to meet financial industry standards.
Still, it’s clear that Blockchain technology has great potential to disrupt traditional finance sooner or later and that everything will be much more efficient once it does. Unfortunately, the current state of affairs between banks and Blockchain technology has made it difficult for both sectors to collaborate meaningfully. Banks have been skeptical about the technology due to security concerns and questions regarding how they will perform in markets like the US, China, or Europe, where regulation might become more stringent later. It is another critical factor in why traditional banks will be reluctant to collaborate with blockchain technology.
Places where blockchain can disrupt traditional banks?
Blockchain technology could help banks in so many ways; here are some of these areas:
Trade processing – a blockchain ledger could easily store and process the data needed to facilitate trade in the market. In addition, it’ll simplify all the complex processes during this time, benefiting both banks and customers.
Asset servicing – one of the other essential things to do for a bank is asset servicing. It refers to managing all information about an asset that the banks hold. These assets can include financial products, physical products, or intangible assets such as intellectual property rights, and blockchain has a massive use in this area. These are two critical areas where blockchain can disrupt traditional banks.
