How Blockchain Technology Could Solve The World’s Biggest Banking Problems
The international banking system is far from perfect. Fortunately, according to some experts, blockchain could be the technology that solves the biggest problems in global banking.
Today, the international banking system is plagued by issues like multiple third-party verifications and transferring services – all of which are required to complete a simple transaction.Blockchain could potentially reduce the need for third-party verification while also eliminating the number of steps between a sender and a receiver in an international banking transaction.
As one expert on CoinCentral explained,
“Blockchain is transforming the way in which we conduct business globally by offering us the ability to perform transactions securely in a peer-to-peer manner without the need of any middleman.”
As an example of the problems with today’s global banking system, we can look at the multiple government bailouts of the past decade. Many see the recession of 2008 to 2009 as partly responsible for the rise of cryptocurrencies. Bitcoin’s network first launched in 2009.
As knowledgeable bitcoin users know, Satoshi embedded a headline from the London Times inside bitcoin’s genesis block. That headline was a reference to the government considering a second bailout of banks. In a way, the history of cryptocurrencies has always been linked to international banking.
Could blockchain technology solve international banking problems? To answer that question, it helps to see how banks emerged – and where they could be headed with blockchain.
How Banks Emerged: Why Do We Have The Modern Global Banking System?
Banks evolved out of the need to store gold. We don’t know what, exactly, the first bank was. However, the first bank was likely just a gold deposit service for wealthy people.
Individuals could drop off their gold bars at this bank, and the banker would issue the individual a receipt. This receipt could be used to purchase items around town. It represented the value of gold.
David Hamilton (DavidtheWriter) at CoinCentral has a good explanation of what happened next,
“Eventually, the banker realized that the people never all came for their gold at the same time and so he decided to start lending out other people’s gold at a slight mark up or interest rate.”
“The people eventually became suspicious of the banker’s quickly expanding wealth and one night the banker was cornered by a furious crowd who accused him of spending their gold. They forced the banker to take them to his vault and show them that he had everyone’s gold. He gladly obliged as he not only had all of their gold but he now had the interest he made in profit as well.”
“After realizing what the banker had done, the wealthy individuals demanded in on the action. This is why banks now have to pay you a small interest on your holdings as well. Not much has changed since then in regards to the purpose of banks; It’s still a third-party organization looking to make a profit off of holding your funds.”
Ultimately, banks emerged out of a need for people to securely store their money. When lots of money gets collected in one place, it can be lent to people in need, and those people are willing to pay money to borrow that money. The end result is a pool of wealth that continues to grow over time.
How Could Blockchain Technology solve Problems with Global Banking?
Blockchain technology could overhaul the global banking system in a number of different ways.
1. Blockchain Lets You Be Your Own Bank
The entire banking system is built on the idea that we need a secure place to store and manage our funds. The global banking industry has enormous power because of this fact.
If everyone had a secure place to store and grow their wealth, then we wouldn’t need banks. Some people believe blockchain presents the perfect opportunity to do this: with blockchain, we can securely store our wealth without relying on a central bank. With blockchain, you are the bank.
As long as you retain hold of your private keys, you can be your own bank. You can store your private keys in a number of different ways. You can encrypt them on a storage device like a hardware wallet. You can keep a paper wallet in a secure location. You can even remember your passphrase in your head like a “brain wallet”. All of these storage systems allow you to safeguard your wealth without a bank.
2. Peer-to-Peer Transfers Are Accessible For Everyone
Peer-to-peer transfers are impossible in the modern banking system. Sure, you can send money from your account to your friend’s account. However, this isn’t a peer-to-peer transfer. There is always at least one middleman between the sender and the recipient.
Typically, this transfer relies on a combination of verifications, monitoring platforms, and money transfer services. Every time you swipe your debit or credit card, your money goes through a number of layers before arriving in the retailer’s bank account. There is, quite literally, no such thing as a peer-to-peer transfer.
With blockchain, peer-to-peer transfers are a real and accessible thing. The blockchain verifies your balance, makes sure you have the funds needed to complete the transfer, deducts the balance from your account, then adds it to the balance of another wallet. It does all of this without the need for a centralized third party – like a bank.
Banks charge enormous premiums for all of the steps listed above – from verifying balances to completing cash transfers. Blockchain does all of this at minimal cost with minimal friction, creating true peer-to-peer transfers.
3. Blockchains Are Transparent
Another advantage of blockchains is their transparency. Global banks are private corporations. Some aspects of the bank’s operations are transparent. They need to provide certain information to regulators, for example, and make other information public. However, banks cannot replicate the transparency of blockchain technology.
Blockchain technology is totally transparent. An individual can check any wallet on the blockchain to ensure funds are present. You can look back at any transaction – from the very first bitcoin transaction sent by Satoshi Nakamoto to the transaction where someone paid 10,000 BTC for two pizzas. It’s all there.
4. Instantly Send Any Amount Of Funds
Have you ever tried to send a large amount of money internationally? Have you ever tried to suddenly withdraw a large amount of funds from your bank? Good luck! Global banking makes it difficult, expensive, and time-consuming to send large amounts of money worldwide.
You might need to send $100,000 to a relative in Germany. Your bank locks these funds during the process. You might need to wait a week. You might need to pay transaction fees of 2% to 5%.
With blockchain technology, this isn’t an issue. The bitcoin network – and other blockchain-based payment protocols – can transfer any amount of money with ease. You might pay a fee of $0.05 when you send $10, then pay that same fee when you’re sending $100,000 or $10 million.
Most people don’t need to send $100,000 globally on a daily basis. However, think of the impact for corporations. Large international companies frequently move money around. Blockchain technology could revolutionize the way these companies operate.
Think of foreign workers: many foreign workers rely on costly remittance services to send money home from overseas. 10% of an individual’s paycheck might be lost to global banking and transfer fees. With blockchain, the global remittance industry is unnecessary.
5. Superior Record-Keeping
A significant amount of a bank’s resources go towards recordkeeping. It takes significant effort, time, and money to maintain accurate records of a bank’s operations.
Blockchain technology maintains records free of charge. A number of banks worldwide are already exploring the idea of using blockchain technology for recordkeeping. More banks may follow suit in the coming months.
6. No More Credit Bureaus
There’s an entire industry dedicated to making sure you can repay a certain amount of money. Blockchain technology may eliminate the need for credit bureaus. With a blockchain-based payment system, anyone can see someone’s financial history, making it easy to determine whether or not they can pay back debt.
7. Better Security
Banks have surprisingly basic security systems. Many banks have ordinary login systems based on a username and password. Some banks don’t offer two factor authentication. Bank security is ancient compared to the cryptographic security of blockchain technology.
Conclusion: Could Blockchain Technology Revolutionize Global Banking?
Could blockchain technology change global banking? It already is! Banks worldwide are already using blockchain technology to change the way they do business. Virtually every bank in the world has at least explored the use of blockchain technology.
We’re just at the cusp of the blockchain revolution. Blockchain may not fully replace global banking in the near future – but blockchain is already playing an increasingly important role in the way banks do business.