Finance Monthly - January 2022

costly, slow, opaque and dogged with security issues. Because of a lack of standardisation between countries, transfers tend to require a number of intermediaries to carry out tasks like verifying a sender or receiver’s identity and creditworthiness. This is not only time-consuming but adds extra costs. What’s more, these transactions often take place on outdated legacy systems, potentially rendering those involved vulnerable to security breaches. So why exactly is blockchain increasingly considered a better alternative? Why are financial institutions moving towards blockchain? It’s more cost-effective Instead of paying transfer fees to multiple intermediaries, those using blockchain only pay a nominal fee to a financial institution or nothing at all. Deloitte estimates that business- to-business and person-to-person payments with blockchain are 40% to 80% cheaper than the standard transfer process. It’s quicker In thesamestudy, Deloitte revealed that blockchain transactions are also astronomically quicker than conventional cross-border transfers due to being near- instantaneous. On average, they take around four to six seconds, compared to two to three days, with none of the hoops around intermediaries to jump through. It’s more secure When records are maintained by one central authority, such as a bank, they are vulnerable to hacking and other threats. But all transactions within a blockchain are tied to previous transactions, as well as being protected by cryptography. Consequently, a hacker would have to also hack every other transaction on the ledger, making it nigh-on impossible to infiltrate. It’s more transparent Considering a blockchain is a public record of digital transactions, it is a lot more transparent than traditional banking. Each party has an identical copy of the ledger, which is continually updated by the connected computers. This also removes the risk of discrepancies between different records, unlike with financial institutions which each have different databases that may not feature matching data. What does the future hold for blockchain in the global payments system? Whileblockchainiscertainlygaining traction in the global payments sphere, it’s unlikely to replace the traditional payment system in the near future. International transactions must meet complex regulatory, compliance, finance and operational requirements, making it hard for independent companies to offer blockchain- based cross-border payment systems. Rather, we’re more likely to see an increasing number of banks use the technology themselves to provide blockchain transactions through their existing payment systems. Finance Monthly. F i nanc i a l Innov a t i on & F i nTech 61

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