The current conventional banking system makes it hard for banks to interoperate with each other. In order to overcome those issues, banks set up huge back offices with lots of staff to deal with huge piles of paperwork. Now a new technology is being tested that is set to change the entire system. Blockchain technology makes it possible to transfer funds between one wallet to another within minutes without having to go through the red tape. All it takes is the initial consent from both the parties and a confirmation from the participants of the network.
Blockchain technology undermines the ‘middle-man’ business model. It makes it harder to cheat in transactions, and so reduces the value of credibility lent by trusted intermediaries. It is less important that counterparties may not know and trust each other. A lack of trust becomes less of an impediment to trade.
Cryptocurrency or virtual currencies (bitcoin, etherium, etc) are a type of currency that exists purely as code. They’re not controlled by a central authority (like a bank) so transactions are neither protected nor at risk from interference in this way.
Now, a group of banks intend to implement the same process into the conventional banking system. In order to do so, they are working on creating a custom cryptocurrency for use within their network. All fund transfers between the branches will be made using this digital currency. Participating banks will play the role of miners by validating and storing transactions on a blockchain. Once a transaction is confirmed on the blockchain, the same will reflect on the statement of associated fiat accounts. By using cryptocurrency based solutions, banks can save a lot of time and money on compliance and record keeping.
Few major international banks may soon have their own cryptocurrency. According to a recent media report, the banks that are initially going to be part of this initiative includes UBS, BNY Mellon, Deutsche Bank and Banco Santander. These four major banks, who also happen to be the members of R3 Blockchain Consortium are working alongside ICAP, a United Kingdom-based electronic dealer-broker. The main aim of this banking group is to develop cheaper and more efficient ways of fund transfer between branches using cryptocurrency.
Confirmation of transactions on the blockchain will ensure that each bank has a copy of the record on its system. Real time updates of records will eliminate the need to manually register the operations.
Clearmatics, a London-based fintech company will be working on creating the new cryptocurrency based settlement system. According to Oliver Wyman, such a system can save the banking industry anywhere between $65-$80 billion a year.
The new cryptocurrency product is expected to be made available by in 2018.