The human factor is one of the biggest reasons behind data breaches, and by eliminating this factor, authorities can make transactions tamper-proof and less susceptible to interception. Blockchain is becoming synonymous with various vertical industries and taking the world by storm as it becomes integrated with basic business operations.
Blockchain technology is completely decentralized, using a distributed ledger-based system that uses multiple computers over a network to record data and process transactions. The biggest advantage of blockchain is that you can put any digital assets on the chain and initiate transactions. Unlike traditional banks, data will always remain secure and no intermediaries will be involved.
In this article, we will explore how the banking and financial services industry is exploring various applications of blockchain. We’ll discuss blockchain’s benefits, cybersecurity implications, and future developments.
The case for blockchain in financial services
Blockchain promises to revolutionize banking, and it’s no surprise that it will change the way customers conduct transactions. It replaces and streamlines traditional banking processes with an innovative approach that is more secure, efficient, cost-effective and transparent. Here are some of the ways blockchain is revolutionizing digital banking.
1. Blockchain speeds up international transfers
Capital markets are made up of issues and investors, matched based on corresponding risk and return profiles. Enterprises lack strict supervision and regulatory measures and suffer from liquidity risks, interest rate fluctuations and other financial problems. Blockchain shows the potential to transform capital markets by eliminating operational risks that contribute to fraud and human error, reducing overall counterparty risk. The digitization and tokenization of financial products and assets makes transactions easier, promotes global inclusion, increases connectivity, and enables fragmentation of ownership, all of which lowers the cost of capital and increases liquidity (Consensys , 2023).
2. Blockchain creates audit trails
Blockchain can improve the security of banking transactions by eliminating financial fraud and data redundancy and maintaining a clear audit trail. Thousands of distributed ledgers secure the blockchain network; data cannot be changed without the consent of all network users. This makes it difficult for hackers to penetrate and destroy sensitive information, saving victims hundreds or thousands of dollars in losses.
Organizations can enhance the security of blockchain services by using VPN services, thereby adding an extra layer of protection (Originstamp, 2023).
3. Blockchain reduces costs for customers and banks
Blockchain can automate banking processes, resulting in faster processing of payments, loans, and seamless transaction workflows. Poor record keeping and reconciliation costs are very high and can lead to cases of fraud. Many aspects of digital transactions can be automated using blockchain, thereby increasing productivity and reducing vulnerability to cyber threats. Financial institutions can solve most of the challenges related to speed and cost by implementing blockchain distributed ledgers. The technology eliminates the traditional paperwork associated with banking, significantly reducing administrative fees and additional expenses. No third parties or intermediaries are needed.
4. Blockchain ensures compliance
Blockchain improves network governance by standardizing processes and automating compliance. It is necessary for financial institutions to ensure they remain compliant amid complex regulatory changes, especially when operating across borders. Regulatory compliance is also critical in the world of trade and e-commerce. Blockchain can streamline real-time financial operations, streamlining reporting and transaction verification. Its immutable distributed ledger and asset digitization eliminate the risk of fraud and speed up settlements.
5. Blockchain protects private information and cyber-physical infrastructure
Hackers are increasingly turning to social media to attack users, targeting platforms such as Facebook and Twitter. Millions of accounts are compromised and information systems intercepted every year as information falls into the wrong hands. Blockchain can be used to standardize communications across various messaging channels and enhance security for businesses. It encrypts communications between parties and ensures data cannot be intercepted.
If implemented properly, it can prevent unauthorized parties from tampering with financial transactions, eliminate identity impersonation, and secure digital interactions. Blockchain can be used in cyber-physical infrastructure to ensure authentication, security and traceability. It also simplifies the payment process and prevents fraud and counterfeiting. This helps combat insider threats and prevents unauthorized access to data by ensuring overall trustworthiness and integrity.
We have seen many cases of hackers infiltrating networks and taking complete control of critical functions. Such incidents can be avoided by verifying the data on the blockchain and adding new entries or editing them.
Can blockchain reduce cyber risk?
Organizations can address potential security gaps by shifting the focus from enterprise-level to network-level cybersecurity. Some industry regulators enjoy an open dialogue, with policymakers acknowledging the unique advantages of blockchain technology, including its cybersecurity benefits. Cyber threats plague the financial industry, and as new threats emerge, protecting personal information is imperative. The retail banking industry is investing heavily in blockchain frameworks, but most new initiatives have yet to be rolled out at scale. Regulatory requirements are demanding, and future regulation of blockchain technology will remain uncertain.
The UKs Financial Conduct Authority (FCA) is developing policy on the use of blockchain, while the US considers blockchain to have inherent risks. In the United States, blockchain-based ETFs have been blocked by the U.S. Securities and Exchange Commission (SEC), even though traditional banks have lost up to $20 billion due to identity fraud, and blockchain distributed ledgers protect data and prevent money laundering through automation and standardization, Helps fight fraud.
Blockchain enables customers to use unique identifiers through digital fingerprints and helps prevent the overlap of KYC and AML checks. Personal management of private keys can help customers keep their data securely and control who they share it with (Higginson et al., 2019).
Additionally, blockchain decentralizes financial transactions and promotes greater interconnectedness among the global financial ecosystem. As banks explore the use of permissioned blockchain, the technology’s distributed architecture improves overall cyber resilience. This prevents sensitive information from being leaked through points of failure or individual access points.
A key feature of blockchain is its various consensus mechanisms that increase the integrity of the shared distributed ledger. Blockchain enhances the robustness of financial systems and makes consensus a prerequisite for network participants. All blocks in the chain must be verified before new information can be added or edited. Breaking a blockchain is much more difficult due to increased transparency among participants and the additional cybersecurity protections of cloud-hosted blockchains. It can be seen that blockchain technology can improve the overall cybersecurity posture of an organization by increasing cyber resilience and protecting against emerging threats.
What does the future hold?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is working with banks around the world on global payments initiatives and trying to improve the cross-border payment experience. SWIFT implements blockchain technology by partnering with active providers and enables banks to allow customers to pay using fiat currencies and Crypto. Blockchain technology is being used to significantly reduce the number of actors required to resolve banking-related queries and ensure compliance, meaning we are already seeing some significant improvements.
Blockchain-based payment solutions will continue to evolve, and businesses will witness mass adoption of the technology. Several companies are experimenting with “tokenization” of cryptographic assets to enable secure transactions, although this is still in the early stages of development. Banks are using blockchain for digital fingerprinting and universal customer identification due to its decentralized nature. They will disseminate information as it is updated and reduce the data burden during certification and verification processes. Blockchain will be used to verify firmware updates and patches and prevent unauthorized access or attempts to install malware.
Smart contracts show users the potential to automate payments through the use of predetermined conditions and automatically reduce fraud by reducing human interference. The technology manages complex reconciliation activities such as invoice creation, financial decisions, loan approvals and application processing. A significant advantage of using blockchain is increased access to banking services and opening up new economic flows to the global unbanked population (Baig, 2023).
The future of blockchain in banking cybersecurity is uncertain, but one thing is clear – blockchain will continue to improve asset security and payment outcomes for businesses.
in conclusion
Blockchain has a lot to offer in modern banking; however, the technology is still new and there are still many challenges to overcome. Banks face pressing issues during implementation, and despite worldwide enthusiasm for blockchain, governments have yet to recognize and approve its use cases. However, this does not hinder the application of blockchain. In the future, blockchain can improve the conditions of capital markets, cross-border transactions and trade finance.
