How are financial institutions getting the most out of blockchain?
This article will explore the most valuable business use cases of blockchain technology in the financial services industry.
Ever since Bitcoin established itself as a cryptocurrency offering an alternative to traditional finance, blockchain has demonstrated its capabilities within financial services. In this article, we take a closer look at how blockchain technology generates value for financial services organizations.
The value of DeFi
A key financial services use case for blockchain comes in the form of decentralized finance (DeFi) – global, autonomous capital markets that are powered by smart contracts that reside on the technology. Decentralized exchanges allow users to benefit from the interoperability, immutability, and faster verification that traditional exchanges sometimes lack.
Kapil Rathico-founder and CEO of Crosstower, explained: “Blockchain and its associated technologies (digital assets, smart contracts, etc.) can bring significant improvements to the financial services market. By publishing all transactions on a blockchain (public ledger), there can be certainty and transparency about the transactions made within a financial market.
“DeFi enables the exchange of digital assets in a decentralized, non-custodial manner, thereby reducing counterparty and custodian risk. Digital asset investors have traded hundreds of billions of dollars in trading volume on these blockchain-powered decentralized exchanges, highlighting their growing popularity and promise.
“Additionally, blockchain has also enabled the emergence of money market protocols, allowing users to obtain loans against their digital assets. Using blockchain, lenders can gain transparency into the health of those loans and the collateral they are secured on. There have already been tens of billions of dollars in digital asset lending from DeFi protocols.”
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DLT and tokenization for payments
Distributed ledger technology (DLT), which allows simultaneous and immutable access to multiple locations in a network, has proven useful in reducing the complexity of payments and settlements. This has been particularly important as cross-border activity increases globally.
“In the age of digital transformation, the financial services industry is actively seeking to adopt new technologies to improve the efficiency of payment and settlement systems. This is especially true for large financial institutions that handle large volumes of intraday liquidity,” said Ram of RhomaiosCEO of Fality.
“As things stand, in order for payments to be made, especially on a cross-border basis, banks often have to communicate with many other intermediaries along the chain to complete the transfer and move the balance as needed. . This process is slow and often risky, made more complicated by the lack of transparency and clear lines of communication. Demand for faster and more secure cross-border transactions is on the rise, and emerging technologies are understandably well-placed to address these concerns.
“Tokenization and the adoption of blockchain and distributed ledger technology (DLT) are revolutionizing the world of payments, removing the frictions associated with payments and settlement. By researching and testing the advantages offered by decentralized infrastructures of financial markets, banks and financial institutions are able to make payment transfers instantly and securely, at a fraction of the cost.
Use of blockchain networks
Decentralized financial operations have greatly benefited from networks built on the public blockchain. Hosting transaction data on these networks allows for transparency and visibility of all users involved.
However, Conor Svenssonfounder and CEO of Web3 Laboratoriesbelieves that regulators need to put this infrastructure higher on their agendas, for financial services organizations to generate real value.
Svensson explained, “We have seen financial institutions offering institutional cryptocurrency products to meet the demands of institutional investors. While at first glance this may not seem like a key value driver, other than providing additional revenue streams to companies making this access possible, I believe this is a key step in facilitating the mass adoption of some of the key innovations happening in public procurement. blockchain networks like Ethereum.
“Thanks to the innovations of the past two years in DeFi, investors are able to earn returns that far exceed what is currently available in traditional bank savings accounts. DeFi-savvy users can see returns from US dollar-pegged crypto assets reach returns of over 7% per year, far exceeding what people can get in bank accounts. It is this type of innovation and infrastructure that is gradually becoming institutionalized, and in doing so, we will begin to see new financial products and services offered to consumers that offer them far more value than what is currently available.
“Fintech’s integration of crypto has been a key step in that direction, but what’s also needed is stronger regulation to protect consumers (especially in the US), which I think which we’ll start to see in 2022. With this in place, we’ll start to see financial organizations create more value for themselves and their customers, providing access to DeFi in a more consumer-friendly way.
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SF and Web 3.0
The concept of Web 3.0 – the decentralized Web – is gaining more and more importance, in which blockchain technology is expected to play a major role. An emerging idea for a more autonomous and intelligent Internet powered by DLT and big data, among other capabilities, Web 3.0 is seen by some experts as the transition financial services need to successfully innovate in the years to come.
“Blockchain may be the foundation of Web 3.0 and the Metaverse, but I believe it’s also the key that will allow today’s financial institutions to continue participating in tomorrow’s reality,” said nelson martenCEO of M10 networks.
“Yet with companies and investors jostling to enter the ground floor and help shape this new iteration of the web, it is worth exploring some of the unintended consequences of this mass movement towards decentralization and what role, if any, traditional financial institutions should play.
“As a customer, Web 3.0 has the potential to add a lot of friction to my life. Obviously, it would be a lot easier if I could earn and spend money without making multiple conversions or needing to manage multiple wallets. I want less complexity, not more. We’re thirteen years into bitcoin and it’s still far too complicated to use in a truly decentralized way.
“If financial institutions are to remain relevant in the age of Web 3.0, they must find ways to address these inefficiencies. Central bank digital currencies (CBDCs) can play an important role, as can digital currencies issued by regulated financial institutions such as banks. However, for this to happen, financial regulators must accept the fact that Web 3.0 is here and that if players in our current two-tier monetary system are to continue to participate, it will require extensive infrastructure upgrades. current payment. We must take steps to create an environment where transactions are global and where payments are meant to be instant, secure and virtually free.