7 Key Blockchain Adoption Challenges in Banking (2024)

Many of us are aware of blockchain technology in relation to decentralised finance (DeFi) and cryptocurrencies. But a rising number of banks and traditional finance (TradFi) providers are also now utilising blockchain. Not only does it unlock a range of new services to offer, but blockchain can also assist with internal back-end processes.

Despite increasing recognition of blockchain’s benefits for banks and TradFi, adoption still remains low – why is this?

Read on to learn about some common challenges banks face when integrating blockchain technology and digital assets. We’ll also explore some steps that can be taken to overcome them.

Previously, many banks saw blockchain as a risky, temporary venture – one synonymous with bitcoin. But in the past few years, the technology has continued to disrupt the financial sector.

Banks and financial institutions are discovering how blockchain can improve efficiency and automate processes. They’re also realising that it has the potential to create new streams of revenue and appeal to customers with its decentralised, more inclusive infrastructure.

It’s important to remember that all growth comes with challenges. If your organisation is considering blockchain adoption, you might want to act fast to avoid getting left behind. Are any of the following obstacles holding you back?

For many banks, budget is the number one challenge when exploring blockchain adoption. Because the technology is unexplored territory, you may be unsure of how much it will cost to put in place.

How do you know how much to invest? Unfortunately, there’s no clear-cut answer – every situation is different. Much of the decision will centre around the type of blockchain services your institution wants to offer. Do you want to offer crypto custody, for instance? Or is your main reason for blockchain adoption to speed up internal processes?

The solution

Before implementing blockchain, it’s vital to have a strong business case for the adoption. How will blockchain applications create revenue or reduce expenditure? It’s also essential to consider running costs down the line as well as the initial investment.

Blockchain’s decentralised nature brings advantages but also poses obstacles when it comes to regulation and compliance. Financial institutions are used to dealing with strict regulations and laws and, because of blockchain’s pseudonymous nature, it needs a robust regulatory framework to avoid criminal activity such as money laundering.

Unfortunately, there are no consistent regulations around the world. This lack of clarity and guidance makes navigating blockchain integration tricky.

The solution

To stay ahead of the curve, keep an eye out for any new regulations coming into play. This will ensure your organisation remains compliant.

Blockchain adoption naturally involves a shift away from traditional centralised processes. It also requires a level of creativity to integrate it successfully and seamlessly. Institutions must believe that blockchain’s benefits outweigh the integration costs and challenges. Banks may need to work closely with Decentralised Autonomous Organisations (DAOs). These are groups that have no central authority – and this can be a big shift for the rest of the team.

The solution

Those heading up the change need to be proactive in supporting this shift. They must help the team work collaboratively in a less hierarchical way than they may be used to. Look at who the technology will affect and help them understand why blockchain integration will be beneficial for them.

Peer-to-peer transactions offer pseudonymity and are often touted as far more secure than other payment methods. Despite this, many people have concerns about the unique vulnerabilities they pose. Security risks such as private key attacks, selfish mining, and double-spending are new to TradFi institutions and can seem daunting.

The solution

To combat security and privacy risks, it’s essential that banks develop an in-depth understanding of blockchain technology and put safeguarding practices in place. From there, they can drive public acceptance by showcasing the privacy and security benefits that appropriately integrated blockchain applications can bring.

Blockchain has been around since 2009 and is one of the most innovative technologies available. However, it is a nuanced concept that requires a deep understanding in order to recognise and make the most of its potential benefits.

Furthermore, banking IT teams likely lack blockchain developers, who will help develop blockchain projects and spread blockchain learnings and concepts within the bank. Blockchain talent is growing across the globe, but it may seem difficult to identify what kind of skills your bank should be looking for.

The solution

Banks must try and educate their organisation on blockchain. This not only applies to the technical teams but also includes business departments and all other team members who may be involved in using or promoting the applications.

To find blockchain talent, start by becoming familiar with the necessary skills and knowledge they should have. See thisinterview guide with common questions by Toptal for inspiration. In a bank’s case, the developer should also have a good grasp of traditional financial services as well as blockchain technologies.

Traditional banking systems are unprepared for the technological infrastructure blockchain requires – not only to offer blockchain services but also in terms of scalability.

The solution

Before building a blockchain infrastructure, banks and financial institutions must ensure their internal systems and processes are modernised so they can integrate external services. Often, this requires complete restructuring.

What’s your main reason for embracing blockchain technology?

Blockchain encompasses a lot more than bitcoin and crypto but many financial providers are not aware of the opportunities the technology can offer. While you can indeed use blockchain to help crypto users store their assets, there are several other validuse casesthat can increase revenue – from liquidity provision to real-time fiat and digital asset payments.

The solution

The decision to adopt blockchain should always come from a strong use case that makes financial sense. In most cases, it’s wise to look at your current business model and target segment to understand what blockchain services are most suited to your offering. For example, if your institution focuses on providing consumer loans, you can provide a greater selection of products by plugging into DeFi services. Institutions that help consumers invest in stocks can also provide a secure gateway into crypto assets by adding cryptocurrencies and NFTs to the existing investment app.

For inspiration, look at what other financial institutions are doing and consider if these new intitiatives align with your current business.

Blockchain is bridging the gap between DeFi and TradFi and has the potential to improve the financial infrastructure for both banks and customers. To do so, however, there are some obstacles to overcome. These challenges are a necessary part of the journey. Banks wishing to push the boundaries of innovation (whether that’s with open banking APIs or blockchain technology) must take risks to reap the benefits.

Learning from other financial institutions can help organisations develop a clear understanding of the processes needed to successfully embrace blockchain and open banking. If you would like a more in-depth look at blockchain adoption within financial services, the report below showcases why and how different traditional financial institutions are integrating blockchain technology or preparing to.

Download your free copy of our report today:Blockchain in Finance 2022: Gauging Blockchain Readiness in Financial Services.