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Which banks got hooked on blockchain and who benefits from it?

13 September 2017 21:00, UTC
Five years ago cryptocurrencies and blockchain were associated with drug trafficking, weapons, financial pyramids and other frauds. The nature of digital money was not understood and it was a cause of fear. But common sense has prevailed and now there is a growing number of banks that integrate distributed ledger technology into their operations.

From disbelief to hype

There are a few reasons why there is so much hype around blockchain. Since banks are commercial structures, they look at innovations from a position of economy. And it would be really huge. 9 out of 10 bank employees do not generate profits and do not even think about it. They only maintain the processes: reconciliation and checking payment documents, carrying out operations in the back-office system, generating economic performance indicators, which are based on data from the same back office, accounting, financial and management reporting programs. For example, the lawyers of the bank JP Morgan spend 400,000 man-hours per year to verify loan contracts. Blockchain-based technology will do this work in a minute and will not ask for overtime differential.

Most of the work are model treaties, reports and other documents, where bank employees are only required to be careful. Therefore machine is more effective than a human when it comes to mathematical calculations. Blockchain won't help to be creative, but this is not required.

Less employees, higher profits

Goldman Sachs has already developed a technology that gives customers access to the information they request. The idea itself is not new: for example, automatic connection with a technical support specialist from a specific department when you press a certain key on the phone is available for about ten years. This eliminated unnecessary call transfers within the call center. Then there was online-banking, and queuing was replaced by transferring money to counterparties, paying for services, filing applications for credit cards and opening deposits.

Innovations in distributed ledger technology will continue to automate systems and reduce the number of employees. This is what low-level bankers fear the most. But progress must not be stalled by fear of losing a job. When 50 peasants were replaced by one tractor driver, they were not happy as well. But for the purposes of technologic development it is worthwhile to introduce every useful innovation. In the future blockchain will reduce the cost of banking commissions, accelerate the processes of customer identification and eliminate mistakes caused by human factor.

Blockchain as a means to reduce bureaucracy

It makes sense to invest in these technologies also because the number of internal regulations is growing, the time for checking documents by security services and credit committees is increasing. Only Anti-Money Laundering legislation is a reason for maintaining large departments of specialists, each of whom must be paid. If it is possible to find a compromise between local and international regulators, the profits of banks will increase, and public products and services will be more available.

Another area for use of blockchain is cooperation with credit-default swaps (CDS). When these derivatives are traded banks act as intermediaries. Another benefit of distributed ledger technology is that it allows to save money. Jeff Billingham, vice president of the processing center, says that "in a few years, the CDS trade based on a new technology will be realized".

British banks are already working with blockchain-based systems, which convert local pounds into other currencies.

Blockchain is not a panacea

One shouldn't expect that in 5 or 10 years blockchain will spread in every branch around the world. Local and regional banks are still unable to afford it. As for developing countries, such as Russia, technology is only being tested with opinion of government agencies in mind. And it is an obstacle rather than help. Perhaps in the future there will be analogues of retail software, but while it's too early to talk about it, all the participants just try to put together puzzle pieces and no one has a whole picture. In addition, there are risks that can not yet be predicted due to the novelty of the technology. Banks will get hurt, but this is the case when the end justifies the means.