In recent years, there has not been a single central payment system that has not announced the use or implementation of blockchain in its services. Western Union, Visa, Mastercard, PayPal, SWIFT, and significant commercial and central banks, are all showing great interest in the new distributive registry technology and moving from theory and testing to the practice of blockchain transfers.
Blockchain in payment systems
Blockchain is a new way to create databases. The peculiarity is that, besides storing information about the transaction itself, the database is a source of “truth.” Where “true” means the belief that the information on the network is accurate and not included in the block without the consent of other users.
This is achieved by recording information on the blockchain in relative “layers” (blocks) and storing them all in the system. Old “layers” cannot be deleted or changed, and the database itself is not stored on the server but in the form of multiple copies on network participant devices (nodes). In this case, information entered in one instance is automatically duplicated in all other models.
Blockchain’s defining feature of the distributive system of financial operations (transactions) is storing the information array not on one server but on many computers connected to a single network. The moment when a new user joins the ecosystem, the blockchain automatically expands its sphere of influence. As a result, the virtual architecture is complicated to hack – almost impossible. On the other hand, various financial and credit institutions are constantly suffering from permanent attacks. Moreover, quite often, hackers achieve their goals. This is precisely the main problem of the banking sector. The use of blockchain in the financial industry can eliminate this problem.
As a continuous chain of information blocks consisting of transaction data, the blockchain conducts all financial transactions anonymously, excluding a series of intermediaries in the fund’s traffic. The Bitcoin electronic payment system and many other tokens successfully operate based on this technology.
Customer identification and KYC
Confirming the client’s identity is one of the main functions of any financial and credit institution. In world practice, this process is called “know your customer” (KYC), which in the Russian version sounds like “know your customer.” This event is often hampered by the presence of disparate information, which, moreover, is stored in organizations separate from the bank. In addition to this unfortunate fact for bankers, providing the necessary data is unrealistic and cannot satisfy all interested parties. The use of the blockchain will allow the procedure described above to be significantly simplified; along with this characteristic, the identification process will acquire some plasticity.
In other words, all the necessary information about each client is in the general list in a unified form. Each bank has access to the register since all financial institutions store it simultaneously. However, making any adjustments to the list will not be possible. Such a policy will make life easier for both banks and customers:
- Decisions on loans will be made almost at lightning speed.
- The full range of banking services will be provided no less quickly.
- Prompt processing of all financial transactions will become possible.
There is a real possibility of exempting the client from verifying his identity. A person entered a financial institution using blockchain technology, and bank employees already know all the ins and outs of it – that is, a credit history.
Payments and international transfers
The lion’s share of transactions of any commercial, financial institution falls on internal and external transfers of money amounts of clients of a particular bank. The integration of innovative technology will make it possible to modify the parameters and quality of banking services, particularly transfers, which, after the introduction of the blockchain, will a priori reach a new level.
The design of bank transfers is based on the addresses of at least two financial institutions, and often with the addition of intermediaries – intermediate accounts. To put it mildly, all this slows down the financial transaction and significantly raises its cost. Foreign banks have been trying to solve this problem for quite a long time. As a result, the “painful” search revealed a compelling product – transactions based on B2B (business to business).
This technology, based on the identical blockchain, greatly accelerates cross-border transfers. Clones of this technology are being actively introduced into global payment systems and banks. In the well-known structure of international transfers, SWIFT is actively testing its prototype, which will significantly increase the transparency of transactions and allow you to track financial transactions at various stages. No less well-known company VISA stated that it is conducting similar developments. The project being developed by the company is referred to as “Visa B2B Connect”. Ultimately, the mechanism for transferring funds between users of this structure will receive the characteristic “instantly.”
Blockchain in mortgage lending
The mortgage lending market is a vivid example of how blockchain can be used in the banking sector. Financial institutions can tokenize assets (securities), and the bank will be able to lend to many borrowers. Then, consolidate all loans into one security – for example, mortgage-backed securities (MSB). Subsequently, it can be sold through over-the-counter platforms. However, the value models of the secondary market for MBS are currently overwhelmingly weak due to a lack of transparency. The integration of blockchain technology will radically change the sluggish situation.
For example, a bank fixes all loans of this type in the blockchain structure, dividing the entire flow of funds into smart (intelligent) contracts and creating MBS checked online. Let’s assume that the verifiers can see how the initial payments were made in clever agreements and how the subsequent payments are made. Such an approach would significantly reduce the time it takes to assess credit risks based on delinquent contributions and underlie the phenomenon of mortgages.
Mortgage installments could also be posted through innovative technology and recorded online and fully automatically. It would also reduce the time for evaluating and marketing the PBS. In addition, thanks to blockchain technology, securities can be sold in any corner of the planet where there is the Internet.
Cryptocurrency and commercial financial institutions
While talking about the blockchain, you still, albeit unwittingly, touch on the topic of cyber money. In addition, virtual currency is closely related to both blockchain technology and banking structure. The appearance of the Bitcoin EPS (electronic payment system) with an internal BTC coin, the issue of which is not controlled by any state institution, forced financial specialists to recall the “prehistoric” times when any private bank could issue its currency. An obvious question arises in specific layers since this fact took place in the history of civilization, why not revive this practice again.
Advantages of blockchain for payments
The financial blockchain covers several security issues. First, it eliminates the possibility of hackers attacking the database and stealing information to demand ransoms from banks or take money from their users. Because the data is distributed across multiple nodes, there is no specific server or another place to attack.
Encryption technology also makes it easier to identify users and detect hackers.
The blockchain uses cryptographic encryption protocols, so the data in many distributed ledgers is securely protected. For example, blockchain messengers often use end-to-end encryption: only the addressee and the sender can read the message. Also, “blockchains” do not have a single server that can be hacked and get all the data.
Most blockchains allow anonymous registration. For example, online bitcoin wallets are not tied to a passport, phone number, or owner’s name. This excludes the possibility that the user’s identity will be established and his data and financial transactions will be made public.
Transactions and other banking activities today require much time to manage, approve, and register; some actions are still performed manually. Fintech blockchain quickly solves this problem by providing instant authentication and verification, which helps to streamline processes and reduce paperwork.
The ability to automate processes and quickly process transactions allows you to reduce costs and staff. Blockchain makes it possible to eliminate complex workflow because any operation can be traced. The technology guarantees the data’s immutability, and the human factor is excluded. There are already projects on the blockchain in the field of issuing loans, customer identification, and corporate financing.
The transfer of data within the blockchain is instantaneous. Therefore, it gained popularity in finance: cryptocurrencies within one ecosystem can be transferred to any of its users in a second. Thus, the blockchain finds severe applications where information transfer speed and reliability are essential.
Information about each transaction is visible and quickly tracked if verification is needed. Blockchain banking leaves no room for money laundering, fraud, and other fake transactions.
Blockchain-based intelligent contracts perform some actions (such as transferring money) after certain conditions are met. This significantly reduces bureaucracy, provides trust between partners, speeds up processes, and reduces the need for third-party intermediaries.
Blockchain information is distributed throughout the network. There are no “master” and “secondary” computers in the ecosystem, which is the blockchain system’s key advantage. It cannot be harmed by disabling several devices. The blockchain will cease to exist only if all computers supporting it are disconnected from the network. Since there is no “master” computer, gaining control of the system is complex. Therefore, large blockchains are independent: they are not controlled by the state, banks, or even development companies.
Data volume and storage
Powerful servers are not needed to create and maintain a blockchain; it is enough to make a network of ordinary computers. At the same time, the data will not suffer from the actions of intruders: there is no central storage of information that can be disabled. The data in the blockchain cannot be corrected or changed, so any information added to it will be stored in its original form. But the amount of storage occupied by the blockchain is more significant than that of a standard database. Containing similar information, so as the ecosystem grows, the blockchain should attract new participants.
Blockchain disadvantages and limitations for payments
As it turned out, blockchain is not a universal technology for banks. R3, from the very beginning, emphasized the need to process vast amounts of data without the intervention of third parties while maintaining process transparency. Therefore, in 2017, the consortium abandoned blockchain development. The developers said that the technology is not intended for processing large data sets, is poorly compatible with banking standards, and its implementation does not fit into their vision.
Technically, the blockchain requires a considerable amount of data storage capacity because each node must store a copy of the state of the entire chain. And according to forecasts, more than 20 billion devices will be connected worldwide by 2022: for the blockchain, this is an incredible amount of data.
Blockchain has problems with regulators, as well as scalability and security. Although it is tough to hack the blockchain network (over the ten years of the existence of bitcoin, no one has succeeded), in small networks, there is the possibility of a “51% attack”.
In addition, there have been significant advances in quantum computing in recent years. It is possible that over time, the most powerful quantum computers can crack the codes used to confirm transactions. The solution could be to upgrade the protocols to new ones resistant to quantum computing.
So far, everything is moving towards official permission to use the blockchain and cryptocurrencies, but only with the maximum degree of control from the authorities – customer identification and anti-money laundering. Over time, banks will probably expand their horizons and offer deposits in cryptocurrencies and other services.
In the coming years, public and private blockchain networks implemented within a company or group of companies will likely develop emerging business models based on the interaction between private and public blockchains.