Why More Banks Are Adopting Blockchain: Shaping the Future of Banking

Blockchain is one of the most innovative and disruptive technologies in the digital economy, with applications ranging from art, music, and gaming to finance, identity, and governance. It's a distributed ledger technology that enables secure, transparent, and immutable transactions and records without intermediaries or central authorities.

While blockchain has been mostly associated with the cryptocurrency and decentralized finance (DeFi) sectors, they have also attracted the interest and adoption of more traditional and mainstream institutions, such as banks. According to a Deloitte survey, 86% of people believe blockchain technology would help our integration towards more touchless corporate operations. In another news article, it is said that financial companies could save up to $12 billion a year using blockchain. Moreover, according to a survey by Mastercard, 77% of millennials are interested in cryptocurrencies and are keen to learn more about them.

Why are more banks adopting blockchain? What are the benefits and challenges of this new technology for the banking industry? In this article, I will explore some of the main drivers and trends that are shaping the adoption of blockchain by banks and what to expect for the future of this emerging and evolving field.

The Benefits of Blockchain for Banks

Blockchain and NFTs offer various benefits and opportunities for banks, both internally and externally, such as:

• Efficiency and cost reduction: Blockchain can improve efficiency and reduce the cost of various banking processes and services, such as cross-border payments, trade finance, identity verification, and asset management. By using this technology, banks can eliminate intermediaries, streamline workflows, automate transactions, and enhance security and transparency. For example, HSBC has used blockchain to process over $250 billion worth of trade transactions, reducing the processing time. Similarly, JPMorgan has used blockchain to launch its own digital currency, JPM Coin, to facilitate instant and low-cost payments among its clients.
• Innovation and differentiation: Blockchain can enable banks to offer new and innovative products and services to their customers, as well as to differentiate themselves from their competitors. By using blockchain, banks can create and access new markets, segments, and revenue streams, as well as enhance customer loyalty and satisfaction. For example, Citi Treasury and Trade Solutions (TTS) announced in September 2023 the creation and piloting of Citi Token Services for cash management and trade finance for institutional clients. DBS has also launched DBS Digital Exchange (“DDEx”), which offers trading services for various digital assets, including security tokens and cryptocurrencies.
• Compliance and regulation: Blockchain can help banks to comply with the existing and emerging regulations and standards in the financial industry, as well as to influence and shape the regulatory environment. By using blockchain, banks can improve their data quality, accuracy, and auditability, as well as enhance their risk management, governance, and reporting. Another example is Spanish banking giant Santander, which used blockchain to issue a $20 million bond that was settled on the public Ethereum network, demonstrating the feasibility and compliance of blockchain-based securities. Likewise, BNY Mellon has joined a consortium of banks and regulators to develop a global standard for digital assets, such as cryptocurrencies.

The Challenges of Blockchain for Banks

Blockchain also poses various challenges and risks for banks, both internally and externally, such as:

• Interoperability and scalability: Blockchain requires interoperability and scalability among different platforms, networks, and systems to ensure seamless and consistent experiences for users and customers. However, achieving interoperability and scalability involves technical, legal, and social aspects, such as standards, protocols, regulations, and incentives. The question is- how can banks ensure that their blockchain solutions are compatible and interoperable with other banks, platforms, and regulators without compromising security, privacy, or performance?
• Quality and security: Blockchain depends on the quality and security of the data and content that are created and shared by users and customers, as well as the quality and security of the devices and networks that are used to access and process them. However, ensuring quality and security involves subjective, objective, and contextual factors, such as accuracy, relevance, timeliness, and usability. For instance, how can banks ensure that the blockchain data they create and consume are accurate, relevant, timely, and usable for their specific purposes and preferences? How can banks protect their blockchain solutions from cyberattacks, fraud, or theft?
• Ethics and sustainability: Blockchain raises ethical and sustainability questions and dilemmas that need to be considered and resolved by banks, regulators, and society, as they involve the impact and consequences of the technology on the environment and society. Another example is how banks can balance the benefits and risks of blockchain, such as efficiency, innovation, and inclusion, versus energy consumption, carbon footprint, and inequality. How can banks ensure that their blockchain solutions are aligned with their values, principles, and responsibilities, as well as with the expectations and needs of their stakeholders?

Personal Thoughts

The evolution and expansion of blockchain technology signify a dynamic landscape for both the banking industry and society at large. As this innovative technology continues to mature, it inherently brings forth a spectrum of new opportunities and challenges that necessitate proactive engagement and collaboration from various stakeholders, particularly banks.

It's crucial for banks to cultivate a deep awareness and readiness for the adoption of blockchain. This preparation involves not only understanding the technology itself but also comprehending its potential implications on traditional banking practices and customer interactions. Embracing this preparation empowers banks to adapt swiftly and effectively to the changing financial landscape.

Collaboration stands as a cornerstone for the successful integration of blockchain within the banking sector. Engaging with regulators allows for the formulation of frameworks that strike a balance between fostering innovation and ensuring compliance with regulatory standards. Collaboration with developers facilitates the creation of robust, secure, and user-friendly blockchain solutions that align with the specific needs of banking operations and customer experiences.

Furthermore, customers play a pivotal role in this journey. Banks need to educate and engage with their customer base, facilitating a comprehensive understanding of blockchain's benefits and functionalities. By doing so, banks not only encourage broader adoption but also pave the way for more seamless and efficient interactions within the financial ecosystem.

Partnerships with other entities, such as technology firms, industry experts, and strategic collaborators, present an avenue for banks to pool resources, share knowledge, and collectively explore innovative applications of blockchain technology. These partnerships foster an environment ripe for experimentation and evolution, ultimately driving the transformation of banking services and customer experiences.

Navigating the trajectory of blockchain's integration into banking requires a proactive approach to managing risks effectively. As with any groundbreaking innovation, there exist potential risks, such as interoperability challenges, security vulnerabilities, and ethical considerations. Banks must proactively address these risks through rigorous testing, robust security measures, and ongoing evaluations to ensure a safe and reliable ecosystem for all stakeholders involved.

By embracing collaboration, innovation, and proactive risk management strategies, banks can harness the immense potential of blockchain technology. Through this approach, banks not only unlock efficiency gains, cost reductions, and innovative product offerings but also contribute to shaping a more sustainable and inclusive future for the financial industry and society at large. The journey toward leveraging blockchain within banking is not merely about embracing a new technology; it's about shaping a future where financial services are more accessible, efficient, and secure for everyone.