the silverlinings of blockchainNot at All Bad: Benefits of Blockchain
Private blockchain networks are growing in popularity, but their benefits have also become appealing to financial institutions, providing means for not only internal controls but also regulatory compliance.
Do you know what blockchain is?
is a technology platform based on a
distributed ledger, which may sound complicated but simply means that all
financial transactions are made and tracked using a publicly-viewed ledger. The
procedure goes like this:
Each party to a blockchain transaction is assigned a cryptographic key which allows it participation in the network. In order for a transaction to be completed, it must first be approved and validated by all participants.
happens, an encrypted block is created and added to the public ledger. But
while the block is public, the transaction details within it remain private,
accessible only to those with a proper cryptographic key.
This means that parties can perform transactions directly and any peer-to-peer transaction can be completed within minutes.
Laundering Stopped by Blocks?
Fraud is an ever present issue for financial institutions, which find themselves locked in a never-ending arms race against criminals. But while modern technology has allowed criminals to become more sophisticated, it has also provided banks and fintechs with means to combat various threats.
Financial institutions have been working hard on increasing the reliability of their anti-money laundering (AML) measures. Problems, however, lie not only in detecting fraud but also in avoiding false positives which cause customer friction and increase operational costs.
AI and machine learning have already decreased such problems and blockchain is becoming another highly useful tool.
Blockchain is decentralized, secure and immutable in nature, which makes it seem almost tailor-made for AML. Its shared ledger contains data on transactions and customers and makes it easy to extract specific data while at the same time making data in general easily available to risk teams. Combining AI with blockchain allows fraud teams to monitor account and client activity in real time. This allows them to identify and prevent suspicious transactions with a high rate of efficiency and minimal customer friction.
Across the Border
Absolutely necessary in a global economy, cross-border payments depend on payment systems that haven't been significantly updated in decades. Financial institutions are now seeking alternatives that will provide increased security and faster transactions at a lower price. The answer seems to be blockchain, and Gartner Inc. has projected that the value this technology will add to businesses by 2025 is in the $170 billion range.
So how can blockchain help with cross-border payments? Well, let's take a look at the classic system.
An international payment between any two parties using established banking channels requires both parties to each partner with a bank in their own country, with said banks then transferring the funds to one another and then transferring said funds to respective parties.
This intermediary system
is slow and expensive, and blockchain can remove both those frustrations. There
are no middlemen, payments are
completed in seconds, and fees are
either nominal or non-existent.
Since payments cannot be reversed or changed in the ledger itself and all data is readily available to all parties, security and accountability are also increased.