The Transformative Power of Blockchain in Banking: Use Cases and Benefits

Traditional banking has undoubtedly changed for the better with the rise of cryptocurrencies, digital assets, and blockchain technology. All of these innovations have come a long way in increasing transparency and security in the fintech industry. 

As a result, more banks and financial institutions are relying on blockchain technology to cut down on operation expenses (OpEx), accelerate transaction speeds, and maximize financial security. 

Crypto businesses aren’t the only companies that are leveraging blockchain technology. Traditional banks, like JPMorgan Chase Bank, are using blockchain technology to provide unparalleled service to their customers. 

What Is Blockchain Technology?

Blockchain technology is an immutable, distributed ledger shared across a business network. In simpler terms, a blockchain is a database that records information in an unalterable ledger. 

Blockchain gained popularity with the rise of cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). In fact, without blockchain, cryptocurrencies can’t exist. For example, if you buy a pair of shoes with Bitcoin, blockchain technology is what conveniently processes your transaction without a bank or intermediary involved. 

Across Bitcoin nodes, anonymous entities — called miners — are present to validate a transaction in exchange for a percentage of the payment. The blockchain network securely records their activity, along with all transaction information. 

Banks and financial service providers are exploring additional ways to implement their own blockchain networks. From allowing peer-to-peer (P2P) financial services to setting up loyalty programs, there are several use cases for blockchain technology in the banking sector.

Security Benefits of Using Blockchain in Banking

Blockchain technology offers several benefits for financial institutions across the world, both modern and legacy banks. Here are the benefits of blockchain in detail.

Enhanced Security Through Encryption and Decentralization

Blockchain’s encryption and decentralized nature contribute to stronger security in the banking industry, specifically when it comes to protecting data and transactions. 

No single authority or entity controls a blockchain network, and it’s impossible for internal or external actors to change the information on the ledger. With a traditional financial system, this kind of security just isn’t possible. 

Immutable Transaction Records

Blockchains are virtually tamper-proof. This feature promotes widespread data integrity, which is an important virtue nowadays. Since the Great Recession of 2008, many in the public have lost faith in traditional banks and fiat currencies. 

Central banking systems aren’t exempt from this scrutiny. In fact, many governments have already enacted cryptocurrency regulations aimed at exchanges. Some people and government leaders are still distrustful of the crypto industry. 

Fortunately, blockchain technology can help restore this faith in both traditional and modern banking systems. Access to a distributed and public financial database keeps all participants honest and accountable for their actions. 

Transparency and Traceability

Since a blockchain keeps detailed records of every transaction, it’s inherently best suited for fraud detection and prevention. For example, regulatory bodies dictate that cryptocurrency exchanges must implement strict identity verification protocols to elevate their customer experience. 

The typical security protocols are Know Your Customer (KYC) and Anti-Money Laundering (AML). Both of these serve to confirm the identity of a person making a crypto purchase or sale in real time. This is not only essential for promoting transparency in the financial sector but also for maintaining compliance with local and international regulations. 

Reduced Risk of Fraud

Blockchain is particularly useful for preventing fraud in banking, since it provides chronological timestamps for each transaction, allowing the network to stop duplicate or suspicious transactions. 

In addition, blockchain networks utilize smart contracts that trigger automatically to assigned stakeholders. A smart contract is a program or directive that functions based on a condition. 

Since blockchains are fully automated, they eliminate the need for humans to manage these networks and possibly manipulate the entire ledger.

Quicker Transactions and Improved Auditability

The use of blockchain may eventually enable quicker transactions and improved auditability in banking. This contributes to overall security and efficiency in traditional and modern banking systems. 

Blockchain networks are completely automated. This means they help lower transaction costs for essential banking services by reducing the need for human resources and improving process efficiency. For example, some banks are starting to implement blockchain in their lending programs.

When a lender agrees to finance a loan, they can utilize blockchain technology to immediately produce and enforce an agreement. This reduces the time and effort spent on completing paperwork for loan applications. 

What’s more, banks can better withstand an audit through convenient access to a public blockchain network. 

How Can Blockchain Be Used in Banking?

As you can see, blockchain offers a wide variety of benefits for banks and financial institutions, but how do banks actually use it? Here are some blockchain use cases in banking and global commerce:

Digital Currency

It goes without saying that some traditional banks are still wary of the crypto ecosystem, and for good reason — the crypto industry disrupts the traditional banking infrastructure. However, blockchain also gives banks the opportunity to create their own digital currencies. 

Blockchain is the backbone of any digital currency. Banks can use private blockchain networks to issue their own tokens. They can even manage the ownership of these tokens with distributed ledger technology (DLT) and digital wallets. 

Whether you plan on issuing your own digital currencies or fractional shares or venturing into non-fungible tokens (NFTs), it all starts with establishing a blockchain network. 

Cross-Border Transfers

Alongside crypto, blockchain technology helps fuel cross-border transfers. Unlike fiat currencies, crypto is completely decentralized. It’s not controlled by anyone or anything. This means that cryptocurrencies like Bitcoin and Ethereum have the same value regardless of the user’s location.

Normal cross-border payments are subject to transfer and processing fees. Sometimes, they’re downright difficult to process, depending on where you live. With the help of a blockchain, countries can streamline more cross-border transfers and create a cashless society. 

For example, El Salvador receives billions in remittances from the United States. Instead of dealing with shifting transfer rates and long transaction speeds, they use the Chivo Wallet to process them in Bitcoin instead. 

Identity Verification

Blockchain is essential for enhancing identity verification processes in banking. Specifically, this technology increases security and reduces the potential for identity fraud. 

For example, if you’re creating an account for a crypto exchange, you can set up a profile across a blockchain network. When paired with identity-confirming security protocols like multi-factor authentication, you can log in securely and minimize the risk of unauthorized access to your digital assets.

Accounting and Auditing

Blockchain technology can also be useful in business accounting. All accountants will agree that keeping accurate records is pivotal for tax reporting, financial management, and compliance purposes.

Blockchains provide accurate, transparent, and efficient information processing for all kinds of startups and companies. In the event of an audit, a bank can quickly access these records without any margin of error. 

By maintaining efficient bookkeeping operations, you can help promote transparency and accountability within your organization. 

Borrowing and Lending

Blockchain technology can empower banks to provide more efficient and streamlined lending services. For instance, some banks are exploring allowing peer-to-peer (P2P) lending services, permitting their customers to lend money to one another. 

Instead of dealing with time-consuming underwriting requirements, producing paperwork, and enforcing these financing agreements, banks can use blockchain technology instead.

With a proprietary blockchain in place, many steps can function automatically with a smart contract. This eliminates the need for banking staff to handle financing agreements. In turn, your organization can delegate staffing, time, and resources to other essential operations. 

Trade Finance

Trade finance, the systems put in place to make domestic and international trading easier, is an essential component of global commerce. Trades require buyers and sellers, and usually a third party to facilitate these transactions. 

Trade finance is usually a complicated and time-consuming process when handled manually. Fortunately, blockchain technology can ease this burden through paperless, automatic smart contracts that trigger at each key point in the process, facilitating smooth trade finance operations. 

Accelerate Your Digital Asset Integration With AlphaPoint Labs 

Many banks are realizing the benefits of employing their own blockchain networks. Blockchain solutions can help them cut down on operation expenses and deliver better customer experiences. 

One of the ways you can use blockchain to your advantage is by providing cryptocurrency services. However, this isn’t possible without digital asset exchange software. 

With white-label exchange solutions and advisory services from AlphaPoint, businesses don’t have to navigate this process on their own. AlphaPoint has over a decade of experience helping businesses and governments deploy successful cryptocurrency initiatives — without hiring and deploying more costly in-house resources.

Learn more about how AlphaPoint Labs’ advisory, development, and implementation services can help you navigate the crypto landscape with confidence.