Banking on Blockchain

Revolutionising Finance in the Digital Age

Traditional banking, with its centuries-old history, has been the backbone of global finance. Although traditional banking systems have served their purpose in the past, blockchain-based finance is now revolutionising how we conduct financial transactions. With its decentralised nature and enhanced security, blockchain has enabled completely digitalised operations that offer greater efficiency and accessibility to meet the needs of today’s users. From basic payment processing to advanced asset management applications – read on to learn why banks are increasingly turning towards blockchain technology for efficient and secure financial operations in the digital age.

Pitfalls of Traditional Banking

With its rich history, traditional banking has become entrenched and resistant to change, resulting in several critical issues:

• Slow innovation has plagued the industry as traditional banks struggle to adapt to technological advancements.

• Excessive paperwork remains a persistent challenge.

• Security vulnerabilities loom large, with cybersecurity threats posing substantial risks.

• The complex settlement process, involving a web of intermediaries, amplifies complexity and cost, often resulting in frustrating delays and errors in transaction settlements.

Banking on Blockchain

A Solution for the Future

In response to the shortcomings of traditional banking, blockchain technology has emerged as a promising solution. Blockchain technology represents a decentralised and distributed ledger system that facilitates secure and transparent transactions between parties without requiring a trusted intermediary. The foundation of blockchain lies in a chain of interconnected blocks, each housing a record of transactions. Once a block is added to this chain, it becomes immutable, rendering it immune to tampering or alteration. Blockchain employs cryptography to ensure that only authorised parties can access and validate transactions.

Some significant advantages of banking on blockchain are:

It streamlines and automates various processes, such as through the use of smart contracts, leading to significantly faster and more cost-effective transactions. Furthermore, blockchain enhances security, making it considerably more challenging for unauthorised access or hacking attempts. Its reliability and fraud-reduction capabilities add another layer of trust in financial transactions.

By eliminating intermediaries' fees, blockchain lowers overall transaction costs, benefiting both banks and customers. This technology also bolsters efficiency and broadens accessibility, extending financial services to diverse populations and locations. Additionally, it promotes transparency, allowing for customised banking services that cater to individual needs. Finally, transactions conducted on a blockchain platform are notably faster, making blockchain a potent force in the future of banking.

Privacy Vs transparency in banking on blockchain

Blockchain technology introduces a delicate balance between transparency and privacy. While transparency is crucial for public trust and accountability, complete transparency may not be desirable in scenarios where certain data should remain private. Public blockchains offer transparency through pseudonymous transactions. This preserves privacy, but it's not synonymous with complete anonymity.

At the same time, private and permissioned blockchains prioritise privacy by restricting access to a limited set of participants, often used in industries where confidentiality is crucial. Banks could also integrate privacy-enhancing technologies like zero-knowledge proofs (ZKPs) and zk-SNARKs, allowing verification without revealing data. Also, ring signatures and confidential transactions obfuscate transaction details and enhance privacy. Off-chain solutions and privacy layers provide additional privacy by conducting transactions or storing data outside the main blockchain.

Possible use cases

This groundbreaking technology can transform the operational landscape of banks, elevating security measures, boosting efficiency, and potentially lowering operational costs. Here are some of its promising use cases:

1. Payment Transfer: Traditional banking systems often impose significant fees and delays on cross-border payments. Cryptocurrencies built on public blockchains like Ripple enable instant, fee-less transactions, revolutionising how money is moved globally.

2. Settlement: Blockchain is a transparent and public ledger, eliminating the need for numerous intermediaries in the settlement process. Transactions can be settled directly on the blockchain, reducing costs and improving efficiency.

3. Securities: The traditional process of buying and selling securities involves multiple intermediaries and outdated paper-based systems, making it prone to inaccuracies and fraud. Blockchain technology allows tokenized securities to be created, streamlining the exchange process and reducing costs by eliminating middlemen.

4. Loans and Credits: Blockchain enables peer-to-peer lending, providing consumers an efficient and secure way to access personal loans. A decentralised registry of payment history simplifies the loan application process.

Blockchain Revolution in Banking:

Success Stories

Banks and financial institutions are exploring these numerous use cases of blockchain in banking. Look at two leading financial institutions, J.P. Morgan and HSBC, and their successful blockchain implementations.

In 2020, J.P. Morgan, a subsidiary of one of the world's largest banks, JPMorgan Chase, introduced its blockchain-based platform, Onyx. The primary goal of Onyx was to revolutionise the global flow of assets and financial data. To achieve this ambitious objective, Onyx leverages blockchain technology to enhance and automate various aspects of payment and settlement processes.

Onyx comprises several components, each tailored to deliver specific services. For instance, Liink is a secure peer-to-peer network designed to exchange information. Coin Systems, in collaboration with JPM Coin, addresses the shortcomings observed in existing payment systems. Meanwhile, Digital Assets provide a platform for converting financial assets into blockchain tokens. This transformation not only enhances transparency but also improves the mobility and utilisation of these assets.

HSBC, another major player in the financial sector, has also embraced blockchain technology. Their focus has been on enhancing efficiency, transparency, and cost reduction. HSBC implemented Voltron, a platform built on the Corda blockchain, which facilitates the real-time sharing of trade information among banks. This innovation significantly reduces the reliance on physical documents and manual processes, resulting in a more streamlined trade experience.

Furthermore, HSBC introduced FX Everywhere, a blockchain platform enabling real-time Foreign Exchange (FX) trade settlement. As of 2021, HSBC is actively researching areas such as supply chain finance and digital identity verification, indicating their dedication to uncovering fresh use cases for blockchain technology, which may lead to broader adoption in the future.

Central Bank Digital Currencies (CBDC)

A Global Trend

Central Bank Digital Currencies (CBDCs) have taken centre stage in blockchain-related banking trends. Replacing physical banknotes with digital tokens representing national currencies has sparked global interest. Numerous countries are actively researching the advantages and potential drawbacks of CBDCs issued by central banks. Notable projects include the Digital Rouble from the Bank of Russia, e-CNY by the People's Bank of China, and the wholesale CBDC by Banque de France, all currently in their pilot phases.

The Swedish Central Bank and the E-Krona

Sweden's Central Bank is at the forefront of CBDC experimentation with its project, the E-Krona. This digital currency endeavour relies on Corda distributed ledger technology developed by R3. As the project progresses, it has entered an experimentation phase that involves collaboration between the Riksbank (Sweden's central bank) and Handelsbanken, a prominent financial institution

Wrapping Up

Thus, in essence, the banking industry is ripe for transformation, and blockchain technology offers a compelling solution to its longstanding problems. Scallop stands at the forefront of this revolution, providing regulated, secure, and fast banking solutions. In the words of our CEO Raj Bagadi, speaking at the Blockchain for Europe Summit 2023, “We have created a blockchain with a regulatory model inside the consensus. After passing regulatory checks, users will be assigned a wallet address on the Scallop Chain. This wallet address doubles up as an IBAN account on Scallop Chain. This is precisely what a bank on-chain is.”