ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY
SCHOOLS OF ELECTRICAL ENGINEERING AND COMPUTING
DEPARTEMENT: SOFTWARE ENGINEERING
BLOCKCHAIN AND CRYPTOCURRRENCIE ASSIGNMENT
SECTION 2
NAME ID NO
NIGUSIE BEKELE UGR/22627/13
EFREM MELAKU UGR/22651/13
EGNUMA GABISA UGR/23003/13
LIDIYA MULACHEW UGR/23156/13
LETI TAREKEGN UGR/22860/13
SUBMITTED TO: Mr.
I. INTRODUCTION
Today, banks are continuously exploring new ways to do transactions quicker for enhanced
customer services by assuring transparency to customers and regulators while ensuring cost
efficiency. Blockchain is an essential technology with promising application scenarios in
banking industry nowadays. It can transform banking industry and make process more
democratic, transparent secure and efficient. Blockchain is a technology that combine several
technologies like distributed data storage, consensus mechanism, point-to-point transmission and
encryption algorithms.
In the banking and finance sector, blockchain technology offers a range of benefits, including
enhanced security, improved efficiency, increased transparency, and reduced costs. It eliminates
the need for intermediaries, streamlines processes, and provides an immutable and auditable
record of transactions .Blockchain has been implemented in areas such as cross-border payments,
trade finance, capital markets, and Know Your Customer (KYC) processes. Financial institutions
and organizations have collaborated to develop blockchain-based solutions that address
inefficiencies, reduce fraud, and promote trust between parties.
APPLICATIONS OF BLOCKCHAIN TECHNOLOGY IN BANKING & FINANCE
Presented below are some specific points, where Blockchain can play a key role for helping
banks and financial institutions realize significant benefits.
a) Cross-border Payment
Blockchain technology can facilitate banks to make direct international payments economical
and efficient. First, banks need to have blockchain networks of their own allowing them to
transfer funds directly to another bank's network. All the transactions are recorded in the block
and are unchangeable. The ledger will be available to the parties involved and no middleman is
required. This way blockchain technology has the potential to reduce the time and cost
associated which is required with SWIFT.
Blockchain technology can help solve current problems in global payments by bringing new
solutions. A third party will not be required to make an international payment. Payment records
and bookkeeping are self-initiated which reduces operational cost. The transactions will be
performed in faster time. It will make payment easy and transparent for the customer.
Case study (Ripple (XRP)
Ripple, a blockchain-based payments platform, has been adopted by several financial
institutions to facilitate faster and more cost-effective cross-border transactions. Santander, a
multinational bank, implemented Ripple's technology for its One Pay FX platform, enabling
customers to complete international transfers in a matter of seconds.
Source: Santander One Pay FX
b) Know your customer (KYC)
Know your customer (KYC) is considered as another important use of blockchain in banking.
The average time banks take to complete the KYC process is around 26 days. It is the bank’s
responsibility and mandatory task to record the details of the customer and ensure that the details
are verified before establishing any financial transactions.
With blockchain technology, a customer data can be stored in a block and the block can be
shared between the banks. It increases the efficiency of operation and removes the repetitive
works.The data stored in blocks are immutable and ensures the information is correct. This way
once the data is stored, it can be used by other banks.
Current Pain Points How Blockchain Can Help
Data integration Intra-bank applications
Expensive technology Inter-bank applications
Evolving regulation Centralized blockchain-based KYC
Fragmented approach Fraud proof
KYC – using Blockchain Technology
Case Study (KYC-Chain)
KYC-Chain is a blockchain-based platform that simplifies and enhances the KYC process for
financial institutions. It enables secure sharing of customer data while maintaining privacy and
control over personal information. The platform has been successfully implemented by
institutions like Standard Chartered Bank, which used KYC-Chain to streamline its client
onboarding process.
Source: KYC-Chain Case Study
c) Capital markets
Blockchain technology has a great potential to transform the capital market trading system.
Capital market involves a heavy procedure and it often takes a long time to settle the accounts.
There are many intermediaries in capital markets such as banks (mostly investment), brokers,
investors, credit agencies and others who actively participate in the market. At present, these
participants keep their ledger themselves and make the changes. This process is time and money
consuming. The current problem with the capital market is that there are different clearing and
settlement systems. Since, there are many parties involved, it has a high counterparty risk. The
defaulting in one party can impact the whole market. The procedure is often slow and inefficient.
Blockchain can be used to increase the efficiency of trade and custody securities services.
Case Study (SETL)
SETL is a blockchain platform designed for capital markets. It provides a secure and efficient
infrastructure for asset registration, settlement, and custody. The platform has been used by
Citigroup to successfully complete a live transaction involving the issuance of equity swaps. The
use of blockchain technology reduced costs, increased operational efficiency, and improved
transparency.
Source: SETL Case Study
d) Trade finance
Banks play an important role in financing the global flow of goods. World Trade Organization
(WTO) estimates that around 80 - 90% of global trade is supported by trade finance. Trade
finance is a credit support and payment guarantee provided by financial intermediaries to satisfy
the trade transaction. One of the common forms of trade finance is Letter of Credit. Letter of
Credit is a written document produced by the bank on behalf of buyer promising to the seller that
the purchase amount will be paid on due date, if not banks will be liable to pay the amount. Like
the cross-border payment, drafting a Letter of Credit is a complex and lengthy process.
Blockchain technology could help increase the efficiency and cut the operation cost with smart
contracts.
Case Study (We.Trade)
We.Trade, a consortium of major European banks, leverages blockchain technology to enhance
trade finance processes. It provides a secure platform for small and medium-sized enterprises
(SMEs) to initiate and track international trade transactions. The platform has successfully
facilitated cross-border trades, such as the shipment of food products from the Netherlands to
Oman.
Source: We.Trade Case Studies
e) Smart contracts
Smart contracts are set of code which stored in Blockchain. These programs execute
automatically when conditions are met. They are performing cryptographic transactions,
transparency without intermediaries because of the decentralized ledger in blockchain. Smart
contracts are self-executing contracts with predefined rules encoded on the blockchain. They
automatically enforce and execute contractual agreements, eliminating the need for
intermediaries and reducing the associated costs and delays.
Case Study (Ethereum and The DAO)
Ethereum, a blockchain platform supporting smart contracts, gained attention with the launch of
The DAO (Decentralized Autonomous Organization) in 2016. The DAO was an investment fund
governed by smart contracts, allowing participants to vote on investment decisions. While The
DAO faced security vulnerabilities, the case study highlighted the potential of smart contracts to
automate governance and decision-making processes.
Source: The DAO Case Study
Benefits and challenge of applying blockchain in the banking and finance sector:
Benefit
Enhanced Security: Blockchain technology provides a high level of security through
cryptographic encryption and decentralized consensus mechanisms. It reduces the risk of
fraud, hacking, and unauthorized access, as transaction records are immutable and
transparent.
Improved Efficiency: Blockchain can streamline and automate various financial
processes, reducing the need for intermediaries and paperwork. This leads to faster
transaction settlements, lower costs, and increased operational efficiency.
Increased Transparency: The transparent nature of blockchain allows all participants to
view and verify transactions, promoting trust and reducing the need for audits. It
enhances transparency in areas such as supply chain management, cross-border
payments, and asset tracking.
Cost Reduction: By eliminating intermediaries and enabling peer-to-peer transactions,
blockchain can significantly reduce transaction costs associated with cross-border
payments, remittances, and trade finance. It also minimizes manual reconciliation and
data duplication costs.
Trust and Authentication: Blockchain's decentralized nature eliminates the need for
third-party trust entities. It provides a tamper-proof and auditable record of transactions,
enhancing trust between parties and enabling secure identity verification.
Challenge
Scalability: Blockchain networks face scalability challenges, particularly public
blockchains like Bitcoin and Ethereum. The consensus mechanisms and validation
processes can slow down transaction speeds as the network grows. However, there are
ongoing efforts to address scalability issues through technologies like sharding and layer-
two solutions.
Regulatory Uncertainty: The regulatory landscape surrounding blockchain and
cryptocurrencies is still evolving. The lack of clear regulations and compliance
frameworks can hinder widespread adoption in the banking and finance sector.
Regulatory compliance and AML/KYC requirements are critical challenges that need to
be addressed.
Interoperability: The lack of interoperability between different blockchain platforms
and legacy systems can complicate integration and data sharing. Efforts are underway to
develop standards and protocols to enable seamless communication and interoperability
between various blockchain networks.
Future Outlooks
Mainstream Adoption: As blockchain technology matures, we can expect increased adoption
by traditional financial institutions. The initial phase of experimentation and proof-of-concept
projects is transitioning into real-world implementation.
Central Bank Digital Currencies (CBDCs): Central banks worldwide are exploring the
concept of CBDCs, which are digital currencies issued and regulated by central authorities.
Blockchain technology is seen as a potential infrastructure for CBDCs, offering benefits such as
increased transparency, efficiency, and programmability.
Interoperability and Standards: Efforts are underway to establish interoperability standards
and protocols that enable seamless communication and data sharing between different
blockchain networks. This would facilitate the integration of various systems and promote
collaboration across industries.
Integration with Emerging Technologies: Blockchain technology is expected to intersect with
other emerging technologies, such as artificial intelligence (AI), Internet of Things (IoT), and
decentralized finance (DeFi). Integration with AI could enable smart contract automation, data
analysis, and risk assessment.
