Personal Finance

Banks Are Turning To The Blockchain In A Big Way

Ripple’s $55 million Series B funding affirms the enthusiasm that the banks share towards bitcoin’s underlying technology – the blockchain. Today, almost all major banks and financial institutions around the world are either a part of a consortium that is working towards the adoption of blockchain, or are engaged in experimenting in their own innovation labs.


Ledgers lie at the heart of commerce and no one understands ledgers better than banks or financial institutions. Over the years, banking operations have become very complex due to rules laid down for regulatory compliance.

This has resulted not only in huge administrative, auditing, and handling costs for these institutions but has also caused an increase in delays, cyber-crime, frauds and internal manipulations. The vulnerability of banking institutions was exposed during the financial crisis of 2008-09 which proved fatal for some banks, and others haven’t been able to fully recover since.

Enter the blockchain.

Blockchain is a huge distributed ledger, simultaneously shared and validated across a network with features such as lower counterparty risk, more transparency, permanency of recordings, and cryptographic security. It is seen as a viable solution to current day banking problems.

Accenture points out that, “Investment banks will look to distributed ledger and blockchain technology as a way to alter the economics of their businesses and bring cost-income (C/I) and return on equity (ROE) ratios closer to pre- financial crisis levels."

A report by Santander Innovations suggests that, “Distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.”

Needless to say, this can have a huge impact and can add substantially to the bottom-line of banks by making them more efficient and transparent.

It is believed that by adopting this technology, the operating costs for banks for international payments can come down by 33%. To reap such benefits, various blockchain-related projects are receiving great financial commitment.

A 2016 report by JPMorgan and Oliver Wyman reflects that “Investments in blockchain startups till date has reached $300 million, and is growing swiftly. Investments totaled to $125 million in 2015, and this has already been surpassed in the first half of this year. Additionally, international spending by banks is estimated to have totaled to $80 million in 2015.”

According to a 2015 estimate by Aite Group, banks will spend approximately $400 million on the blockchain technology by 2019.

What Banks Are Doing

Banks are enthusiastically filing for patents, joining cohorts, and experimenting in labs to be a part of this historical turn.

The Bank of America filed for multiple patents related to the blockchain technology and cryptocurrency transfers.

Goldman Sachs’s patent titled ‘Cryptographic Currency for Securities Settlement’ came out towards the end of 2015 which introduces its own cryptocurrency SETLcoin.

Citibank has been testing its own digital currency ‘CitiCoin’ for some time now.

In April 2016, BNP Paribas Securities Services signed a strategic partnership with SmartAngels for the use of the blockchain technology to ‘enable private companies to issue securities on the primary market.' It recently hosted the first Blockchain Bizhackathon in New York for the Americas platform.

In May 2016, Santander Bank became the first bank from UK to roll out blockchain based international payment through an app (currently as a staff pilot) which supports payments between £10 and £10,000, any time of the day.

Earlier this month, it was reported that Barclays carried out the world’s first trade transaction using the blockchain technology in partnership with an Israel-based start-up, which would trim the regular time for a process to less than four hours from the usual seven to ten days.

These are just some of the trials and real-time tests being conducted by various banks worldwide.

The Rise of Cohorts

Meanwhile, there are cohorts working with banks on the distributed ledger technology for faster payments and settlements. For example, New York-based R3 is a consortium of more than 60 big financial institutions.

Ripple is a global provider of financial settlement solutions, has some of the biggest names in the industry as its investors and members. To date, Ripple has received over $93 million in funding (both in Series A and Series B).

Digital Assets is yet another platform build that is distributed and encrypted straight through processing tools.

Some banks have also formed consortiums which represent collaborations at country level, like the Blockchain Collaborative Consortium (BCCC) in Japan which has fast grown to more than 80 members. Another newly formed cohort, based in Russia, includes QIWI Group, Accenture, BINBANK, MDM Bank, Bank Otkritie, and Tinkoff Bank.

Central Banks

Even central banks across the globe have shown their intent to adopt the distributed ledger technology. The Dutch Central Bank has been actively experimenting blockchain and developing the DNBcoin.

In July 2016, Bank of England issued a paper that discusses the ‘macroeconomics of central bank issued digital currencies’ which reveals some interesting findings. It says, “In a...model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distorting taxes and monetary transaction costs.”

Such findings showcase the potential that the blockchain holds for the financial machinery of a country.

In June this year, Reserve Bank of India (RBI) said that it would study blockchain technology to curtail paper currency. The People’s Bank of China and Bank of Canada have already shown their interest to release their own digital currencies while Bank of Japan and Russia’s Central Bank are keeping a close watch and say that “exploring the technology” is on the cards.

The Hong Kong Monetary Authority (HKMA) recently announced the setting-up of HKMA-ASTRI (Applied Science and Technology Research Institute), Fintech Innovation Hub to support research and adopt innovative technologies such as the blockchain.

Final Word

Blockchain is seen as the missing technology link that can enhance security, transparency, and speed of banking and financial operations while reducing compliance, regulatory, administrative, and various other costs.

While banks around the globe, both commercial and central, are excitedly exploring it, final adoption isn’t just dependent on its technological success. It would involve a paradigm shift in the existing structure of these institutions along with working out issues such as cost-benefit analysis, scalability, industry standardization, and governance, for a successful bond between blockchain and the highly-centralized banking world.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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