Why Blockchain for Banking?
The current day banking systems are highly reliable on paper and outworn process. The Need of the hour is to have an upgraded system embedded with reliable and trust-able technology that could withstand frauds, scalability and security issues. The blockchain technology and its decentralized nature can give the banking systems the much-needed edge they’re on the lookout for.
Banks cannot be termed as independently operating self-sufficient entities as any transactions made through them still involve intermediaries. Moreover, the rate through which money is transferred on an international scale can still take up to 5 days along with entailing risks. With a blockchain system in place, banks would be able to make transfers real quick without even having to take the burden of risks as the system would be self-sufficient to resolve it all on its own.
The world is going digital and with this progress, even small transactions and payments are happening digitally. The economic activity rate is increasing and there’s no doubt in assuming that the rate will keep picking up in the coming days. The blockchain technology will make small transfers feasible and fast along with the aid of lower fee and scalability of transactions.
Financial services other than banks are constantly evolving their systems with the aid of the latest technology in order to secure the markets by providing economically available services at cheaper rates. Banking and other financial institutions should look forward to the adoption of new blockchain technology too in order to secure their place in the ecosystem.
Challenges in Adoption
Blockchain sure has its advantages in terms of adoption given its proposed features but there are some hurdles along the road as well which need to be addressed for banks and financial institutions to grow ahead with blockchain.
The blockchain technology is not bounded by any international rules and regulations that place a standard to it. With the increasing need for interoperability among large industries like banks, the technology needs to be compatible with different systems and should hold the potential to get adopted by the masses. The integration of existing systems with a blockchain based model is a big challenge today as the current systems and processes cannot be entirely eliminated. If the actual adoption of blockchain allows multiple systems to work together smoothly, operational feasibility can be achieved.
Banks and financial institutions are the entities that are trusted by people for storing their funds. In order for blockchain to take their place, it is important to ensure that the data stored on the blockchain technology is kept securely and would not hamper the identity of any individual. As the transactions made on a public blockchain are publicly available, the need of exploring the potential of private blockchains for data-critical sectors is needed along with the resolution of issues like interoperability.
Private keys are the essential elements of a blockchain as they play a significant role in securing the data of an individual on the blockchain. However, a private key generated once has to be kept very securely as once it is misplaced or lost, there’s no way to get it back. Moreover, the encryption used to store data can be compromised by finding loopholes in the network which in turn, makes the blockchain susceptible to hacker attacks.
The blockchain network is secure and powerful as it is embedded with cryptography techniques. Cryptographic networks are complex to hack and thus, any kind of security breach in such networks would require a high amount of computational power in order to secure any hack. When a blockchain network is applied to any banking institution, it has to be secured with multiple security protocols. The network should be capable enough to restrict participating authorities to take control of the network only according to the access permission given to them. Depending upon the requirement, the blockchain involved in such systems or organizations could be permissioned or permissionless. People in an organization need to be handled with different levels of access permissions in order to save the overall network from malicious insiders and cyber hackers.
Growth of existing databases is undeniable. The number of entries will keep on increasing as the number of people will continue to grow too. This poses a big challenge to the application of blockchain technology network. The network created through a blockchain should be able to handle the growing traffic while maintaining the speed of accessibility for the network participants. If the blockchain technology is applied to the current banking systems and institutions, it has to ensure the capacity of handling large volumes of data too.
Most of the current successfully running blockchain networks run on the concept of proof-of-work mechanism in which the network participants are rewarded based on how quickly they solve the equation to add a new block to the network. While this keeps the network working smoothly, it also increases the consumption of energy in enormous amounts in the form of computational work. This kind of computing power leaves massive carbon footprints which affect the environment. Before adopting Blockchain in an industry like banking, this issue needs to be resolved through alternate rewarding mechanisms.
If blockchain is applied in the banking sector, the need for international and national regulations around it will become mandatory. Currently, cryptocurrencies, the most popular application of blockchain, do not have any regulations around them which makes them susceptible to both profits and losses. However, if and when blockchain finds its place in the banking or finance sector, the regulations need to be in place so as to avoid chaos among people in case of any losses.
Despite the strict jurisdictions around the banking sector, the financial institutions have started to realize the potential of blockchain technology seeing the popularity of cryptocurrencies in the current markets. The big giants in the banking sector have started conducting the tests for finding out the possible use cases of this decentralized technology for their business processes.
Moreover, some of the organizations are also investing heavily in such researches and tests conducted by startups to develop blockchain based solutions. With Blockchain entering the current scenario, a lot of problems could be solved while making the system more transparent, easy to access and reliable.