December 11, 2023

Whether you understand DLT as distributed ledger technology or blockchain technology (as it is more widely known), its present and future impact is decentralization. The big question is what to decentralize – and for whom?

So far, the delays in traditional banking have been understandable — banks’ fees and services are at stake. But with 90% of members of the European Payments Council recently saying they expect blockchain technology to fundamentally change the industry by 2025, it seems certain that DLT will replace or revolutionize elements of the banking system in the future. So will banks embrace it or be replaced by it? So far, they’ve just dipped their toes in the water. But many banks are now experimenting with issuing bonds on the blockchain. This makes financial sense.

The beauty of blockchain is its automation and redundancy of middlemen. The use of blockchain reduces the number of intermediaries involved in the transaction process of issuing financial instruments. In fact, research by German fintech company Cashlink shows that the use of blockchain technology can save at least 35% in issuance costs by automating processes such as communication, verification and manual updating of bond documents throughout the life of the bond.

The European Investment Bank has already shown confidence in blockchain. In April, it raised 100 million euros in a two-year bond registered on the ethereum blockchain network, the first such deal involving a syndicate of banks. But when it comes to day-to-day transactions, banks have so far taken little action. But they have reason to worry. If blockchain technology becomes mainstream, its impact will be:

  • Payments: Blockchain technology is a decentralized payment ledger (like Bitcoin) that facilitates faster payments at far lower fees than banks.
  • Clearing and settlement: Facilitating payments is a big cash cow for banks Distributed ledgers will reduce or offset these operating costs.
  • Fundraising: Initial coin offerings (ICOs) — the cryptocurrency industry’s equivalent of initial public offerings (IPOs) — can be a source of funding untethered from traditional fundraising services and companies.
  • Securities: By tokenizing traditional securities such as stocks, bonds, and any other asset—and putting them on a public blockchain—blockchain technology can reduce entry costs by creating more efficient, interoperable capital markets. the cost of capital markets.
  • Loans and credit: Another cash cow for banks. By eliminating the need for gatekeepers in the lending and credit industry, blockchain technology could replace costly banks and drastically reduce loan processing times.
  • Customer KYC and Fraud Prevention: KYC and AML compliance are expensive policies to implement and maintain. According to a recent Thomson Reuters survey, banks spend an average of £40 million a year on KYC compliance. But by storing customer information on a decentralized block, blockchain technology could make it easier and more secure to share information between financial institutions, increasing efficiency and saving costs.

If banks are currently hesitant to embrace blockchain, they won’t be able to ignore its impact for long. The answer is to seize its strengths, introduce new levels of transparency and security, significantly reduce complexity and ditch redundant elements of current infrastructure. Thanks to a deep understanding of end-user needs, financial institutions are in the right position to embrace the opportunities of blockchain and benefit from its new transaction models and cost-saving potential. But they need to act quickly. Because the only way is to move forward, and before fintech companies move forward…