Banking has quietly begun to embrace Web3, the next generation of the internet, which integrates elements like blockchains, smart contracts, digital currencies, and nonfungible tokens. Embracing web3 will need banks to discover novel consumer trust-building strategies. Financial institutions must put in a lot of effort to build wholesome relationships rather than enter a sector and start making money.

As web3 banking takes center stage, the middleman will have no place. Smart contracts will be extensively deployed for asset swaps, remittances, insurance, and trade finance. Users will thus benefit from automation efficiency. This article will discuss how Web3 will impact the banking industry.

What is web3 banking?

Decentralized banking and Web3 go hand in hand. New financial ventures have already begun to combine both technologies. They believe that people can save and spend money without the help of banks. According to Market Research Future, the market for Web 3.0 blockchain technology will be valued at more than $6 trillion in 2023. From 2023 to 2030, Web 3.0 is expected to increase at a CAGR of 44.6%. Supporters of stablecoins and DeFi contend that this enables a sizable section of the global populace to borrow, spend, and use the digital currency without having to provide any supporting evidence or adhere to the rules set down by traditional banking. They can even use anonymous Web3 accounts to do it.

Web3 banking was chosen because a bank that relies on legacy infrastructure can fail. Still, a digitally equipped bank with the right information systems and technology will succeed. Decentralized cloud platforms were created using API-driven technologies. A cutting-edge payment system that can conduct transactions and integrate with different digital currencies is required in this new environment.

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How can traditional financial institutions adapt to the modern world?

Web3 banking enables direct connections between creators and users and the financial system. These early settlers must secure their finances, safeguard assets, and maintain a reserve fund. In the US, the Office of the Comptroller of the Currency (OCC) advised that banks provide users of cryptocurrencies with safeguarding and custody services. This includes accessing users’ “cold” and private wallets, in which users keep their valuables.

How can banking benefit from web3 technology?

There are several benefits that web3 offers to today’s banking sector.

Faster Financial transactions

In banking history, it has never been possible to transfer money quickly enough to settle transactions. Settlement clearing will move more quickly from its existing multiple business day lags. Regardless of time or day, it will go from days to seconds. Transaction and settlement costs for remittances sent in foreign currencies would significantly decrease. Without the user having to be aware of the underlying blockchain technology, these upgrades are made in the backend.

Blockchain-based credit reports

Credit reports do have an impact on consumers’ financial lives. Blockchain-based credit reporting may affect clients’ financial lives more than traditional, centralized credit reporting. It also enables businesses to calculate credit scores using unconventional factors. Web3 enables the provision of high-quality, blockchain-based credit histories. Both traditional credit products and loans made using blockchain technology will be far more accessible to consumers. Soon, automated credit lending and borrowing, safe credit history verification, and decreased administrative costs for consumers and businesses will be possible with blockchain-based solutions to provide financial credit services.

Cost-effective compliance

Blockchain solutions offer stakeholders full auditing, transparency, and a live view of the key papers that regulatory bodies normally request to see. American federal laws mandate that licensed banks submit suspicious activity reports to FinCEN (Financial Crimes Enforcement Network). To control fraudulent transactions, regulators rely on the banking industry. Financial institutions can easily track suspicious behavior thanks to blockchain systems that enable extensive financial metadata to be incorporated into a transaction.

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Benefit daily banking customers

We can already see blockchain solutions’ effects on the banking and finance sectors. A few fintech businesses let you send and buy cryptocurrency. These cryptocurrencies can be combined with conventional fiat money. Bank transfers that are speedy, simple, and have cheap fees for international remittances may soon be available in nations with developed financial infrastructure. This is blockchain’s first significant impact on everyday banking consumers’ lives. Blockchain technology can establish a brand-new financial system in nations without a banking infrastructure. If these consumers have access to the internet in nations with limited banking infrastructure, they will accept new markets, laws, and financial services concepts more readily.

Web3 banking applications

Some potential applications for web3 in banking are listed below:

Tokenized securities and assets

Investment banks use tokens for individual securities, bonds, and other assets. The tokenization of these assets offers you two major advantages:

  • As the customer requires seamless trading, it is simple to generate securities and bonds.
  • The asset can start auto trading using smart contracts, allowing banks to create an algorithm that can reduce risks and increase returns.

This situation is demonstrated by tokenizing expensive physical goods using NFTs, such as diamonds or works of art. Consequently, the item could also be traded.

Digital currency backed by central banks

Federal or central banks are developing digital currency backed by banks. According to a recent financial declaration in the US, they intend to introduce Central Bank Digital Currency (CBDC) before the parliament enacts a crypto-bill. Additionally, according to a plan announced in the Union budget, CBDC will be introduced in FY23, and the Financial Act will treat CBDC as bank notes on par with fiat money. The same is intended for a few prototype projects. This will make it possible for Indian users of CBDC to do online trading.

Virtual banking

One essential application of web3 in banking is a virtual visit to banks through the metaverse. Customers can visit a virtual branch of a bank, engage with the employees virtually, and do transactions using their customized avatars. It’s interesting how remote services have taken off since the outbreak. Customers can interact more easily with advisors from their homes because of the metaverse’s immersive features. Financial planning, financial reviews, virtual annual portfolio evaluations, mortgage counseling, and similar services can be facilitated by utilizing the power of the metaverse. Once a consumer decides, transactions can be carried out using token-based assets, transforming how customers interact with banks.

Employee onboarding

Through the metaverse in web3, it can hold 1:1 virtual meetings and provide employee training. Banks can use the technical features of web3 to overcome communication gaps between personnel working in tier 1 cities and those in tier 2 and tier 3. As a result, staff relationships are strengthened, and customer service is streamlined, resulting in an easier and more efficient onboarding experience.

How can smart contracts help lending and web3 in banking?

Although the mode of the money will vary, it will be common for depositors to want to earn interest on their web3 deposits. Customers will retain their funds in a non-custodial wallet, which is nothing more than an account on the blockchain, in web3, instead of relying on banks or unregulated platforms. In this case, ownership and transaction data are stored on the blockchain rather than with the bank or other unregulated organizations. Customers don’t have to rely on intermediaries or banks to lend their money. Instead, they can use smart contracts to secure their money. The smart contract holds the money in escrow and only releases them when specific conditions are met. People can still look for loans with traditional lending, but with web3 lending, smart contracts only release funds when the borrower produces enough collateral.

Closing thoughts

The most ardent supporters of Web3 believe that Web3 can introduce a completely new decentralized economic system. Both centralized and decentralized systems and business models are expected to dominate the future. Banks can establish a network of trusted buyers, sellers, exchanges, and service providers by utilizing the web3 connected web network. As a result, the bank’s status as a reliable partner in the growth of the customer’s finances and as a financial safety net is maintained and enhanced. Financial institutions and banks undoubtedly will have a role to play in Web3, regardless of how it develops.

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