# The future of blockchain in banking
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-09-26
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: Blockchain Technology: Future Applications in the Banking
Meta Description: Learn about the useful applications of blockchain technology in the banking sector, including the impact on KYC processes and cross-border payments. Discover
URL: https://financedigest.com/the-future-of-blockchain-in-bankinghtml

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**Philippe Meyer,** managing director of Avaloq Innovation

![Philippe Meyer](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/47-1736843432000-compressed.jpg)

Philippe Meyer

Blockchain has useful applications in various industries, with banks proving increasingly interested in this technology. So far, the only generalised example of this has been bitcoin and although the famous crypto-currency has been an undeniable success, [blockchain is not a magic wand that will solve every bank’s problems](https://www.financedigest.com/the-problem-with-blockchain.html "The problem with Blockchain").They shouldn’t [expect it to revolutionise the whole industry](https://www.financedigest.com/german-industrial-orders-slump-more-than-expected-in-august.html "German industrial orders slump more than expected in August") overnight. While some stakeholders seem to have unrealistically high expectations, [future developments](https://www.financedigest.com/fish-protein-market-exploring-future-growth-2021-2031-opportunities-development.html "Fish Protein Market Exploring Future Growth 2021-2031 | Opportunities & Development") will take time.

Bitcoin: Significant Interest

Bitcoin is one of the first examples of blockchain technology banks have shown interest in. Admittedly, this virtual currency [remains somewhat mistrusted due](https://www.financedigest.com/automotive-glass-market-to-witness-sales-slump-in-near-term-due-to-covid-19-long-term-outlook-remains-positive.html "Automotive Glass Market to Witness Sales Slump in Near Term Due to COVID-19; Long-term Outlook Remains Positive") to perceptions of this as a tax evasion tool. Despite this, more and more clients are asking their private bankers about the crypto-currency. Some clients have large bitcoin assets and wish to consolidate these with their regular portfolios. This pressure will [push](https://www.financedigest.com/central-banks-ease-off-on-rate-hike-push-in-october.html "Central banks ease off on rate hike push in October") banks to adopt platforms enabling clients to visualise those assets directly while allowing customers with bitcoin assets to rely on their trusted banks instead of specialised bitcoin players who may not be firmly established.

Know Your Customer: A Major Issue

Know Your Customer (KYC), the regulatory process used to verify clients’ profiles, is also set to have a [huge impact](https://www.financedigest.com/impact-com-announces-huge-investment-in-workforce-with-raft-of-new-hires-globally.html "impact.com announces huge investment in workforce with raft of new hires globally") on the industry. This [regulation makes attracting new customers increasingly demanding](https://www.financedigest.com/strict-regulations-regarding-hygiene-at-industrial-workplaces-to-create-high-demand-for-industrial-dispensers-persistence-market-research.html "Strict Regulations Regarding Hygiene at Industrial Workplaces to Create High Demand for Industrial Dispensers: Persistence Market Research") and complex for the bank, but also for customers, who have to complete seemingly endless forms.

In the future, it’s possible some KYC information will be factored and pooled between banks. “Regtech” start-ups are already offering products of this kind and customers have already shown interest in such solutions.

[Blockchain shares](https://www.financedigest.com/uks-argo-blockchain-shares-soar-on-deals-to-avoid-bankruptcy.html "UK’s Argo Blockchain shares soar on deals to avoid bankruptcy") and distributes information and encryption in ways that make it a particularly powerful solution for KYC obligations. Blockchain can be deployed on private networks, so cryptography can be implemented to shield sensitive information.

It’s impossible to set up a distributed KYC service without sharing some sensitive information. However, there is a potentially viable business model for [scenarios](https://www.financedigest.com/how-bank-cisos-can-respond-to-a-digital-hostage-scenario.html "How Bank CISOs Can Respond to a Digital Hostage Scenario") when a customer completes a KYC process with Bank A before deciding to do business with Bank B. In this case, the customer could use a certificate from Bank A to prove to Bank B he has already completed a KYC process. Bank B would probably pay a fee to Bank A, but this would be small compared to the cost reduction..

In this model, the first bank would be informed its client has started a relationship with another provider. At a time where multi-banking is common, at least in the private banking world, this would not be an issue.

Payments Revolution

Blockchain is also a tool that can ease [cross-border payments](https://www.financedigest.com/crossing-the-rubicon-why-cross-border-payments-are-primed-for-transformation.html "Crossing the Rubicon: Why Cross-Border Payments Are Primed for Transformation "). For example, Ripple has [set up a blockchain network connecting banks](https://www.financedigest.com/bank-of-england-set-for-second-hefty-rate-rise-in-a-row.html "Bank of England set for second hefty rate rise in a row"). The typical use case is a cross-border transaction between two SMEs. The standard correspondent [banking scheme is quite inefficient;it takes five days to transfer the money](https://www.financedigest.com/digitisation-of-banking-the-impact-of-digital-money.html "Digitisation of Banking: the impact of digital money"), while transaction fees soon add up. With the standard scheme there is also a [risk the intermediary bank will default](https://www.financedigest.com/concern-over-us-default-risk-grips-global-markets-as-talks-resume.html "Concern over US default risk grips global markets as talks resume"), leaving transactions unmatched.

Blockchain offers a more [efficient solution](https://www.financedigest.com/scanwriter-v-verafin-which-solution-can-help-you-unravel-financial-scams-efficiently.html "ScanWriter v. Verafin: Which Solution Can Help You Unravel Financial Scams Efficiently?"). In the case of Ripple, an internal currency has been created that is quoted by authorised [market makers](https://www.financedigest.com/sports-nutrition-market-share-revenue-and-average-worth-by-makers-shared-in-an-exceedingly-latest-analysis-report.html "Sports Nutrition Market SHARE, REVENUE, AND AVERAGE WORTH BY MAKERS SHARED IN AN EXCEEDINGLY LATEST ANALYSIS REPORT"). Payment is completed in minutes and doesn’t depend on message exchange. As the internal currency is not a true digital currency, each bank still [needs money](https://www.financedigest.com/eu-raw-material-targets-need-money-and-faster-permits-sector-chief-says.html "EU raw material targets need money and faster permits, sector chief says") to guarantee the transactions. Despite this small drawback, this solution is really promising.

Payments in [Europe will be disrupted](https://www.financedigest.com/factbox-europes-travel-disruption-stretches-into-autumn.html "Factbox-Europe’s travel disruption stretches into autumn") by the PSD/2 directive. Among other [things this will enable clients to manage all the accounts they hold with different banks](https://www.financedigest.com/the-bank-of-things-bot-has-arrived-but-what-does-it-mean-for-banks-2.html "The Bank of Things (BoT) Has Arrived: But What Does It Mean for Banks?") using a single interface. This revolution on the front-office side will massively impact the banking landscape. It could be accompanied by a similar revolution in the back-office. Blockchain [technology would introduce payment systems that work](https://www.financedigest.com/what-is-5g-technology-and-how-it-works.html "What is 5G technology and how it works") using transactions instead of messages, making a clearing mechanism unnecessary.

Beyond Payments

Blockchain technology will also be used to setup “smart contracts” which execute automatically according to predetermined criteria.

In this instance, the advantages of blockchain can monitor the life cycle of financial products more complex than simple payments, including options and other derivative instruments. Due to their derivative nature, these products, whether they are OTC or listed, require both counterparties to [monitor market](https://www.financedigest.com/iomt-internet-of-medical-things-to-accelerate-the-intracranial-pressure-monitors-market.html "IoMT (Internet of Medical Things) to accelerate the Intracranial Pressure Monitors Market") conditions and track when barriers are hit.

Cash flows are [generated when certain market](https://www.financedigest.com/diesel-generator-market-projected-to-be-resilient-during-2020-2030.html "Diesel Generator Market Projected to be Resilient During 2020-2030") conditions are reached.Tracking several hundred or thousands of [products consumes](https://www.financedigest.com/bagasse-tableware-products-market-will-top-us-3-75-bn-by-2031-as-consumers-proclivity-for-eco-friendly-and-single-use-product-purchase-grows.html "Bagasse Tableware Products Market will top US$ 3.75 Bn by 2031 as Consumers’ Proclivity for Eco-Friendly and Single-Use Product Purchase Grows") significant resources and requires substantial reconciliation work. It would be more effective to automate the [process using smart contracts to schedule these cash](https://www.financedigest.com/keep-your-head-in-the-cloud-improving-the-order-to-cash-process.html "Keep your head in the cloud: improving the order-to-cash process") flows. Also,this solution combines the [flexibility of the OTC world with the transparency demanded by regulators](https://www.financedigest.com/the-future-of-payments-flexibility-regulation-and-bespoke-models.html "The Future of Payments: Flexibility, Regulation, and Bespoke Models").

Speed of Adoption

The speed at which blockchain technology is adopted will be determined by differences in the structure of the [banking market](https://www.financedigest.com/the-stem-cell-banking-market-to-keep-up-the-digitized-momentum.html "The Stem Cell Banking Market to keep up the digitized momentum") from country to country. Progress will be faster in smaller or non-existent ecosystems. If we look at geography, a country like Australia,  could [adopt blockchain technologies](https://www.financedigest.com/specialty-printing-consumables-market-rising-adoption-of-advanced-technologies-to-bolster-markets-growth-prospects.html "Specialty Printing Consumables Market – Rising Adoption of Advanced Technologies to Bolster Market’s Growth Prospects") faster than others as there are only four banks. The same could be said of Switzerland, where integration is already quite strong thanks to the SIX [\[1\]](#_ftn1) centralised payment system. However, the presence of such an effective centralised tool will make it more difficult to migrate to an alternative.

However, while the securities chain will benefit from this technology, adoption could take between 10 to 15 [years due to the lack of ambition to transform the industry](https://www.financedigest.com/signal-transformer-market-one-the-most-booming-industry-in-upcoming-years-due-to-global-demand-in-industry-by-2027.html "Signal Transformer Market| One the Most Booming Industry in Upcoming Years Due to Global Demand in Industry by 2027").

The more attractive the use case in terms of potential cost reduction, the higher adoption reluctance is likely to be. This is because there will bemore intermediaries, all with something to lose.

In the coming months, we can expect to see the first blockchain initiatives [reach production](https://www.financedigest.com/global-liquid-breakfast-products-market-to-reach-us-185-bn-by-2027.html "Global Liquid Breakfast Products Market to reach US$ 185 Bn by 2027") stage. These potentially competing initiativeswill pose integration problems to the industry. That said, these challenges will not necessarily be more difficult than those we facealreadyin securities, for example.

Despite the lack of standardisation of blockchain solutions, this technology is here to stay; it allows all assets to be truly digitised.

[\[1\]](#_ftnref1) A company owned by 130 Swiss banks that offers central services: securities transactions, financial information processing and cashless payment transactions.


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