A collaboration of traditional financial institutions has begun testing a new service that blurs the line between innovative blockchain technology and traditional banking. HSBC, Bank of America, Euroclear, and the Monetary Authority of Singapore (MAS) started testing asset tokenization and settlement solutions on Solana.

Solana is a high-performance public blockchain, and it’s perfectly suited for such cooperation; however, other blockchains and crypto assets will likely join in soon. For some time now, banks and other traditionally conservative financial institutions have been open to working with cryptocurrencies.

Institutional Finance’s Blockchain Evolution

Over the past decade, banks have experimented with using blockchain to streamline back-office processes. Experts on the matter, such as the ones from Cryptomaniaks, have written about the efforts made with Hyperledger Fabric, Quorum, and R3 Corda. These allowed banks to have greater control over their user data and to achieve compliance with government regulations regarding customer data.

Private chains are unable to meet these demands as they struggle with issues of interoperability, scalability, and long-term developer support. Public chains have stepped up to this need, especially so when it comes to tokenized real-world assets (RWAs).

Why Solana?

Among many public blockchain options, Solana has emerged as the best solution for these collaborations with the traditional financial sector. There are several reasons why this is the case, and the primary one is related to the technical capabilities of the chain.

High Throughput via Proof of History (PoH)

Solana is engineered to be very scalable. It utilizes a unique consensus model known as Proof of History, which is combined with Tower BFT. Those can process as many as 5,000 transactions per second (TPS). Such capabilities would be enough to manage the needs of the Visa’s global network. At the same time, it provides the speed needed for financial markets.

Low Latency and Near-Immediate Finality

Block finality on Solana occurs approximately 400 milliseconds after the block is created. It’s a much faster network than that of the biggest competitor – Ethereum. From the user’s perspective, this means that the transaction is essentially instantaneous. It’s a critical feature for real-time trading.

Cost-Efficient Operations

The average cost of transactions using Solana is significantly lower than with alternative platforms. It costs approximately $0.00025 to process a transaction, regardless of its size. Such a pricing scheme allows for microtransactions and high-volume batch settlements, which are services the users are looking for.

Parallel Transaction Execution

Solana is able to process multiple smart contracts in parallel as long as they access disjoint memory regions. This is accomplished via Sealevel runtime. This is very applicable to the financial sector as it’s a quality needed to balance portfolios and accomplish multi-asset settlements or collateral liquidations.

Institutional-Grade Upgrades

Solana has faced issues with validator bottlenecks. This can present a problem when working with large financial institutions. The company will solve the issue soon by issuing a new upgrade that will eliminate the issue by increasing throughput. It should increase to over 1 million transactions per second (TPS) while improving network resiliency.

Real World Use-Cases

There are already many real-life use cases for this. These take advantage of the technical abilities Solana provides. The number and scope of use cases will likely increase as the technology continues to evolve and more banks become willing to incorporate blockchain into their operations.

Tokenized Bonds and Securities

Banks are trying out bonds that are equivalent to ERC-20 tokens. Those bonds are actually SPL tokens based on the Solana system. These assets carry metadata, expiration terms, and even programmable yield parameters. It allows for flexibility and automation that you couldn’t get with paper-based bonds.

Real-Time Custody and Settlement

Platforms like Fireblocks and Anchorage are enabling Solana-native asset custody and multi-party computation (MPC) wallets, allowing for secure transactions. This service enables the bank to maintain its level of compliance while offering digital, real-time asset settlement.

Smart Compliance Layers

With Solana, banks can achieve a higher level of regulatory compliance. This is achieved by incorporating compliance regulations directly into the blockchain’s code. For example, the code could automatically restrict transfers based on “know your customer” regulations, blacklists issued by banks, or specific jurisdictions.

Retail CBDCs and Payment Systems

MAS and other banks are considering using Solana for retail CBDC and other wholesale payment systems. Programmable money and cross-border remittance networks are a huge market for banks to tap into.

Challenges and Risks in Using Solana

There are also challenges and risks that may affect the banks and other financial institutions. These are also, in most cases, the result of the novel technology behind blockchains and the distrust between traditional finance and crypto finance.

Network Outages

Networks responsible for transfers have been known to experience outages, leaving users without a means to transfer funds. This has happened before due to technical errors and hacks. Although the technology is always improving, this remains a concern for users.

State Bloat

Financial institutions generate a massive amount of data that can lead to what’s called state bloat, thereby slowing down services. Solana needs to implement data pruning, archiving, and indexing, and at this point, it’s unclear if it can do so on a scale that banks require.

Complexity of Smart Contracts

Solana smart contracts are written in Rust and comply with BTF. This represents a departure from Ethereum’s practices, which are also known for their smart contract capabilities. Such an approach offers benefits in terms of performance, but it also presents a steep learning curve and necessitates the use of formal verification tools to ensure contract safety.

To Sum Up

Banks are embracing the use of blockchains, as their services enable them to offer more modern solutions to their users. Solana has proven to be one of the best blockchains for this purpose. Many traditional financial institutions have already set up products, such as bonds, using the Solana blockchain.

The innovative approach to finance isn’t without its risks, too, and most of them are also related to the technology and its limitations. Banks and blockchain providers will have to resolve these as more users are signed in.