DLTs(Decentralized Ledger Technology) are databases of data, typically assets, that are shared over a network of nodes. In contrast to a centralized ledger, which needs assets to be stored in a “clearing house” (a centralized and secure database), a distributed ledger enables asset owners to control their assets directly via a network in which copies of the same ledger are stored locally at each node.
Essentially, traditional banking is incompatible with distributed ledger technologies since the latter’s technological foundation permits “simultaneous access, validation, and record updating” across a network that spans several places or entities. It permits the secure operation of a decentralised, digital database, obviating the requirement for a central authority to monitor for fraud or manipulation continuously.
The disparity in innovations between DLTs and traditional banking
Because distributed ledger technologies have the potential to disrupt the typical flow of assets processed by financial institutions, it is a little bit similar to DLTs but a better system than DLTs. The blockchain is an example of a DLTs. The name is coined from the fact that each block of assets is added to a transparent and permanent chain of transactions that keeps accumulating. This is where DLTs gives the banking system a run in seamless innovations.
DLTs are an improvement in payment, clearing, and settlement. Here, the entities will be responsible for their management which includes arrangement, modification, and updates of their source codes and nodes, while in the traditional banking system, governance and management are centralised and the entities have no power of modification.
Where DLTs are incompatible with traditional banks
DLTs are incompatible with banks, but not completely different when it comes to making payments. To aid banks in their clearing and settlement processes, DLT serves as a useful tool. It is still difficult and time-consuming to transfer money across international borders because of the many parties, brokers, and institutions involved in the process.
As a result of all of this, foreign payments can take up to three days to process. A decentralised blockchain-powered DLT eliminates the need for an intermediary and allows banks to process foreign transfers nearly immediately after they are begun, which is a huge benefit for both clients and banks.
However, the application of DLT in traditional banking services is exciting since it increases financial equity and access. The devastation caused by Covid-19, which has reduced incomes, employment, and entire sectors, makes this work even more urgent.
Boosting financial inclusion
Around 1.7 billion adults were reported to be unbanked worldwide even before the outbreak of the pandemic. DLT-based technology can provide cost-effective, scalable solutions with acceptable data transparency, safety, and accuracy to improve financial inclusion.
For unreached people, DLT offers cheaper transaction costs than traditional banks, making banking less appealing. Additionally, the cheap fees of DLT allow financial service providers to plan an extension of their operations across wider locations and customer segments that have previously been underserved by their current offerings.
Additionally, the cheap fees of DLT allow financial service providers to plan an extension of their operations across wider locations and customer segments that have previously been underserved by their current offerings.
The future of traditional banks: vis-à-vis DLTs
Businesses must first and foremost acknowledge that distributed ledger technology (DLT) and blockchain are disruptive technologies. Businesses in every sector, including financial services, could be transformed by it. However, it is critical to not get distracted by the hype surrounding it and instead concentrate on the underlying technology.
The traditional banking industry has been dragging its heels so far, which is understandable given the stakes in terms of costs and services. According to recent statements made by 90 percent of the European Payments Council’s members, blockchain technology will have a profound impact on the banking industry by the year 2025.
As a result, will the banks embrace or be displaced by this new technology? Only a small amount of water has been dipped into their shoes thus far. Banks have been trying out issuing bonds on blockchains for some time now, Financially, this makes sense.
The DLT’s automation and lack of a middleman is a major incompatibility and advantage of the blockchain over the traditional banking system. There are fewer intermediaries involved in the process of issuing financial instruments when using blockchain technology. Over the life of a bond, using blockchain technology to automate activities like correspondence, validation, and manual document updates could save at least 35% in total expenditures, according to German fintech firm Cashlink study.
The European Investment Bank (EIB) has already shown its faith in the blockchain technology that powers Bitcoin. In the first trade involving a group of banks and recorded on the Ethereum blockchain, it raised €100 million in April. Nevertheless, banks have made little progress when it comes to daily transactions. Then again, DLTs are here to stay.