Can financial institutions be trusted with our life’s money?
Who can you trust with all your finances? What if one day you realize the financial institution that you entrusted with all your life’s savings was run by one person? What if he never intended to fulfill his promises and suddenly vanished into thin air with all your money? Do you feel insecure now?
Let’s think of a different scenario where the central administrative authority of the financial institution had all the intentions of serving you. However, that doesn’t safeguard you from losing your money to duplicitious activities of an employee in the firm. These situations are not a product of my curious mind but a reality supported by various instances.
In February 2018, one of the largest state-run banks in India, Punjab National Bank, issued a letter to other banks informing them of illicit Letter of Undertakings (LoU) issued on behalf of few companies belonging to Nirav Modi group. These letters were issued by ‘junior level’ branch official that collectively allowed a loan of Rs 11,400 crore (about USD 2 billion) to the said group. Nirav Modi vanished with the money and never repaid it to the bank. The state-run bank is now pulling all the stops to recover that money from its customers, i.e., people like you and me.
In another instance that occurred in 1995, Barings Bank collapsed due to a major trading loss caused by the unauthorized trading done by Nick Leeson, the head derivatives trader in Singapore. Nick was directed by his superiors to buy Nikkei 225 futures contracts listed on the Japanese securities exchange named Osaka Securities Exchange along with Singapore International Monetary Exchange. The next step was to immediately sell them at a small profit in another market where the prices differed. Defying the suggested strategy, Nick held on to those contracts bought from one market, playing a gamble based on the future direction of the Japanese markets. The unidentified losses continued to add up and were only recognized when it was too late, and the bank went bankrupt. All the people who had their savings in the bank lost their money with the collapse of the institution.
On 23rd March 2018, Danske Bank gave its take on cryptocurrencies in one of its blogs. It said, “As a financial institution, we have an obligation to assist in the fight against financial crime and money laundering. At the current stage, cryptocurrencies do not offer the sufficient level of transparency in order for us to live up to our obligations within anti money laundering regulation.”
Ironically, the same bank was accused for laundering $235 Billion in September 2018. This amount is greater than the entire cryptocurrency market cap which is $225 Billion. The money laundering was only possible because of lack of transparency in the operations of financial institutions.
But how can we solve this problem? Can we really trust any financial institution? What if I tell you that the solution to this problem is elimination of the trust factor altogether?
Decentralization is the ultimate solution that the financial sector needs. What is decentralization and how can decentralization help the society in building a corruption free economy?
We are looking at a future where Blockchain Technology will help in achieving the desired transparency in the FinTech industries because of its immutable, trustless and decentralized nature. Financial Institutionals are already on their way of implementing blockchain related technologies such as distributed ledger technology, smart contracts, and technical standards (as followed by ERC-20 tokens) that brings the data out in open for every concerned party to review, successively eliminating the chances of fraudulent activities.
But the question arises, How can a decentralized economy help society?
