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The future of banking is set to experience a seismic shift due to its integrations with blockchain technology, with new security, transparency, and efficiency potentials now on the horizon.
With this in mind, this article will explore different predictions regarding the future of blockchain in banking – so read on to discover how this groundbreaking technological intersection may reshape how we bank, invest, and interact with money in the coming decade.
For an in depth exploration of the technology in general, visit our article on the future of blockchain.
Key Takeaways
- Market Growth: The global blockchain market in banking is expected to reach $8271.7 million by 2027.
- Widespread Adoption: Approximately 60% of banks plan on implementing blockchain technology by 2025.
- Smart Contracts for KYC: Smart contracts can reduce the time taken for KYC processes by 50-70%.
- Cost Reduction: Blockchain can reduce IT costs for banks by 30%.
- Fraud Reduction: Blockchain technology can reduce bank fraud costs by up to 75%.
Predictions About the Upcoming Trends in Blockchain
So…what does blockchain technology mean for the future of banking?
In a general sense, the tech is set to alter the banking sector by enhancing security, transparency, and efficiency through streamlining transactions and reducing fraud.
Let’s now explore how this exciting landscape may manifest in practice.
Bitcoin ETFs: Bridging Traditional Finance With Crypto
The several Bitcoin Exchange-Traded Fund (ETF) approvals from earlier this year provide a proficient gateway for institutional investors to venture into the cryptocurrency market with reduced risk.
For context, ETFs are exactly as the name implies; they are funds that trade on exchanges, generally tracking a specific index. Typically, when you invest in an ETF, you receive a bundle of assets that you can buy and sell during market hours.
Of course, within the context of Bitcoin, institutional investors receive an ETF that holds Bitcoins (BTC) in a secure digital vault, which only registered custodians can manage. This kind of ETF then mirrors the price of BTC.
Such system essentially allows investors to invest in cryptocurrencies with ease, as no actual on-chain activity is needed by them. As of May 2024, ETF approvals for Ethereum (ETH) – the second largest cryptocurrency project – have also taken place, meaning crypto has even more exposure across traditional finance nowadays.
Beyond their familiarity and regulatory backing, Bitcoin ETFs will likely catalyze a shift in investment strategies within traditional finance, as financial institutions can diversify portfolios with crypto assets while eliminating exposure to volatile ‘direct’ cryptocurrency investments.
Here, the role of custodial services – i.e. worldwide asset managers like BlackRock or Fidelity – will become more prominent, as they are the providers of secure storage solutions for these digital assets.
In addition, the integration of Bitcoin ETFs into mainstream banking practices is set to foster greater innovation in financial technologies. For example, HSBC’s success in streamlining letter of credit processing times from a week to 24 hours demonstrates how blockchain’s efficiency can be leveraged in banking operations. Looking forward, we can also expect a surge in hybrid financial products that combine traditional securities with digital assets, offering novel opportunities for portfolio optimization.
Further, the adoption of Bitcoin ETFs could therefore help accelerate the use of blockchain tech in trade finance, settlement processes, and cross-border transactions, to ultimately reduce operational costs and enhance transparency. Additionally, banks may begin exploring smart contracts for automating complex financial agreements.
Market Growth
Similarly, Brad Garlinghouse, CEO of Ripple, anticipates the crypto market reaching an astonishing $5 trillion by the end of 2024. This bullish outlook signifies not only a surge in valuations, but also a profound adoption and integration of blockchain technology across multiple sectors, particularly banking.
Therefore, we can expect traditional banks to increasingly leverage blockchain technology for a variety of applications – from streamlining cross-border transactions, to enhancing security protocols and compliance measures.
This predicted expansion is already driving substantial investment in blockchain solutions, as Ripple’s own network, RippleNet, is being adopted by worldwide banks to facilitate faster and cheaper international payments.
Strategic Recommendations For Banks
Anand Rengarajan – Deutsche Bank’s head of securities services in Asia-Pacific and the Middle East – states that blockchain tech will become a crucial tool in helping us remain competitive as margin compression impacts the financial services sector.
In other words, as profit margins tighten, banks face increased pressure to streamline operations and reduce costs while maintaining high levels of service and security. To counter this, blockchain technology offers a robust solution that enhances the efficiency and transparency of financial transactions, whilst also reducing the need for intermediaries in payment processing (thereby lowering transaction costs and speeding up settlement times).
By embracing blockchain technology, banks can offer more secure services that protect against fraud and cyber threats – and as the technology continues to evolve, banks that integrate these solutions will be better positioned to offer innovative financial products and services, such as smart contracts for automated loan processing, or blockchain-based identity verification systems.
Widespread Adoption
According to recent statistics, around 60% of banks plan to implement blockchain technology in their operations by 2025. This significant adoption rate underscores the industry’s recognition of the tech’s transformative potential, as banks are becoming increasingly aware that blockchains can drastically enhance processes.
In the grand scale of things, the global blockchain market size in banking is projected to reach $8271.7 million by 2027, with this exponential growth reflecting the increasing recognition of blockchain’s potential to address several key challenges faced by the banking sector.
Smart Contracts Enabling Smooth KYC Processes
Traditionally, know your customer (KYC) procedures involve extensive manual checks and paperwork, which are time-consuming and prone to errors.
As an improving solution, smart contracts can automate these verification steps, reducing the time required for KYC processes by 50-70%. Whilst doing so, this automation ensures that customer data is checked quickly and correctly, boosting efficiency and cutting down the costs of doing KYC manually.
In turn, the integration of blockchain technology in KYC will allow banks to create a decentralized and tamper-proof ledger of customer identities. This ledger can be securely accessed and updated by authorized parties, ensuring that customer information is up-to-date and protected against fraud.
Cost Reduction
Blockchain technology can revolutionize the banking sector by significantly reducing IT costs. In fact, by 2025, it is predicted that blockchain technology will cut IT expenses by 30% for banks – with this reduction primarily coming via the elimination of intermediaries and the automation of processes through smart contracts.
For example, banking service Quorum is already demonstrating how blockchain technology streamlines and expedites traditional processes through automating complex financial transactions and cutting settlement times from days to mere minutes.
Increased Transparency
Filename: blockchain-in-banking-transparency
Alt-text: A depiction of increased transparency with blockchain technology in banking
Blockchain in banking is expected to evolve transparency in transactions, potentially increasing it by 60-80%.
This is because by utilizing a decentralized ledger, every transaction is recorded immutably and can be accessed by authorized parties, ensuring that the data is tamper-proof and transparent. Further, this level of transparency builds trust among all stakeholders, including customers, financial institutions, and regulators.
Enhanced transparency also simplifies auditing processes, as all transaction histories are readily available and easily verifiable. This shift towards more transparent operations can help banks reduce the risk of fraud and errors, leading to a more secure and reliable financial system.
One notable example is the Marco Polo Network, which demonstrates the tangible benefits of blockchain in trade finance by leveraging it to provide real-time visibility into transaction statuses for all parties involved. In turn, this significantly improves operational efficiency.
Fraud Reduction
Blockchain technology is poised to significantly reduce bank fraud, with predictions estimating a potential decrease of up to 75%.
This substantial reduction is largely attributed to the inherent security features of blockchains, as by using a decentralized and immutable ledger, the tech ensures that transaction records are tamper-proof. Intuitively, this makes it exceedingly difficult for fraudulent activities to go undetected, as once a transaction is verified by multiple nodes and recorded, it cannot be altered or deleted without consensus from the entire network.
For example, IBM’s blockchain platform exemplifies how blockchain tech can enhance security across banking networks, as through providing a single, immutable record of all transactions, the platform helps multiple banks verify the authenticity of each transaction and identify discrepancies in real time.
Operational Efficiency
Blockchain technology in banking is expected to evolve operational efficiency by enabling 24/7 services with 99.9% uptime. This capability is crucial for banks looking to provide uninterrupted service to their customers, particularly in an era where digital transactions are becoming the norm.
Further, the decentralized nature of blockchain ensures that the system remains operational, even if some nodes go offline. This constant uptime is a significant improvement over traditional banking systems, which often face downtime due to maintenance or technical issues.
For example, Standard Chartered’s blockchain-based cross-border remittance service is a prime showcasing of how the tech can support continuous banking operations, as the service allows for instant, secure, and cost-effective international money transfers around the clock. In turn, Standard Chartered has reduced transaction times from days to mere minutes thanks to blockchain technology.
The Future of Blockchain – FAQs
How big will the blockchain industry become?
The global blockchain technology market is projected to grow from $19.7 billion in 2024 to $2,450.4 billion by 2034, with a CAGR of 62% over this period.
This growth will be driven by increasing enterprise adoption, regulatory advancements, and the proliferation of blockchain-based applications in areas such as finance, supply chain, and digital identity management.
Where will blockchain technology be in 5 years?
In five years, financial institutions will widely use blockchain for cross-border payments, trade finance, and digital identity verification. Supply chains will also benefit from enhanced traceability and anti-counterfeiting measures, and governments will use blockchain to improve public services. Finally, decentralized applications (dApps) will be more prevalent, providing new opportunities in various sectors such as healthcare, gaming, and real estate.
How will blockchain technology impact government operations?
Governments will likely use blockchain to manage and distribute data securely, reducing bureaucratic inefficiencies and improving public trust. Additionally, blockchain tech will streamline processes such as voting, land registration, and identity verification, making public administration more effective and accountable.
What is the future of blockchain in digital identity management?
In the future, blockchain will play an important role in digital identity management by providing decentralized, secure, and tamper-proof systems. For instance, it can allow for the creation of self-sovereign identities where individuals control their personal data and share only necessary information with verifiers. This can enhance privacy and reduce the risk of identity theft.
What role will blockchain play in intellectual property (IP) management?
Blockchain will likely ensure transparent, immutable records of ownership and transfers. This will facilitate easier and more secure tracking of IP assets, reduce disputes, and streamline processes like licensing and royalty payments.
