Introduction to the Blockchain Impact
The Blockchain impact in the world of finance has transformed the traditional banking system and revolutionized new changes. It has decentralization that increases transparency and security in the banking system. The blockchain’s decentralization enhances transactions and payments with the help of automation and smart contracts. Generally, it is a distributed Ledger technology where the information is not changed and assists in the settlement of the transactions in banking. Particularly, the nature of blockchain, which provides a secure and transparent approach to financial institutions, helps in transforming the traditional banking system. In addition, this plays a major step to offer efficiency and reshape the financial landscape in the banking system.
Overview of Traditional Banking System
Basically, in the traditional banking system, the banks act as intermediaries between loan borrowers and loan depositors. In this, there is involvement of setting up the money. The banks get profits in the form of interest and charge a percentage on the loans. The process of both transactions and withdrawals is made with the permission of centralized systems, which could delay the process. To clear the settlements, the process undergoes verifying and transferring the settlements (Kumar & Nandhini, 2024). This process involves multiple parties, which consequently led to more costs. Moreover, the centralized systems are prone to failures and vulnerabilities, which lead to financial crises. The high fee for services at banks burdens many customers.
Impact of Blockchain
Impact of Blockchain in the Banking System
Role of cryptocurrency
There are groundbreaking uses of cryptocurrency in the banking system and financial industries. Its decentralized nature has guaranteed businesses, individuals, and economic sectors worldwide. Generally, Cryptocurrency is known as a virtual currency. Earlier, in the traditional systems, there were central banks to approve the transactions, which caused delays. With the help of blockchain technology, it has enhanced security and transparency (Kumshe, Daneji, Dame, & Abubakar, 2024). Moreover, cryptocurrency lessens the cost of banking services and enhances the autonomy of individuals. Also, with the use of cryptocurrency, there is no involvement of cyber-attacks.
Enhancement in the transaction process
One of the major impacts of blockchain in banking is the speed of transactionsThe. This helps in speeding up the transactions and settlements. In the traditional banking system, there were many intermediaries. Consequently, that led to delays and more costs. With the enablement of peer-to-peer transactions (Ley, 2023), eliminated the need for intermediaries and enhanced the speed of transactions. In the traditional banking system, this takes weeks and several days to confirm and accept payments, whereas with the introduction of blockchain, it confirms immediately and enhances the process without delay. The transparent nature of blockchain records all the transactions. This supports the elimination of both errors and fraudulent activities.
Smart contract and Automation
One of the effective features of blockchain technology is the smart contract. Generally, it is the self-executing and written code. There is no involvement of humans. Also, there is automatic execution of codes. In the traditional banking system, for the verification of agreements, there is involvement of intermediaries, such as the government and contractors. With the help of smart contracts, the whole process is automated and executed (Pakenaite & Taujanskaitė, 2019). With the introduction of smart contracts, it eliminates the delay time and enhances the transactions. In addition, the transparent nature of blockchain ensures that the process is progressed with all the fulfillments and increases the trust. In the various sectors such as insurance, real estate, and supply chain management, it enhances the process by reducing operational costs and increasing efficiency.
Cryptocurrency in blockchain
Challenges of blockchain in banking
There are regulatory challenges and compliance issues in blockchain. Traditional systems rely on legacy systems, which have certain processes. The transformation to blockchain involves investments for both training the employees and maintaining the infrastructures. The integration also makes i difficult to manage the payments, loan management, and settlements, and is hard to be compatible with legacy systems (Sajjan, Pal, Chaurasia, Chawra, & Yadav, 2024). The introduction of blockchain in banking, it results in high energy consumption because it uses proof of work. It leads to sustainability challenges and environmental issues. Are problems related to latency and throughput limitations. With inadequate smart contracts, it would also lead to loss of financial services.
Future of banking with the usage of blockchain
The blockchain plans to enhance the traditional banking with the implementation of both cross-border payments and trade financing. The function of hybrid systems where the future would adopt only blockchain to enhance the services. Furthermore, increases blockchain adoption with an Internet connection and enhances the system globally. The blockchain permits the tokenization of elements such as real estate, commodities, and stocks. Also, making more investments in financial assets increases the usage. The future of blockchain banking enhances services such as efficiency, security, and decentralization with effective transformation. Introduction of blockchain with secured digital identities to eliminate cyber security issues in banking. With the help of digital assets, banking adapts to increase foreign transactions.
Conclusion
Blockchain has great potential to transform traditional banking with secured alternatives and faster transactions. Blockchain reduces the cost, enhances cross-border payments, and manages real-time settlements. In summary, there is a long-term impact of the traditional banking system with the involvement of blockchain, and it eliminates the challenges and creates great opportunities in the financial sector. However, there are challenges related to scalability and regulation with existing banking systems. But blockchain continues to address those problems. The banking system involves decentralized financial systems, particularly blockchain plays a main role. In conclusion, the future of banking with blockchain will be more beneficial to financial systems.
References
Kumar, G., & Nandhini, V. (2024). A study on cryptocurrency’s impact on traditional banking. Asian Journal of Management and Commerce, 5(2), 730-734. Retrieved from https://www.allcommercejournal.com/article/419/5-2-120-895.pdf
Kumshe, H. M., Daneji, B. A., Dame, S., & Abubakar, I. (2024). Examining the Impact of Cryptocurrencies on the Traditional Banking System: A Review. Journal of Economics, Finance and Management Studies, 7(8), 5197-5200. Retrieved from https://ijefm.co.in/v7i8/Doc/40.pdf
Ley, S. (2023, Dec 18). The Impact of Blockchain on Traditional Banking. Retrieved from Linkedin: https://www.linkedin.com/pulse/impact-blockchain-traditional-banking-suzanne-ley-tidde
Pakenaite, S., & Taujanskaitė, K. (2019). Investigation of the Blockchain’s Influence on Traditional Banking: Challenges and Opportunities. European Scientific Journal, 15(10), 1-15. Retrieved from https://www.researchgate.net/publication/332883072_Investigation_of_the_Blockchain’s_Influence_on_Traditional_Banking_Challenges_and_Opportunities
Sajjan, S., Pal, M., Chaurasia, P. K., Chawra, A., & Yadav, M. (2024). Impact of Digital Currencies on Traditional Banking Systems. European Economic Letters, 14(03), 626-631. Retrieved from https://eelet.org.uk/index.php/journal/article/view/1812/1630
Keywords
Smart contract, Cryptocurrency, Blockchain, Traditional banking system, Automation
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