Implementing Blockchain in Financial Services
Blockchain is designed for financial transactions, so it's no surprise that the financial industry is the sector using blockchain technology most intensively. From cross-border transfers and insurance to clearing and identity management, blockchain is making financial services cheaper, easier, transparent, secure, and more accessible. Here we have compiled five of the brightest blockchain implementation cases in financial services.
Issue. Cross-border payments totaled $150 trillion in 2021. Although experts predict the sector will grow to $250 trillion by 2027, everyone in the industry notes that payment processing tends to be clunky, opaque and heavily mediated. This leads to unnecessary bureaucracy, long processing times and excessive costs for such transactions. In some cases, the situation has become so absurd that the fee exceeds the transfer amount by a factor of two. In practice, this means that for a transfer of $50 from Senegal to the UK, a bank can demand $100. Often the sender doesn't receive even confirmation of the transaction's completion.
Other problems with cross-border payments also include:
Blockchain solution. Blockchain technology can fully or partially solve all these problems, which has already been proven in practice: cryptocurrencies transfer money from one account to another in seconds, the cost of such a transfer is an order of magnitude lower than the cost of bank transactions (the average commission in Bitcoin is $0.775), such payment systems are transparent (this is OSS) and virtually impossible to hack.
That is why it is extremely difficult to find a large bank or financial company nowadays which would not be engaged in cross-border transfers and announced the use of the blockchain. SWIFT, Visa, Mastercard, NASDAQ, the London Stock Exchange, the Australian Stock Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, JPMorgan Chase and the Royal Bank of Canada are prime examples.
However, the adoption of blockchain technology in cross-border payments is not limited to the private sector. Many countries have also announced the creation of national cryptocurrencies (Central Bank Digital Currency, or CBDC) to make domestic and international transfers faster and cheaper.
Issue. According to Mandiant’s M-Trends 2022 report, the financial sector is the top target for cyberattacks worldwide (14% of all attacks). Meanwhile, the number of successful hacks and the damage caused by them is growing steadily, with the cost of data breaches rising from $3.5 million in 2014 to $4.35 million to 2022. And what's even more remarkable, the 2022 study showed for the first time that 83% of victims experienced more than one data breach and only 17% said it was their first data breach. This is a very disturbing trend because it shows a global problem for companies in the security industry - if they used to get hacked, they " patched holes," compensated everyone and worked as usual, now they are simply unable to "patch up all the holes."
Another consequence of centralization is the cascading effect. According to a report by the Federal Reserve Bank of New York, when a large financial company experiences a digital breach, there is a cascading negative impact. This means that a major bank hack typically results in direct costs to that bank and secondary effects on counterparties in the financial sector and in the real economy (customers, contractors, partners, etc.)
Thus, we can say that for the financial sector, security is more than protection from a single failure. It is about preventing a negative domino effect that can be triggered by a single failure.
Blockchain solution. Integrating blockchain into financial services can provide transparency and security at the same time. In doing so, blockchain can be used to create a single, neutral, open platform for storing and transmitting financial data that has the following benefits:
Another example of using blockchain for financial services cybersecurity is the Shinhan Bank project. In 2019, the largest South Korean bank, together with blockchain startup Ground X (a subsidiary of South Korean Internet giant Kakao) and blockchain developer Hexlant, began building a public key management system for Shinhan Bank's banking services.
Almost all other blockchain integrations in the banking and financial sector are also aimed at security in one way or another.
Issue. We trust banks and financial institutions to protect our identity data (phone and social security numbers, passport information, biometric data, bank accounts, addresses), expecting them to keep it private and protect it from hackers. But, alas, our wishes are often unfulfilled. For example, in 2021 alone,more than 2.8 million users reported fraud incidents, including credit and banking information theft, resulting in $5.8 billion in losses.
The main problems here: centralization and multiple duplicate identities. Centralization creates risks, because storing sensitive data in one system allows hackers to get that data by hacking into just one program or server. Whereas hacking a blockchain network requires access to 51% of all nodes on the network.
Multiple identity duplication is when you sign up for multiple services (Twitter, Netflix, Spotify, online banking), each of which requests your identity and stores it on their servers. This creates security risks for two reasons. First, the more places where data is stored, the greater the risk of data leakage. Secondly, a leak in one place may create an opportunity to hack other services, for example you can hack a user's email and through it get access to his Facebook account, then you can get access to the phone and then to the bank account.
An excellent example of such a project is ION (Identity Overlay Network). It is a Bitcoin blockchain-based service that was launched by Microsoft in June 2020. Its goal is to provide a simple decentralized identification (DID) of a user's identity using something like a fingerprint or Face-ID.
The ION platform works as follows:
In addition to ION, blockchain identity is also offered by IBM, Blockchains, Cambridge Blockchain, Tradle, ID2020, Civic and hundreds of other companies.
Issue. We are talking about loans that are granted to borrowers by at least two lenders (syndicators). Due to the fact that there are more than three parties involved (usually 10 or more), the granting of such loans usually takes quite a long time, as syndicators have to study the borrower's data and then make a general decision on whether or not to grant funds, in what amount and under what conditions (term, interest rate, etc.).
Blockchain solution. The introduction of blockchain into the lending industry could change it dramatically. An immutable, publicly available distributed database would give historical financial data on the borrower and help generate a new, open and as reliable credit rating as possible for each participant. Whereas smart contracts would automate the processes involved in processing the application, compiling the scores (based on statistical data), collecting funds from syndicators, disbursing them to the borrower and then accepting loan payments and distributing them automatically to participating syndicators.
The first such blockchain loan was issued back in November 2018. Then Spain's BBVA (Banco Bilbao Vizcaya Argentaria), Japan's MUFG (Mitsubishi UFJ Financial Group) and France's BNP Paribas lent $150 million to Spanish company Red Electrica. According to the parties, the entire process took 40 hours.
Now syndicated loans using blockchain technology are issued all the time besides banks and large financial structures. Typically, users also come together to lend loans to other users through blockchain startups such as MakerDAO, Aave, Euler, Compound, etc.
Issue. There are a lot of typical processes in the financial industry that are handled manually, from filling out various applications to screening unwanted counterparties, such as sanctioned and/or on terrorist sponsor lists. According to the RiskScreen survey, despite the rise of automation, 8 out of 10 employees at financial firms as well as banks still spend a tremendous amount of time on manual processes.
"Manual processes not only waste precious employee time and exacerbate negative customer experiences, but they also significantly reduce the time to generate revenue from new and existing business. They also exacerbate the risks of human error and can lead to regulatory fines and huge reputational damage", said Stephen Platt, CEO of RiskScreen and co-founder of the International Compliance Association.
Blockchain Solution. Smart contracts can eliminate the daunting task of maintaining records, filling out various forms, billing, financial payments and even settling claims. Their nature allows these kinds of processes to be reduced to automated, self-executing algorithms that will run on the Ethereum, Binance Smart Chain, Solana or Polkadot blockchain network.
The simplest example is decentralized cryptocurrency exchanges based on Automated Market Maker (AMM), such as Uniswap, PancakeSwap, Curve and Balancer. These exchanges can automatically process cross-currency transactions of hundreds of thousands of users - securely, confidentially and at almost instant speed.
Another example is Uulala. This startup uses smart contracts to automate bill payments, microcredit and microloan agreements in the Americas. In addition to Uulala, Black, Lemonade, Teambrella and RiskBazaar are also startups that use smart contracts and neural networks to automate insurance services.
If you still have questions about this topic or are planning to launch your own blockchain project in finance, contact us at +1-206-785-16-88 or via email at firstname.lastname@example.org. Our consultants will answer all your questions and tell you where to start.