Blockchain technology is probably the most disruptive force of the current decade and it is still too early to know how far into the future its disruptive force will go. When investors hear blockchain technology, they mostly think about Bitcoin and the highly divisive arguments that it generates. On the one side, there are people who believe that Bitcoin is the future of money; on the other hand, skeptics believe that Bitcoin is an outright fraud or an overrated tool at best.
Irrespective of what you think about cryptocurrencies, it would be myopic to discountenance cryptocurrencies – they are here to stay, even though are still undergoing an evolutionary process that will culminate in their mass-market adoption.
However, beyond cryptocurrencies, investors will do well to pay attention to the underlying blockchain technology that powers cryptocurrencies. This piece seeks to provide a deep-view insight into the latent potential in blockchain to solve some of the biggest problems in the financial services industry.
Blockchain applications are solving specific problems
Bitcoin (BTC), the most popular application of blockchain technology is simply a decentralized form of money that erodes the power of governments to embark on irresponsible monetary policies. Ethereum (ETH), is simply a blockchain based solution designed to facilitate smart contracts by eliminating the complexities that intermediaries bring to business transactions in the name of bridging the trust gap.
Stellar XLM is setting up shop as a blockchain payment infrastructure that facilitates instant on-demand cross border payments with real-time traceability and at a low operational and liquidity cost. We can go on and on about the different tokens in the market and the specific market need that they are trying to solve with blockchain technology.
Stellar is forging strategic alliances to birth the future of banking
In Q4 2017, news broke that IBM and Stellar are launching a blockchain-based banking solution to unlock access to low-cost financial services. IBM convinced a network of banks in the South Pacific region to adopt Stellar and its underlying blockchain technology to facilitate cross border transactions. The network of banks transverse big economic movers such as New Zealand and Australia as well as smaller companies such as Tonga and Fiji.
With Stellar’s solution, banks in the South Pacific currency corridors will be able to send money in almost the time it takes for an email to be sent and delivered. Prior to Stellar and IBM’s partnership, it typically takes several days for cross border payments to be processed and the delay has a ripple effect on the local economies involved.
Stellar’s partnership with IBM will also benefit banks in the region because the banks no longer have to keep Nostro accounts where they will keep some funds in the local currency. Using a Nostro Account to settle funds in international payments is slow and inefficient because the banks are forced to tie capital down unnecessarily.
Bank are perhaps the biggest winners
Banks are likely to be the biggest beneficiaries of blockchain banking; unfortunately, banks are probably the most vocal critics of blockchain technology. Blockchain technology can cause a drastic reduction in the overhead costs involved in banking operations and ultimately help banks to improve their bottom lines.
The major importance of blockchain to traditional financial institutions is that it will help to build a trust economy in which the genuineness and security of transactions are guaranteed. Hence, banks can easily automate their operations, reduce payroll expenses, and record negligible transaction errors in their processes.
Secondly, banks will spend less time and resources worrying about fraud, data loss, or data breaches. In fact, traditional financial institutions spend between $60 million and $500 million annually to keep their businesses compliant with KYC regulations in different jurisdictions. Blockchain technology could bridge the identity gap and help banks save money from identification and verification processes.