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Blockchain is transformed into the private market. Will traditional banking embrace this tech or be replaced by it?
Blockchain technology provides a way to an agreement with a middleman. By providing a ledger that nobody administers, a blockchain could provide specific financial services – like payments, or securitization – without using a middleman, like a bank.
For example, this could be a high degree of decentralization – but could benefit from better coordination – blockchain's cousin, "distributed ledger technology (DLT)," could help corporations establish better governance and standards around data sharing and collaboration.
Following were some of the banking services that could be disrupted.
1. Payments
By establishing a decentralized ledger for payments (e.g. Bitcoin), blockchain technology could facilitate faster payments at lower fees than banks.
- Blockchain technology offers a high-security, low-cost way of sending payments that cuts down on the need for verification from third parties
- 90% of members of the European Payments Council believe blockchain technology will fundamentally change the industry by 2025
If you work in San Francisco, you might have to pay a flat fee for a wire transfer, and additional fees up to 7%. The bank receives a cut, and you're charged the exchange rate. Until the week later.
Facilitating payments is highly profitable for banks, providing them with little incentive to lower fees. Cross-border transactions, from payments to letters of credit generated 40% of global payments transactional revenues during 2016.
Cryptocurrencies like Bitcoin and Ethereum are built on public blockchains that anyone can use to send and receive money. In this way, public blockchains cut down on the need for trusted third parties to verify transactions and give people around the world.
Bitcoin transactions can take 30 minutes or up to 16 hours – in extreme cases – to settle. It's still a perfect 3-day processing time for bank transfers.
More importantly, developers are working on scaling cheaper solutions for cryptocurrencies – like Bitcoin and Ethereum – to process more transactions, faster. Other cryptocurrencies, like Bitcoin Cash and TRON, already have low-priced transactions.
Some examples of payments through blockchain
While cryptocurrencies are a long way from the replacing fiat (like the US dollar) when it comes to payments, the last couple of years have seen mostly upward growth in transaction volume for cryptocurrencies like Bitcoin and Ethereum.
Some companies are using blockchain technology to improve B2B payments in developing economies. One example of this is BitPesa, a blockchain company focused on facilitating B2B payments in countries like Kenya, Nigeria, and Uganda. The company has processed millions of dollars in transactions, reporting 20% month-over-month.
Another example is BitPay, a Bitcoin payment service provider that helps merchandise accept and store Bitcoin payments. The company has over 40 integrations, partnering with e-commerce platforms like Shopify and LemonStand to facilitate Bitcoin payments. Additionally, it has become the first state to accept Bitcoin tax payments, and the transactions are enabled by BitPay's platform.
2. Clearance and Settlements Systems
Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions.
- Distributed ledger technology could allow transactions to be established directly, like SWIFT
- Ripple and R3, among others, are working with traditional banks
The fact that an average bank transfer – as described above – takes 3 days to set up.
It's not just a pain for the consumer. Moving money around the world is a logistical nightmare for the banks themselves. Today, a simple bank transfer – from one bank account to another. The two bank balances have been reconciled across a global financial system, comprised of a wide network of traders, funds, asset managers and more.
UniCredit Bank account in Italy to a Wells Fargo account in the US, the transfer will be executed through the Society for Worldwide Interbank Financial Communication (SWIFT), which send 24 million messages a day for 10,000 financial institutions .
Because UniCredit Bank and Wells Fargo do not have an established financial relationship, they have to search for a bank. Each of the different banks led by the different banks, which means that these different ledgers have to be reconciled at the end of the day.
The centralized SWIFT protocol does not actually send it simply sends the payment orders. The actual money is then processed through a system of intermediaries. Each intermediary adds up to 15-20 minutes.
Blockchain technology, which serves as a decentralized "ledger" of transactions, could disrupt this state of play. An interbank blockchain could keep track of all transactions publicly and transparently. This means that we can rely on a network of custodial services and correspondent banks, transactions could be settled directly on a public blockchain.
Further, blockchain technology allows for "atomic" transactions, or transactions that are clear and settle when a payment is made. This stands in contrast to current banking systems, which are clear and settle at transaction days after payment.
That might help alleviate the high costs of maintaining a global network of correspondent banks. Banks have estimated that blockchain innovation could cut at least $ 20B worth of costs from the financial sector.
Examples of transactions using blockchain
Ripple, an enterprise blockchain services provider, is the most prominent player. Cryptocurrency XRP, Ripple – the venture-backed company – is building out blockchain-based solutions.
SWIFT messages are one-way, much like emails, which means that transactions can not be settled until each party has screened the transaction. Ripple's xCurrent product provides banks with a faster, two-way communication protocol that permits real-time messaging and settlement. Ripple currently has over 100 customers signed up to experiment with its blockchain network.
R3 is another major player working on distributed ledger technology for banks and wants to be the new operating system for financial markets. "It raised $ 107M in May 2017 from a consortium of banks like Bank of America Merrill Lynch and HSBC. It is also lost to some key members, such as Goldman Sachs, which has been
Projects like Ripple and R3 are working with traditional banks to bring greater efficiency to the sector. They are looking to decentralize systems on a smaller scale than public blockchains.
3. Fundraising
Initial Coin Offerings (ICOs) are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms.
- In initial coin offerings (ICOs), entrepreneurs raise money by selling tokens or coins, allowing them to fundraise without a traditional investor or VC firm (and the due diligence that accompanies an investment from one)
- Echo's blockchain company raised over $ 4B in its year-long ICO ending in 2018.
In an ICO, projects sell tokens, or coins, in exchange for funding (often denominated in Bitcoin or ether). The value of the token is – at least in theory – tied to the success of the blockchain company. Investing in tokens is a way for investors to bet directly on usage and value. Through ICOs, blockchain companies can short-circuit the conventional fundraising process by selling tokens directly to the public.
Venture capital firms have taken notice, with Sequoia, Andreessen Horowitz, and Union Square Ventures, among others, all directly investing in ICOs, as well as gaining exposure by investing in cryptocurrency hedge funds.
Venrock partner David Pakman has said, "There's no question that will crypto the business of venture capital. And I hope it does. The democratization of everything is what has excited me about technology from the beginning. "
Examples of fundraising through blockchain
While the majority of ICOs have become pre-revenue blockchain projects, we're seeing more and more paradigm of decentralization.
Telegram, the messaging app, for example raised $ 1.7B via ICO. The idea behind the ICO is a payment platform on top of the messaging network. If you want to buy it, you will be able to buy and sell via ICO.
Several promising blockchain companies have emerged around this space. Companies like CoinList, which started as a collaboration between Protocol Labs and AngelList, are helping to bring digital assets to the mainstream ICOs. CoinList has facilitated more than $ 400M in token sales since August 2017.
It has developed a bank-grade compliance process that allows companies to access through a streamlined API, helping projects While CoinList's platform is designed for blockchain projects, its focus on reducing the logistical and regulatory load around fundraising is being mirrored in the public markets. Investment banks today are experimenting with automation to help eliminate the thousands of work hours that go into an IPO.
Of course – given regulatory pronouncements – ICO activity should be taken with a grain of salt. And there's no doubt that many of these projects will fail altogether. They're testing out blockchain technology that could replace the functions of traditional banks. Fundraising, but also the underlying fabric of securities.
So you can see there is lots of potential.
This is just part 1 of Blockchain's Potential to Disrupt Banking Services series, covering more examples of how blockchain could disrupt securities, loans and credit, and trade finance.
Excerpt originally published by CB Insights, How Blockchain Could Disrupt Banking.
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