We’ve taken time at Cryptoswede to explain to you what the blockchain is and how it works. Many people know that the blockchain is a fundamental aspect of cryptocurrencies like Bitcoin. What they may not know is that banking on the blockchain and other applications are in development. From healthcare data management to the recording of contracts, blockchains are being used for many things beyond the management of digital currencies.
Other Blockchains Besides Bitcoin
Bitcoin was the first example of a successful large-scale blockchain application. As we have explained, Bitcoin is not the blockchain. It is merely a cryptocurrency that is underpinned by a blockchain. Other tokens have created their own blockchains, and many companies are now researching how this technology may be used in their own businesses. IBM is just one of the companies that has invested millions of dollars in blockchain research and development.
Two popular cryptocurrencies that are doing exciting things with their blockchains are Ethereum and Ripple. Ethereum is unique in that its blockchain supports something known as Smart Contracts. It also makes it possible for developers to create decentralized apps, or Dapps, on the Ethereum platform. A Smart Contract is one that automatically executes when the conditions that have been established by two or more parties are met. This automated process makes creating a contract much quicker, and it also minimizes the chances that there will be errors in the data.
Dapps are also autonomous, meaning that they have no need for third-party involvement. By combining Smart Contracts and Dapps, Ethereum has the potential to change the way business models are envisioned. Imagine a vending machine that had the ability to reorder its own supplies, issue refunds, and manage inventory without needing human involvement, Or perhaps a car that could be operated without a human behind the wheel. Such things are not out of the realm of possibility when it comes to blockchain technology.
Ripple has chosen to focus its blockchain operations on financial transactions across borders. A problem with exchanging currencies from one country to another has always been that the process is expensive and takes a lot of time. Ripple is working to simplify the process. The Ripple blockchain is called xCurrent. It has the potential to remove the vast amount of institutions that are required for currency transfers. Cutting down on the parties involved means a more simple way to move money.
As you might expect, the presence of Smart Contracts, Dapps, and more efficient money transfers has attracted the attention of the banking industry. Banks are now beginning to explore ways that they can use a blockchain to improve their operations.
Spanish Banking and the Embrace of the Blockchain
Spanish financial institutions have become some of the first in the world to seriously explore how blockchain technology can improve their operations. In particular, BBVA has used the blockchain to issue and manage a large loan. BBVA chose to loan a company named Indra 75 million euro, and the entire loan process was carried out via the blockchain.
Think about the process that you must undergo when you want to borrow money from a bank. It involves a lot of paperwork. There are various individuals at the bank or loan company that must process that paperwork so that the loan can be delivered. BBVA wanted to find out if there was a more simpler way to accomplish this by using the blockchain and a Smart Contract to make the loan. It was very simple in theory. BBVA created an app that the bank and Indra used. The company used the app to put in all the data that was required by the bank in order to approve the loan. If BBVA required more documentation, or if the terms needed to be negotiated, the bank would use the same app to make changes.
This continued until the terms of the loan were worked out. The blockchain preserved a record of all the changes. Once all the terms had been satisfied, the loan was automatically executed by means of the Smart Contract. The entire process was handled automatically without the need for extensive involvement by the bank or the company’s personnel. This contract was then made a permanent record of the BBVA blockchain.
BBVA also chose to make the transaction a part of the Ethereum blockchain so that it became a part of a public ledger. The bank has estimated that it took 40-50% less time to process the loan through the blochchain than it would have taken to do it in the standard way. It is believed that the BBVA loan to Indra was the first ever global loan transaction made by a bank using a blockchain.
It is interesting to note that BBVA has referred to the blockchain as a “disruptive technology” in its discussion of the loan. Why designate it thus? Because the bank realizes that the blockchain has the ability to disrupt the banking industry as we presently know it. It also has the ability to fundamentally alter many other business models.
One of Spain’s major lenders, Santander, has also turned to Ripple to explore how the blockchain can be used for banking. One Pay FX is a means of money transfer that can be accomplished with xCurrent. It allows individuals to transfer money across borders. The technology handles all of the conversions that are necessary for the cross-border transactions to take place. The result is a means of transfer that is far less expensive for the user.
How the Blockchain Can Change Banking
Recently in the United States the users of the popular Netspend pre-paid debit card were shocked when scheduled direct deposits from employers did not appear in their accounts at the scheduled time. It was subsequently revealed that Metabank, the financial institution that issues the Netspend cards had suffered a breakdown of its direct deposit and ACH transfer system. Some cardholders were left in limbo for almost two weeks as they waited for direct deposits to post.
The problem was that an ACH processor that Metabank uses for processing direct deposits lost the ACH files that are necessary to process the deposits. While worried individuals waited to find out if they would be receiving their funds, Metabank tried to recover the missing files. The files were eventually located and the deposits were paid, but the incident serves as a reminder of the fragility of the American banking system.
Had the deposits been transferred using a form of blockchain technology, it would have been almost impossible for the ACH files to become lost. This is because the blockchain cannot be altered after a transaction has been recorded in the digital ledger. Therefore there would have been a permanent record of the deposits that could be accessed in order to process the payments.
The blockchain can change banking by making it more reliable and secure. It can reduce the chances that mistakes will be made, and it can virtually eliminate the possibility that individuals will lose access to their funds. These are big factors that are compelling banking institutions to explore the development of their own blockchains.
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