Blockchain, also known as Digital Ledger Technology (DLT), allows for decentralized financial transactions while maintaining anonymity or pseudonymity without a central authority. Participants in blockchain transactions are accountable for their actions, and while innovation in this area continues, regulations are also becoming more comprehensive and transparent. By observing these trends, one can understand the potential impact of DLT on banks and other financial institutions. As the market for blockchain expands, the opportunities in the field of blockchain banking increase.
Smart Contracts
Smart contracts are digital versions of legally binding agreements that establish obligations and decision-making criteria between multiple parties. Unlike traditional contracts, they utilize blockchain technology to track modifications and other relevant actions, offering features that are not available in conventional contracts.
Smart contracts ensure accountability by implementing automated monitoring of the agreement. Any unauthorized alteration or forgery of a signature is illegal, and with smart contracts, it’s also technically infeasible. Each signer’s digital identity is linked to the contract, and each provision is time-stamped automatically.
INITIAL COIN OFFERINGS (ICOS)
Commercial and investment banks could explore potential involvement in ICOs as intermediaries and underwriters, similar to their current role in IPOs. Such participation offers advantages to clients, including faster processing times and increased accessibility. Participants can trade tokens in real-time, similar to stocks, but with the added flexibility of trading from any location and at any time of the day.
Through tokenization, asset owners and developers can promote their projects worldwide to both retail investors and institutions. This approach provides greater liquidity and transparency in the domain of initial offerings.
ASSET-BACKED DIGITAL TOKENS
Compared to non-blockchain-based programs, tokens offer several advantages. The access cards associated with tokens cannot be misplaced or stolen, and the system is less susceptible to the disclosure of personal information. Owners can convert tokenized assets into various forms of currency or trade them in real-time with minimal transaction costs. In the past, token opportunities were restricted to accredited institutional investors, but nowadays, the entry barriers are lower.
NONFUNGIBLE TOKENS (NFTS)
NFTs utilize blockchain to ensure the authenticity of non-fungible assets, a process that can be challenging. Platforms like Rarible.com and OpenSea.com maintain protocols where creators or collectors can register their assets, provide a description of the work, and specify how it can be sold, whether through direct transactions or auctions.
The worth of an NFT mirrors the value of the asset linked to it, although the asset may not always include the artwork. As an example, an NFT might represent ownership of a digital collage designed by an artist to be exhibited on large video screens. While the artist or another manager may oversee copyright, including the location and duration of display, the NFT owner would control sales rights.
CENTRAL BANK DIGITAL CURRENCIES (CBDCS)
Central banks globally are considering developing their digital currencies in response to the decline in cash usage and the proliferation of private cryptocurrencies. As a digital currency issued by a nation’s central bank, a CBDC isn’t a purely fiat currency. Instead, it serves as a liability against the country’s reserves, validated through a blockchain-based technology system.
DECENTRALIZED FINANCE (DEFI)
The DeFi sector is experiencing substantial growth, with fresh DeFi advancements arising frequently. Additionally, there is a trend towards modular DeFi solutions that integrate decentralized applications (dapps) and protocols like building blocks, with smart contracts serving as connectors, analogous to specified APIs in conventional IT systems. Thus far, the majority of DeFi initiatives have been constructed on Ethereum, making it the primary blockchain for most dapps.
ROBO-ADVISORY SERVICES
One of the most significant prospects for banks in the cryptocurrency sector could be to broaden their existing financial advisory services to include blockchain-based products. The demand for real-time automated financial advice powered by data and analytics is expected to surge, providing assistance in a fraction of the time required for human responses. Robots and automated software programs leverage algorithms or AI to track cryptocurrency transactions, identify indicators of promising buying or selling opportunities, and communicate them to investors or holders.