Abstract
In recent years, the blockchain emerged as a trending technology, and the innovations introduced by blockchain technology have influenced financial services as well as other sectors. The banks are currently using several blockchain applications, but they are not mature and still not widely adopted. Despite the numerous benefits, blockchain has many challenges to be solved, such as lack of regulation and governance; energy and other costs of development and implementation; interoperability, technical, security, and privacy problems; and user-related challenges. Therefore, this chapter aims to overview blockchain technology and discuss the opportunities and challenges for the future banking sector concerning the extant literature.
TopBlockchain Technology
According to World Economic Forum, blockchain is the heartbeat of financing sectors. Financial institutions have been implementing blockchain technologies in different areas, such as domestic banking and payment services (Mishra & Kaushik, 2021). Blockchain is an emerging and promising technology central to the Fintech movement and has affected the functioning of financial institutions. Although many people associate this technology mainly with cryptocurrencies, it can produce solutions to challenges faced by the financial industry (Pal et al., 2021).
Blockchain technology, which is “a peer-to-peer system that operates in a decentralized manner”, has four key features: secure, shared, ledger, and distributed (Mishra & Kaushik, 2021). So, this technology focuses on having a universally accessible and open decentralized ledger that contains the shared and agreed-upon state of the blockchain for establishing trust in an unsecured environment without relying on a third party. Blockchain can also be utilized with identity management and encryption, providing stakeholders privacy, transparency, and trust (Osmani et al., 2021). Blockchain can be perceived as a transparent and secure system as users can control their information and transactions, and any change to the public blockchain can be accessed by all users (Zhong et al., 2021).
Blockchain has three layers; protocol, extension, and application. The protocol layer has network and storage layers that provide network programming, encryption signatures, distributed algorithms, and data-storage technology. The extension layer is the heart of the blockchain, where product development of applications such as cryptocurrencies and smart contracts occurs. In addition to the intelligence technology that makes transactions possible, data forms such as pictures, documents, or videos are processed in this layer (Luo & Yan, 2021). The application layer has programs for communicating with end-users. This user interface masks the technical aspects and facilitates the real-world applicability of blockchains (Cointelegraph). As blockchain combines different computer technologies regarding data storage, information transmission, and encryption, it is expected to transform existing models of economy and finance. Therefore, some companies in the financial sector have already established their blockchain laboratories and are formulating their plans, working closely with blockchain platforms (Guo & Liang, 2016). These financial institutions have invested millions in researching the best implementation (Marr, 2017).
Key Terms in this Chapter
IFRS (International Financial Reporting Standards): IFRS is a single set of high-quality accounting and financial reporting standards published by IASB (International Accounting Standards Board) to be used worldwide by public companies and companies with public accountability. The standards aim to provide a common framework and transparency in financial statements and financial information presented.
Syndicated Loan: It is a loan that is provided by multiple lenders on a single contract where one of the lenders is generally the lead lender or underwriter that administers the loan. Such credit facilities are extended when the loan amount is too high.
FinTech (Financial Technology): This term refers to innovative technologies and software designed to provide automation to improve financial products and services.
KYC (Know Your Customer): Due to anti-money laundering regulations, a financial institution needs to collect basic identifying information from real persons and legal entities before working with them as customers. The KYC verification process ensures that the financial institution will not act as an intermediary in money laundering or terrorism funding activities.
Financial Inclusion: Financial inclusion refers to financial and banking services being offered to all businesses and individuals, including disadvantaged and vulnerable groups.
Long-Tail Personalized Service: It provides niche services to customers based on their needs rather than general and basic services. Such services are personalized and customized, aiming to improve customer loyalty and satisfaction.
Smart Contract: It is a program or protocol running on blockchain to automate the facilitation, verification, or enforcement of a contract when predetermined conditions are met.
Anti-Money Laundering (AML): Anti-money laundering includes laws, regulations, and procedures to monitor and prevent suspicious activities and transactions related to illegally obtained proceeds.
SWIFT (Society for Worldwide Interbank Financial Telecommunication): SWIFT is a messaging network used by financial institutions for transferring international electronic payments via payment orders.