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How blockchain technology is disrupting the banking industry

How blockchain technology is disrupting the banking industry

Mon, Jun 12, 20235 min read

Category: Business Stories / Blockchain / FinTech

In the early days of blockchain, many thought the technology will be a major threat to the traditional banking industry. But, as the years went by, it became more and more clear that blockchain adoption, rather than a peril, might be a huge opportunity for banks worldwide if applied wisely. Let’s take a closer look at the current state of blockchain technology adoption in traditional banking. 

The crypto industry started with grand ideas of its users ditching the intermediaries (like traditional banks) when dealing with assets, and switching to decentralized exchanges and wallets. But as events of 2022 showed us, it might not always be the safest idea. Traditional banks for a long time were hesitant to join the crypto bandwagon, but as statistics show us, more and more of them are exploring the possibilities that blockchain brings. 

The rise of CBDCs

Central Bank Digital Currency (CBDC) is a digital version of the currency issued by the government, that isn’t pegged to any physical commodities. The main difference between CBDCs and cryptocurrencies is that the former is very much centralized - issued and operated by the state. According to McKinsey’s report, there are currently 87 countries actively exploring the concept of CBDC. 

The various types of CBDCs

Although it may seem that way, CBDCs aren’t always blockchain-based. There are some projects like Jamaica’s JAM-DEX (launched in June of 2022) that do not use a distributed ledger. CBDCs can be issued as stand-alone tokens that are distributed by multiple carriers or held directly at the central bank as account-based assets. They can be fully digital and exist only as a digital book entry, or stored on physical devices (phone wallets, physical cards). 

An example of an account-based model is DCash, which is a CBDC developed by the Easter Caribbean. Its consumers hold deposit accounts with the central bank. The opposite of that is China’s e-CNY which is a pilot project where private banks distribute and maintain CBCDs for their customers. e-CNY was first showcased in 2022, during the Olympics in Beijing where visitors were enabled to make purchases using the currency. 

What does the rise of CBDCs mean for traditional banking? Commercial banks need to acquire the necessary skills to efficiently perform KYC procedures and anti-money laundering monitoring for digital currencies. In scenarios where commercial banks issue CBDCs to customers, thereby enabling revenue generation through deposits, these banks will bear the responsibility and associated costs of ensuring KYC compliance. 

The implementation of CBDC has the potential to disrupt the banking industry by reducing the need for intermediaries, enhancing financial inclusion, and increasing competition. 

Asset tokenization is here to stay

Asset tokenization is the process of converting physical or tangible assets into digital tokens that are stored and transacted on a blockchain or distributed ledger. It enables representing the ownership or rights to a certain asset in the form of a digital token stored on a decentralized network. What is great about this concept is the possibility of fractionalizing assets, dividing them into smaller units that can be stored and traded individually. What can be tokenized? The real question is - what can’t be? From expensive wine bottles through real estate to love (sic). 

Why banks should look into tokenization

The tokenization process typically involves several steps. First, the asset is identified and evaluated. Then, a digital representation of the asset is created on a blockchain platform, assigning a specific number of tokens to represent the asset's value. These tokens can be fungible or non-fungible, depending on the asset and its characteristics. The benefits of asset tokenization include increased liquidity, fractional ownership, enhanced accessibility, and potential cost savings. By digitizing assets, tokenization eliminates the need for intermediaries, reduces transaction costs, and enables 24/7 trading. It also enables global access to investment opportunities that were previously restricted to certain individuals or institutions. 

How can traditional banks tap into the benefits tokenization brings? There are a few examples of how they are doing it now. In 2020, the US financial giant JPMorgan started a project called Onyx, which is a blockchain-based platform for wholesale payment transactions. One of its most prominent offerings is Tokenized Collateral Network (TCN) which enables investors to utilize assets as collateral. Another one that taps into tokenization is Onyx Digital Assets which is an asset tokenization system that lets financial institutions, fintechs, and asset managers unlock new utility for their financial resources. Onyx is a perfect example of a very established traditional institution not being afraid of technology, but rather utilizing it for a variety of benefits. 

Regulators need to catch up

There is a lot of potential in blockchain for banking. But there is a major obstacle that seems to be keeping a lot of financial institutions wary of getting involved. And that obstacle is the law. There aren’t many regulations at hand when it comes to tokenized assets, cryptocurrencies, or blockchain-based financial solutions. Regulators are of course aware that there is a pressing need for clear policy and Europe seems to be at the forefront of making it happen. The EU’s Markets in Crypto Assets (MiCA) regulation was published in the Official Journal of the EU in early June of this year and will enter into force in the second half of 2024. The document is a regulatory framework for digital assets that use DLT (decentralized ledger technology) and it’s the first and (so far) only legislation of this kind in the world, which makes Europe a very attractive market for crypto-enthusiasts and entrepreneurs. With MiCA published, there is a greater chance of traditional banks getting more into crypto assets.

Banks have to learn from IT

In order to tap into crypto in the most effective way, banks need to understand the underlying technology of distributed ledgers and the nuances of crypto assets. And the best way to do it is to take advantage of the knowledge and experience of people who’s been doing blockchain projects for years. Training sessions, discovery workshops, and consulting are the way to go. If you work for a traditional bank and need to explore how blockchain can expand your’s bank offering for it to stay relevant, don’t hesitate to contact us - we’re here to help.

Agnieszka Dobosz
Agnieszka Dobosz

Head of Business Development

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