How Banking Is Adapting Blockchain Technology

As a decentralized, immutable ledger system, blockchain offers banks the potential to reduce transaction costs, improve security, streamline compliance processes, and enable near-instantaneous transaction settlement. Major financial institutions, from JPMorgan & Chase Co. (JPM) to Goldman Sachs (GS), have been developing blockchain services, particularly in areas like cross-border payments, know your customer (KYC) verification, and trade finance.

However, widespread adoption faces significant hurdles. Technical challenges around scalability, high energy consumption, and integration with legacy systems remain barriers. Regulatory uncertainty and concerns about privacy and data protection have also slowed implementation. In addition, blockchain’s potential to eliminate intermediaries poses existential questions for banks’ traditional role as the go-between in financial transactions.

Key Takeaways

• Blockchain technology could reduce transaction costs significantly by eliminating intermediaries, automating processes with smart contracts, and streamlining compliance tasks.
• Blockchain’s immutable ledger provides a tamper-proof system for recording transactions. This transparency might boost trust while reducing the risk of fraud and errors in the banking sector.
• Despite its promise, blockchain adoption faces significant hurdles, including scalability, regulatory uncertainty, and high energy consumption.

What Is Blockchain and What Does It Offer Banking?

Blockchain is a digital ledger technology where transactions are recorded across a decentralized network of computers. Unlike traditional systems, blockchain entries are immutable—once a transaction is verified and added to the chain, it can’t be altered or deleted. This creates a secure and transparent record that’s resistant to tampering or fraud.

What Blockchain Offers Banking

Proponents argue that blockchain technology offers the following:

Improved Efficiency

Blockchain could automate many processes, from transaction verification to compliance, significantly reducing manual errors and administrative tasks. This efficiency could cut costs for banks and enable faster transaction settlements.

Stronger Fraud Prevention

The tamper-proof nature of blockchain ensures transaction authenticity, making it nearly impossible for bad actors to manipulate data. This heightened security reduces fraud risk in payments, lending, and identity verification.

Cutting Costs

By eliminating intermediaries, blockchain lowers the costs of cross-border payments, clearing and settlement, and trade finance. These savings could be passed on to consumers through lower fees.

New Financial Products

Smart contracts, self-executing contracts with terms directly written into code, could allow for new financial services, such as programmable loans.

Problems Blockchain Hasn’t Solved

Despite being touted as a revolutionary technology, blockchain has faced significant barriers to mainstream adoption in banking. Translating its promise into reality has been fraught with technical, regulatory, and operational challenges.

Here’s a closer look at why blockchain adoption has been slower than anticipated, what has been attempted, and where it has fallen short.

Blockchain’s Trilemma

As Blockchain 3.0 —the generation related to expansive banking use—requires more network capacity, it’s essential to recognize the inherent trade-offs in blockchain design. These trade-offs revolve around three core elements:

• Decentralization: Distributing control and decision-making authority across the network.
• Security: Safeguarding data integrity and preventing unauthorized access.
• Scalability: The network’s ability to handle a growing number of transactions per second while maintaining its performance.

The trilemma arises from the inherent tension between enhancing one aspect and inevitably compromising another:

Decentralization vs. Scalability

Greater decentralization requires more nodes to validate each transaction. However, a larger number of validators slows down the network because of the consensus requirements. Faster networks often focus on speed by employing fewer validators, leading to increased centralization.

Security vs. Scalability

Robust security relies on comprehensive validation systems. These meticulous checks, while crucial, slow transactions. Faster systems may compromise security rigor to achieve higher speeds.

Decentralization vs. Security

Distributing control among many participants can improve security but hinders rapid threat response. Conversely, a more centralized system can react swiftly to attacks but concentrates control in fewer hands.

Integration with Legacy Systems

All banks have legacy IT systems, and transitioning to blockchain requires considerable time and resources. Compatibility and standardization issues further complicate integration, as the World Bank has found with its attempts at blockchain-based bonds.

Regulatory and Compliance Concerns

Regulatory uncertainty surrounding blockchain and cryptocurrencies creates risks for banks. Laws and regulations differ not just across nation-state borders but often within them.

Privacy Issues

While blockchain is secure, it is also transparent. Public blockchains expose transaction details to the network, which could conflict with banks’ need for privacy and data protection laws like GDPR in the EU.

Banking Blockchain Initiatives

Here are specific projects that are underway in the global banking sector:

JPMorgan Chase’s Kinexys

JPMorgan Chase initially launched Onyx, a private blockchain network for wholesale payments, but rebranded it as Kinexys in early 2025. Kinexys facilitates a variety of financial transactions, including cross-border payments, foreign exchange, and securities settlement. The platform has an average daily transaction volume exceeding $2 billion and serves clients across five continents, including major corporations, financial institutions, and fintech companies.

• Key player: JPMorgan Chase
• Challenges: Scalability, interoperability with the pre-existing financial infrastructure and other blockchain networks, navigating the evolving regulatory landscape, security and privacy measures to protect sensitive financial data.

Fnality International

Fnality International is a consortium of global banks—including Banco Santander S.A. (SAN), HSBC Holdings, plc (HSBC), Barclays plc (BCS), and UBS Group AG (UBS)—meant to streamline cross-border payments using blockchain technology. The project is focused on “utility settlement coins,” which are digital representations of fiat currencies backed by central bank reserves.

• Key Players: Santander, HSBC, Barclays, UBS
• Challenges: Regulatory approval and achieving widespread adoption.

JPMorgan’s Liink

JPMorgan Chase’s Liink network is a permissioned blockchain platform designed to improve interbank communication. By enabling faster and more secure information exchange, Liink aims to streamline processes like account verification and payment dispute resolution. Over 400 financial institutions have joined the network.

• Key player: JPMorgan Chase
• Challenges: Scalability, interoperability with other blockchains, and broader adoption

Project Agora

Led by the Bank for International Settlements, Project Agora seeks to improve efficiency and transparency in the trade finance sector. Built on the R3 Corda platform, it creates a shared digital ledger for real-time tracking of trade transactions. By tokenizing trade assets like invoices and letters of credit, Project Agora aims to improve cash flow for businesses and cut fraud.

• Key players: HSBC, BNP Paribas
• Challenges: Regulatory uncertainty, interoperability, and broader adoption

Canton Network

The Canton Network, spearheaded by SIX, Deutsche Börse, and Goldman Sachs, aims to create a unified infrastructure for financial markets. The Canton Network is essentially a privacy-enabled, interoperable blockchain network designed for institutional assets. It’s built on the digital asset modeling language (DAML), which can be used to create smart contracts with strong privacy controls. However, maintaining confidentiality while ensuring transparency and auditability remains a challenge.

• Key players: HSBC, BNP Paribas
• Challenges: Regulatory uncertainty, interoperability, and broader adoption

Versana Platform

Backed by major banks like JPMorgan Chase, Bank of America Corp. (BAC), and Citigroup Inc. (C), the Versana Platform targets the syndicated loan market. It offers a centralized platform for real-time data access, reducing manual errors and delays in loan servicing. Built on the DAML smart contract language, Versana seeks to improve efficiency and transparency in this multi-trillion-dollar market. However, its success relies on overcoming the inherent complexities of the syndicated loan market and achieving widespread adoption among various stakeholders.

• Major players: JPMorgan Chase, Bank of America, Citigroup, Credit Suisse, Barclays, Morgan Stanley, Deutsche Bank AG (DB), Wells Fargo & Co. (WFC), and U.S. Bancorp (USB)
• Challenges: Regulatory uncertainty and interoperability

How Would Central Bank Digital Currencies (CBDCs) Affect the Relationship Between Commercial Banks and Central Banks?

In a blockchain-based CBDC system, central banks could interact directly with consumers, potentially bypassing commercial banks for certain transactions. This could reduce commercial banks’ role in money creation and deposit-taking. However, commercial banks would likely remain crucial for credit, customer service, and other money matters.

If Blockchain Ends Up Enabling More Peer-To-Peer Financial Services, What Role Would Banks Still Have?

A future where most peer-to-peer services are done through the blockchain appear, in the mid-2020s, unlikely anytime soon. Nevertheless, should that happen, banks could become “trust anchors” in blockchain networks, offering services based on their expertise in regulatory compliance, security, and risk management. Banks could provide value-added services like digital identity verification, custody services for digital assets, and services integrating traditional and blockchain-based financial systems.

What Other Sectors Are Implementing Blockchain-Based Services?

Some sectors doing so include supply chain management, with companies like Walmart Inc. (WMT) using blockchain to track products from source to shelf, ensuring authenticity and rapid response to recalls. In healthcare, organizations are implementing blockchain for secure patient record management and pharmaceutical supply chain verification. Some parts of the real estate sector are using blockchain for property records and automated smart contracts for property transactions.

The Bottom Line

While cryptocurrencies initially brought blockchain into the spotlight, advocates say its true potential lies in its ability to transform core banking operations. From reducing settlement times and costs in cross-border payments to streamlining KYC processes and enabling smart contracts, blockchain could solve longstanding banking inefficiencies.

However, success will depend on how banks navigate key challenges, including regulatory compliance, scalability issues, and integration with existing systems. Most financial institutions are pursuing hybrid approaches—combining blockchain’s advantages with traditional banking expertise rather than viewing it as a complete replacement for existing systems.