It is no secret that big banks have expressed the desire to attack the value and premise of bitcoin and blockchain since being first introduced in 2009. Many have referred to the two as a fraudulent threat to traditional banking systems. But, as cryptocurrency has become more mainstream, it is becoming increasingly difficult for these big banks to ignore. Major names such as Goldman Sachs and Barclays are beginning to invest in this sector to accommodate the inevitable growing demand from smaller banks for cryptocurrencies and blockchain technology. According to a Thomson Reuters survey, one in five financial institutions are seriously considering trading cryptocurrency in 2018, and are planning to do so over the next 3-12 months. It seems as if this once niche segment, is beginning to enter the standard financial services industry. There are three considerable benefits for big banks to embrace this fact and incorporate the technology into their systems:
Reduce settlement times
Traditionally, the way that banks conduct transactions with each other consists of one bank agreeing to purchase a certain amount of an asset (such as stock) for a certain price from the other. The period of time for this transaction to occur is referred to as a settlement. Settlements are typically very slow (both settlements done by exchanges via clearing houses or international payments made by SWIFT) and open the door for either of the parties involved to default or back out of the agreement. This costs the financial industry between $65-$80 billion a year. When trading cryptocurrency, settlement times have the potential to be significantly reduced or eliminated due to the fact that they operate on the blockchain, providing digitally secure and speedy transactions. According to Thomson Reuters, Swiss bank UBS is leading BNY Mellon, Deutsche Bank, Santander, and brokerage ICAP IAP.L. towards the development of a system that will enable financial markets to make payments and settle transactions quickly by incorporating blockchain technology.
Secure financial supply chain
The very basis of blockchain technology is rooted in transparency and security. When using publically shared ledgers, transactions are unable to be meddled with. They are automatically processed and settled, without the need for third party authentication. Through the use of advanced computer algorithms, these secure transactions are scalable and easily integrated into the entire supply chain process, with the global currency exchange as a whole protected by increased transaction protection. Blockchain technology eliminates the need for extra office time, paperwork and costs, reconciling the supply chain to be significantly more efficient. While institutions are still cautious regarding regulatory requirements, they are soon going to be integral in safeguarding and quickening the supply chain process.
According to American Express, since blockchain technology is a “complete and immutable record of asset transfers”, the entire sequence of transactions is traceable, making them less likely to be hit by fraudulent activity. Even if fraudulent activity occurs, any money lost would have a better chance of being recovered, and whoever is responsible for said activity is more likely to be caught. Take the 2016 Bangladesh central bank heist for instance. A central bank was hacked and $81 million was stolen through authenticated messages on SWIFT’s messaging service sent from Bangladesh to the New York Federal Reserve Bank. These messages authorized payments to a number of recipients, with little of the money having been recovered since. This is only one example of the prevalent shortcomings within current financial systems that make it extremely difficult, and nearly impossible, to accurately trace the movement of money. Blockchain technology promises trustworthy transactions and the ability to trace the entire sequence from point A to point B (this does not apply to the same extent for blockchain technology with enhanced encryption such as Monero, Zcash and some privacy protocols such as zk-SNARKs).
Even though banks are only starting to dip their toes into the world of blockchain and cryptocurrency, it will soon become detrimental to ignore. Instead of big banks viewing these platforms as a threat that will take down the traditional banking system, it can be viewed as an upgrade and a sort of supplement to not only benefit the general public, but the institutions as well.
About Omri Ross:
After earning his PhD in Mathematical Finance from the University of Cambridge, Omri is now Assistant Professor in Blockchain Technology at University of Copenhagen. Omri’s portfolio includes consultancy for top blockchain companies such as Bancor and Colu. He has been advisor to governments, banks, and large corporations. Omri now represents Firmo, the company bringing financial contracts to the blockchain with secure, domain-specific language, which translates smart derivative contracts to any of the major blockchain platforms.