How Blockchain will redefine Digital Banking

Aug 2018 | Team Rubique

Blockchain has become the most talked-about topic in the financial services industry. Once it is adopted, banks will find it easier to process payments more efficiently. It will also help to reduce the transaction processing costs and make the payment process more accurate.

To capitalize on this potential banks need to have the infrastructure in place so that it can easily create and operate a better global set up based on this technology. According to some surveys, blockchain is the word which many banking executives are thinking about. Many of them are quite eager and anxiously waiting for the blockchain to transform the banking industry globally.

The blockchain is a safe and secure ledger for recording the transactions of digital currencies such as Bitcoin and Ethereum. The transactions are recorded in the ledger chronologically and publically. Due to the growth and popularity of cryptocurrencies many banks are now trying to implement blockchain projects.

How does it work?

The usual way in which banks work with each other is through creating agreements which is similar to how a customer purchases an item from the store. This can also be explained in a way that one particular bank agrees to purchase a specific amount of stock at a specific cash price from the other. Such a process can take several days to clear and is slow, with a risk that one bank can default or might decide to back out from the agreement.

The blockchain projects can reduce and eliminate the settlement time because of it being digital in nature. Other advantages of blockchain projects would be secured global currency exchange rate along with increased transaction security. This will also replace the traditional back-office clearinghouses and other outdated methods which exist between asset sellers and buyers.

Despite all the benefits being offered by blockchain, this transition will take a long time actually to come in to being. The main reason for this is quite simple; banks have already invested billions of dollars in building the current infrastructure. The core banking systems which are in place today were designed with the most important factor of security being the primary thought. However, this has resulted in the core banking system being less-friendly in communicating with other technologies and lack flexibility.

Keeping it simple

Successful integration is one where there is minimal complexity. Many banks are now looking forward to running the test phase of the integration process. It is important to have the systems in place, build a proper process flow and to present the idea to the business leaders. If they like it, they can go ahead with it since it will be beneficial in the longer-term.

Sample case

The best example of the stochastic integration process is the development of killer app such as digital cash which is also known as “fiat backed stable coin” which will help to support micropayments and pay-per-download of digital content. The concept of digital cash is not new and has been tried before. The question which arises is that what components would be required for a fiat-backed stable coin.

i) User wallet

At this stage, the user will need to register their blockchain wallet with the digital cash platform. The KYC Know your customer) process will be performed at this time.

ii) Escrow account

This is an account with the bank where funds of all different users are pooled. The funds are segregated through distributed ledger.

iii) Tokenizer

This is the interface between the core bank system and blockchain. The application is responsible for identifying incoming transfers to the escrow account and create the matching amount of digital tokens in the wallet of its users. It will also aid in helping redemptions of symbols and the transfer of real funds from the escrow bank account to a user’s bank account.

iv) Transactions

The transactions occur directly between user wallets on the blockchain. At this point, integration might not be needed although the regulatory requirements demand the KYC and anti-money laundering screening for transactions increasing a certain threshold.

Technically building a digital cash application might look straightforward. This is because very few integrations with the core banking system are required. The “tokeniser” is responsible for most of the work, as KYC and AML can also be done off-chain if needed.

However, this does not overlook the fact that there will be various regulatory and legal challenges which must be overcome before bank-backed digital cask can become a reality on public blockchains. Some of the technology might not be competent enough to support digital cash but creating fiat backed stable coin would not be so difficult.

It is all about the network.

To achieve the banking integration with blockchain, banks need to have a global network to transform payments and reduce the risk of failure. Listed below are two of the most important characteristics to have an effective network:

– The inclusion of necessary defined rights, standards, obligations and controls

– It should have a quick and efficient process of onboarding that would help to enable the plug and play into the network for the present and the future corridors.

The network should not be a restrictive one. In fact, it should be open to banks and non-banks to create a level playing field. Much work needs to be done to define the engagement rules and help create the basics of the network so that banks can move forward from the discussion phase to the implementation phase. The banks need to ensure as to how they can use this technology for their benefit. However, a robust system needs to be in place to make blockchain a success.