Technological innovations change the way of life and introduce new methods of business. Such innovations are capable of growing the global economy and making our everyday lives easier. Blockchain is one of the modern innovations. Most of the industries are discovering the benefits of incorporating blockchain within their system. So, how about the blockchain in finance? Despite all the speculations around blockchain, will it really shape the traditional financial system?
Our traditional financial system has some inefficiencies, or it requires updates. Financial institutions such as banks, stock exchanges, and money transfer services suffer from economic crime every year. Processing costs are higher somehow, which is ultimately a burden on consumers. With a centralized database, there are a few more drawbacks such as high intermediary cost, rising global inequality, and low trust in financial institutions and government. The blockchain has emerged as a decentralized solution to address the above problems and optimize the financial system.
What is Blockchain?
Blockchain started as a record-keeping mechanism to record the transfer of digital “coins” such as Bitcoin and other cryptocurrencies. These coins required a way to keep a record of ownership. Hence, Blockchain was created out of the need to build a digital ownership record.
Blockchain, at its most basic level, is an immutable ledger that contains a record of digital assets. The “Assets” can be monetary, non-monetary, or just information, like health records, government records, tickets to an event, an auto title, or a trademark.
Why we call it blockchain? Perhaps, the simplest analogy to understand the blocks in a blockchain solution is to think about sheets of paper in a notebook. In Blockchain, a sheet of paper is equal to a block. The act of embedding a previous block of data into the current block of data is called chaining. Hence, it is named as Blockchain.
The key points that make the Blockchain prominent are:
- Unlike the traditional financial system, blockchain is the concept of decentralization. A decentralized solution removes centralized power and ownership in all fields.
- Cryptography in blockchain solves privacy concerns, protects data confidentiality, and promotes group consensus processes.
- Immutability in the blockchain means that once the data entered into the blockchain, it can neither be updated nor deleted.
- Transparency in the blockchain is the beauty of this solution. It means one can track the data, and it is publicly verifiable.
Blockchain has proven its worth in finance. Before we move to highlight the benefits of blockchain in finance, let’s see how the world is getting ready for blockchain.
Blockchain in the world of business and finance
- According to Global Fintech Report 2017, 77% of Fintech institutes expect to adopt blockchain as part of their production system or process by 2020
- Financial institutions alone have spent about $552 million on blockchain-powered projects
- Investments in blockchain-related firms already doubled in the first half of 2018 in comparison with 2017
- Market giants like IBM, Walmart, Microsoft, Mastercard, Huawei Technologies are successfully implementing blockchain to their day-to-day business operations
- Dubai hosts all record-keeping operations on blockchain as part of the Smart Dubai 2021 initiative.
- The business value added by blockchain will surpass $3.1 trillion by 2030
Benefits of blockchain in finance
When we see the benefits of blockchain in the finance sector, it seems that the blockchain was predominantly designed for financial solutions.
More financial data Accuracy
Blockchain uses cryptography and time stamps on its transactions to make financial reports more accurate.
Lower transaction cost
The transaction cost is lower because there is no middleman involved. Only peer-to-peer transactions are possible in the blockchain solution.
Control on financial data
Who can access the financial data and who can not? We can control it in a permissioned and permissionless blockchain solution.
Smart contracts
In a blockchain, anyone can develop Smart Contracts, no need for intermediaries such as lawyers, brokers, or auditors. Smart contracts help small business finance managers develop, track, and stick to financial arrangements with suppliers and customers.
Instant global transactions
Cross-border transactions will now occur instantly. It will no longer take hours to reach the recipient.
Quality assurance and data tracking
Blockchain solution tracks the origins of all supply chain components. By registering goods on the database, businesses may provide their customers with the requisite details about the origin of the product, its past history, current and previous owners. Buyers could know the authenticity of goods as well.
Improvement in the banking sector
Crypto Banking, because of its impressive uptake, is expected to be an integral part of the financial sector. The use of blockchain technology has made crypto-cash more fluid besides enabling users to make quick and convenient transactions globally.
Blockchain uses cases in financial services
The blockchain solution is strongly implemented in the following financial services.
- Banking
- Trade finance
- Insurance
- Capital markets
- Asset management
- Global payments
- Financial records-keeping
- Stock exchange
Drawbacks of blockchain solution
There are some drawbacks to the blockchain. We must consider it to determine if the blockchain is a replacement or an alternative solution.
Some of the drawbacks that blockchain faces:
- Very new technology
- Constantly changing and evolving
- Not very many trained resources
- High Cost for trained resources
- Best practices, recommended patterns still being formed
- Scalability issues
Final Thoughts
It seems that the blockchain solution is well compatible with the financial sector. While it has a few drawbacks as well. Despite this, many organizations have adopted this technology or thinking to adopt it soon. It is critical to understand that each new technology is not a replacement to the previous one while it could be taken as an additional tool or an alternative solution to the problem. Blockchain isn’t a cure-all, however, there are many financial problems for which this technology could be an ideal solution.
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