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The Impact of Blockchain on Investment Banking

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One of the most significant advantage Blockchain and its technologies has to offer is its ability to solve various issues. In the banking industry, Blockchain has helped accomplish tremendous work by facilitating faster remittance services and reducing fraud.  There are many use cases of blockchain technology in the banking industry, including helping reduce the inefficiencies within investment banking. 

Initially, the Investment banking sector had many inefficiencies that made it hard to provide services to customers. Some of the inefficiencies included costly reconciliation processes and systems, cumbersome trade, confirmation processes, data quality issues that lead to trade breaks, complex regulatory, and reporting requirements. Within the last couple of years, Blockchain has completely turned things around. Here are a few things worth noting.

Smart Contracts

For investment banks, in particular, the smart contract serves more than recording a transaction. These contracts are now being used to automate contracts, including processes such as conveyance, payment, execution, and escrow. By using smart contracts, investment bankers are now able to act fast in case of extremely time-sensitive investments, and markets.

Faster data reconciliation

While Blockchain is still going through various developments, technology has played a significant role in shaping multiple investment banking processes. Let us start by understanding how Blockchain works. Blockchain technology uses blocks of data in a chronological chain sequence in a shared ledger. It allows for authentication and verification for several processes. Blockchain replicated simultaneously in real-time across various computer nodes in different geographic. 

Since Blockchain is a shared ledger, it has enabled faster reconciliation of data within the banking industry. Traditionally, organizations and investment bankers had to send data back and forth regularly, which was a time-consuming process for both parties. 

However, Blockchain, by contrast, has helped reconcile the entire transaction process by providing all the needed information under one platform. Bankers and other institutions share and store the data on the public, private Blockchain. The shared ledger has made it easier and faster for organizations to find any information needed for a particular transaction. 

Increased security and transparency

The main advantages of Blockchain to investment bankers are increased security and transparency. Generally, the traditional banking system is highly prone to attacks that lead to the loss of funds and customer data. This has forced many to look for better security measures to prevent such instances. Blockchain’s nature provides automatic security and integrity of transaction records, down to the individual transaction level. This includes even the minor alteration in a record that becomes evident almost immediately; it is done throughout the chain.

Blockchain keeps a perfect record of all transactions between parties. Everyone with access to the platform can view activities done by both parties. In addition, no change can be done without the approval of all coders and parties involved since Blockchain ensures everyone operates within the set stimulations of the project. 

Eliminated fraud cases

According to expert reports, fraud and cyber-attacks are the main challenges facing the banking industry. Blockchain creates an irrefutable digital paper trail that is more transparent and cuts out room for manipulation. Since third parties cannot manipulate data stored on Blockchain, fraud cases have reduced significantly.

Lex Sokolin, a fintech expert at ConsenSys, a developer of solutions based on Ethereum blockchain technology, explains:

 “Blockchains help create public sources of truth, which means they reflect the one and only set of global transactions that are mathematically verified and secured. To that end, it becomes harder to cheat the system at the actual data,” 

Also, Investment banks are required to perform their own Know Your Customer (KYC) checks to avoid identity theft cases. By providing a shared-client database in a blockchain, investment banks are now able to onboard previously, KYC validated investors from other financial institutions. The process entails investor uploads requisite KYC documentation into the shared database, and customer authorizing the Investment Bank in question access rights to the KYC documentation.

The industry that is full of money laundering and many illegal activities, Investment bankers, are using the Anti Money Laundry (AML) within the blockchain space to reduce these instances. This is being used in the same sequenced chain validation process with KYC. If the bank encounters any lousy character, they record the information on the database, which alerts other vital players. 

Increased savings

Blockchain technology has helped various industries save billions of dollars by eliminating unnecessary processes. Reuters reported that in the coming days, banks could save $8 to $12 billion by 2025 if they adopt blockchain technology. Additionally, the technology is helping investment bankers cut down on investigation costs, cost incurred during the validation process, and many more. 

According to reports, banks lose about $20 billion annually from Identity fraud only. Since the introduction of Blockchain, investment bankers have saved an estimate of about 30-50% globally on AML and KYC compliance.

According to Accenture, Blockchain can help banks save up to 70% on Central Finances reports. This is mainly due to streamlined and optimized data quality, internal control, and transparency. When it comes to centralized operations and business operations, investment banks can save up to 50%.

Payment

While many banking institutions had initially expressed great distrust in using blockchain’s innovation, cryptocurrencies, the last couple of months have seen many financial entities adopt them for payments. By the end of 2019, many central banks began exploring the possibilities of having a central bank-issued cryptocurrency. The shift was partly a response to the challenge that existing cryptocurrencies such as Bitcoin pose to their operations. 

While the investment banking industry is yet to use cryptocurrencies for payment, Switzerland’s UBS has come up with the ” utility settlement coin,” which aims to create a digital currency for use in financial markets by issuing tokens convertible into cash on deposit at central banks.

For the payment industry, making payments using cryptocurrencies has proved to be a faster and cost-effective endeavor.  Investment Bankers and their clients are also shifting to cryptocurrencies partially because; traditional currencies are currently under pressure due to increased inflation rates. The cryptocurrency market currently seems to be the better alternative. 

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