Blockchain Technology: Benefits, Risks & Banking Applications

Blockchain promises faster settlement, richer audit trails, and programmable money — but not every claim holds up in regulated finance. In 2025, U.S. rules for payment stablecoins are finally on the books, supervisors have clarified what banks may do, and large institutions are piloting tokenized deposits and on-chain collateral. Here’s what blockchain can (and cannot) do in banking, how today’s rules shape adoption, where the real benefits are emerging, and which risks matter most for consumers and institutions.

What Blockchain Is (Banking Context)

A blockchain is a distributed ledger where transactions are recorded in blocks linked by cryptography and validated by a consensus mechanism. Properly designed, it produces a shared, tamper-evident history across multiple parties. In regulated finance, most deployments are permissioned (known participants) rather than fully public networks. That design choice influences throughput, governance, privacy, and how regulators evaluate controls. The goal is not “coin speculation,” but safer, more efficient record-keeping and asset transfer across institutions that do not fully trust each other’s internal databases.

“Immutability” is often overstated. The accurate description is append-only with strong tamper evidence. Under normal operation, finalized history is practically immutable because re-writing requires breaking consensus or extraordinary coordination. In permissioned systems, governance can allow corrective actions (with audit trails) to meet legal or operational needs. Precise language reduces confusion and helps risk teams design controls that reflect how the ledger truly behaves.

Where Banks Use Blockchain Today

Institutional adoption focuses on use cases with measurable frictions in legacy rails: settlement speed, reconciliation effort, collateral mobility, and cross-border payments. Supervisors have clarified that some crypto-asset services may be permissible for banks if risk management is robust, and that FDIC-supervised institutions no longer need prior approval to engage in permissible crypto-related activities. That does not mean a free-for-all — exam expectations still apply, and banks must document governance, third-party risk, custody controls, AML, and operational resilience.

Tokenized deposits and assets. Large institutions are testing deposit tokens (on-chain claims to bank deposits) and tokenized securities or collateral to compress settlement windows and automate workflows. In 2025, J.P. Morgan’s Kinexys USD deposit-token proof-of-concept (JPMD) on a public chain illustrated how wholesale payments and collateral movements could occur with bank-grade controls. Other banks are exploring on-chain repo, intraday liquidity, and programmable cash-management.

Custody and execution for digital assets. Under OCC guidance, national banks may provide certain custody and execution services with appropriate risk frameworks (e.g., key management, segregation of client assets, reconciliation, incident response). For banks, the value proposition is to serve institutional clients that require regulated guardianship rather than retail speculation.

Payment stablecoins. With the GENIUS Act now law, “payment stablecoin” issuance in the U.S. is limited to licensed issuers and subject to 1:1 reserves, disclosure, and bankruptcy-priority protections for holders. Banks analyzing stablecoin rails will need to map exactly which parts of a product are deposits and which are digital assets — the distinction drives consumer protections and disclosures.

Benefits: Where Blockchain May Add Real Value

Faster, programmable settlement. Shared ledgers can reduce reconciliation work and support delivery-versus-payment with on-chain assets. Programmable logic (smart contracts) enables conditional transfers that execute when predefined events occur, potentially cutting back-office costs and settlement risk. Policy groups (BIS/FSB) note efficiency and transparency gains while stressing careful design to preserve the “singleness of money.”

24/7 market access (with controls). Unlike batch windows on legacy rails, permissioned networks can operate continuously, supporting intraday liquidity management and cross-border flows when paired with bank-grade compliance. This is attractive for treasury and securities-finance desks managing time-sensitive collateral moves.

Better auditability. Append-only logs provide granular histories for regulators, auditors, and counterparties. When combined with privacy-preserving techniques in permissioned networks, firms can share proofs without exposing full datasets. This can shorten investigations and reduce disputes about transaction state.

Interoperability and standardization. Token standards and shared messaging reduce vendor lock-in and manual file exchanges. If widely adopted, consistent schemas can lower integration costs across custody, clearing, and treasury tools — though governance and standards bodies must align on interfaces.

Risks: What Can Go Wrong (and How Banks Mitigate)

Run risk and reserve integrity. For stablecoins, the main consumer risk is whether reserves are truly there and sufficiently liquid in stress. The GENIUS Act addresses reserve quality and disclosures, but supervisory testing and independent attestation remain central. Misrepresenting insurance or reserve backing is a regulatory and enforcement risk.

Operational and key-management failures. Hot-wallet compromises, flawed custody processes, or faulty signing can cause losses. Banks must implement layered controls (HSMs, MPC, segregation, approvals, disaster recovery) and demonstrate incident-response readiness to supervisors.

Legal finality and governance. “Immutability” collides with error correction, sanctions, and court orders. Permissioned designs can support administrative actions with auditable trails, but policies must be explicit and consistent with law. Poorly specified governance invites disputes and systemic risk.

Market-structure and financial-stability concerns. BIS and FSB warn that tokenization at scale adds new interdependencies and potential opacity (e.g., layering of smart contracts and oracles). Benefits are real, but safeguards must preserve monetary integrity and manage liquidity stresses.

Compliance, AML/CFT, and data privacy. On-chain transparency does not remove KYC/AML obligations. Banks still need customer due diligence, sanctions screening, travel-rule compliance, and data-minimization consistent with privacy law. Controls must be designed for cross-border operations and vendor ecosystems.

Regulatory Landscape (2025): What Changed — and What Did Not

GENIUS Act (Public Law 119-27). Establishes a federal regime for payment stablecoins: licensing pathways, 1:1 reserve requirements, disclosures, supervisory oversight, and bankruptcy priority for holders. It limits issuance to permitted issuers and phases in prohibitions on unlicensed issuance. It is not a CBDC law; the CBDC debate proceeds on a separate legislative track.

OCC clarifications. In 2025, the OCC reaffirmed that certain crypto-asset activities — custody and some execution services — are permissible for national banks when supported by strong risk management and coordination with supervisors. This recognition does not waive prudential expectations; it clarifies scope.

FDIC guidance shift. The FDIC rescinded the 2022 “advance notice” requirement and clarified that FDIC-supervised institutions can engage in permissible crypto-related activities without prior FDIC approval, provided risks are identified, measured, monitored, and controlled.

Deposit insurance messaging. The FDIC’s 2022 advisory remains the baseline: FDIC insurance covers deposits at insured banks — not crypto assets, stablecoins, or non-deposit products. Clear disclosures are mandatory to avoid consumer confusion.

Consumer Benefits, Access, and Financial Inclusion

For consumers, blockchain-based rails could reduce frictions that keep everyday payments slow or expensive. But the promise depends on practical details—on/off-ramps, disclosures, supervision, and user protection. This section summarizes credible benefits, who may gain access, and the policy guardrails that matter for inclusion in 2025.

Lower-cost cross-border payments (potential). Global remittances remain expensive by legacy standards — the World Bank’s benchmark shows an average cost of about 6.49% as of the March 2025 report. Tokenized money and compliant stablecoin rails may compress costs by shortening correspondent chains and enabling 24/7 clearing, though savings can be offset by exchange and cash-out fees at the edges. Any inclusion gains should be measured against this baseline rather than assumed.

Always-on availability and faster settlement. Permissioned networks can operate beyond batch windows, enabling near-real-time transfers for bill pay, gig-income disbursement, and emergency aid — provided banks and licensed issuers meet supervisory expectations (risk management, disclosures, complaints handling). Faster availability helps liquidity-constrained households smooth cash flow.

Programmability for consumer value. Smart-contract logic can automate conditional payments (for example, pay-on-delivery, escrow, or automatic refunds) and improve audit trails. Designs that include error-resolution features without weakening safety (for example, supervised reversal mechanisms or counter-payments) can make digital cash behave more like familiar consumer payments while preserving finality when appropriate. Policy groups note the benefits but stress governance and “singleness of money.”

Who is currently excluded — and why that matters. In the U.S., the share of unbanked households fell to about 4.2% in 2023, yet millions still lack full access or rely on costly alternatives. Inclusion efforts should therefore prioritize low-fee access, transparent terms, and safe storage — no product should be marketed as “insured” unless it is truly a deposit.

Access and consumer protection go together. The CFPB’s 2024–2025 oversight of large, nonbank digital payment apps aims to reduce fraud, strengthen data safeguards, and stop illegal account closures. As banks and licensed issuers deploy tokenized rails, applying similar oversight and complaint-resolution standards helps ensure that “access” doesn’t mean “exposure to harm.” Use cases that serve lower-income and remittance users should pair cost savings with strong error-resolution and disclosures.

Realistic inclusion checklist. To translate technology into inclusion, programs should (1) minimize on/off-ramp fees, (2) support low-cost cash-out options, (3) offer plain-language receipts and dispute paths, (4) protect privacy consistent with law, and (5) design for low-bandwidth and mobile-first users. U.S. inclusion strategy documents emphasize that durable access requires a mix of safe accounts, consumer protection, and interoperable rails — not technology alone.

Bottom line. Blockchain can support inclusion when it makes payments cheaper, faster, and more reliable — without diluting consumer protections. Measure progress against real benchmarks (for example, World Bank remittance costs) and ensure every dollar of “savings” survives the on/off-ramp. The safest path to inclusion combines supervised issuers, deposit-insurance clarity, robust dispute rights, and user-first design.

Outlook: What to Watch Next

Institutional rails first, consumer later. Expect continued pilots in deposit tokens, tokenized collateral, and cross-border corporate payments. Retail products will expand more slowly as consumer-protection rules, disclosures, and wallet UX mature.

Standards and interoperability. The value of tokenization depends on common standards across custodians, brokers, and payment networks. BIS and FSB emphasize governance and risk controls alongside technical interoperability to capture efficiency without compromising stability.

Guardrails over hype. The 2025 policy reset lowers uncertainty for permitted bank activities. But supervisors will continue to focus on risk management, vendor oversight, and accurate consumer disclosures — especially on deposit-insurance status and reserve backing for stablecoins.

Summary

Blockchain in banking is moving from theory to carefully governed practice. With the GENIUS Act setting ground rules for payment stablecoins and supervisors clarifying permissible bank activities, the space now rewards risk-managed, utility-driven deployments — especially for wholesale payments, collateral, and programmable settlement. The consumer bottom line remains simple: understand what is a deposit versus a digital asset, and never assume deposit insurance applies unless the product is truly a bank deposit.