Introduction
In the past decade, major banks and financial institutions had ample opportunity to explore the potential of using blockchain technology for enhancing cross-border and interbank transactions. This advancement could have led to the development of efficient, regulatory-compliant solutions that would be ready for implementation once authorities granted their approval. Regrettably, few initiatives were actually undertaken.
Current State of Blockchain in Banking
Notably, JPMorgan’s Onyx project, now rebranded as Kinexys, demonstrated the feasibility of institutional blockchain solutions. However, such projects remain exceptions rather than the norm in the industry. Now that regulatory frameworks are beginning to clear the path for innovation, the sector has missed a critical opportunity to launch effective, ready-to-use systems. The repercussions are felt globally, as the failure of banks to modernize their operations incurs costs in the billions due to ongoing friction in transactions.
Challenges in Traditional Banking
The traditional banking system is rife with challenges, mired in inefficiency. For instance, settlements in securities, foreign exchange trades, and various transactions still take days to finalize. Each delay not only incurs costs but also results in capital sitting idle in intermediary accounts—funds that could be making returns or fuelling new initiatives. Take Brazil, where individual cross-border payments often wind their way through offshore bank branches, further adding to the latency, expense, and complexity of compliance. This system ultimately translates to higher fees for consumers and diminished liquidity for corporations.
This delay in transaction finalization comes at a significant cost, akin to how risks in credit markets dictate interest rates. Financial institutions are aware of these inefficiencies and should have seized the opportunity to enhance their systems. Unfortunately, they have not taken decisive action.
The Evolution of Financial Risks
Historically, financial analysts highlighted “internet risk” in their assessments at the dawn of the digital age, but this concept has faded, as internet infrastructure became fundamental. Similarly, as blockchain technology matures and security and insurance standards are established, it will inevitably transition from a perceived risk to a crucial asset that enhances operational security.
Opportunities in Decentralized Finance
Moreover, inefficient traditional financial systems create lost opportunities for investors. In private equity or venture capital, funds can be locked for up to two decades, restricting liquidity. In contrast, cryptocurrency tokens may become viable for trading significantly sooner, often on global exchanges, which streamlines the funding cycle and minimizes financing stages. Even while unreleased, these tokens can still be utilized for staking, generating yields, or serving as collateral. Hence, capital that would have remained stagnant in conventional finance can continuously circulate within decentralized finance (DeFi) frameworks.
The impact of blockchain extends beyond earnings and trading mechanisms to fixed income markets as well. Unlike traditional bonds that pay interest biannually, on-chain yields can accumulate almost instantaneously. Additionally, meeting margin calls in conventional finance can take days due to cumbersome processes, whereas collateral in decentralized finance can be transferred instantly. For example, when the crypto market experienced significant liquidations, timely settlement occurred without delay.
Impact on Emerging Markets
Emerging markets, particularly Latin America, are disproportionately affected by banking inefficiencies. In Brazil, individuals are not permitted to hold foreign currency domestically, creating necessity for foreign exchange transactions. Particularly in cross-border operations, this can lead to multiple trades, each accompanied by delays and costs. Utilizing blockchain technology allows for direct settlements, which could significantly streamline these processes while eliminating elaborate intermediary steps.
Even the rigid cut-off times imposed by traditional banking can slow operations, as seen in Brazil’s same-day foreign exchange trades which must conclude by early afternoon. In contrast, the 24/7 nature of blockchain transactions liberates businesses from these constraints, allowing real-time settlements irrespective of time zones.
Conclusion
These pressing issues within banking systems could have been alleviated through early adoption of innovative solutions. Brazil’s environment, in particular, faced less regulatory resistance than in other nations like the United States, underscoring why these challenges persist today.
The finance sector has always been cautious of delays, understandably treating them as risks. With blockchain technology, however, these risks can be significantly diminished, transforming how instantaneous transactions and settlements can free up capital. Until banks and financial service providers commit fully to adopting blockchain-based solutions, the global economy will remain burdened by their inertia. Consequently, the financial toll of this delay continues to escalate, compounding with each passing day.
— Thiago Rüdiger
