For the first time in centuries, the financial sector is on the verge of change. Here are five ways how blockchain can achieve this.
The financial system of billions of businesses and individuals is still paper-based despite the digital outlook that it carries. This antique system is plagued with several issues that increase expenses, cause delays, and promote fraud. It has remained in this state for years, thanks to its apathy to change. However, this is bound to change with the development of blockchain technology.
So, what exactly is blockchain?
It is the technology that drives the leading cryptocurrency in the world today, Bitcoin. It is as the internet, except that the internet is used to share information while the blockchain ifs for transferring value.
As the name suggests, it is a chain of blocks. Each chain acts like an online database that is organized in a peer-to-peer, distributed fashion. Each person can change only the part of the chain to which they have access. The blocks have timestamps to help track changes and a link that connects to the previous block, forming a chain.
Key features of blockchain
Blockchain technology presents three advantages that make it a suitable tool for transforming the financial industry. First, it is distributed. That is, it has no central database but instead run on several computers around the world. Secondly, it can be seen by anyone on the network. Lastly, it highly encrypted, making it tamperproof.
The possible uses of blockchain in the financial services industry:
Making payments is probably the part of financial services that will benefit the most from the implementation of this technology in the financial industry. Currently, there are several intermediaries in the process. You need the bank to authenticate payments to your supplier; sometimes the government has to verify your identity, and so forth.
The numerous intermediaries make the process of making payments long and slow. With Blockchain, however, individuals can make payments without these go-betweens provided their details are on the chain.
It is a blockchain-based software that executes agreements between two parties. It can accept input and use it to trigger an action. For example, providing evidence of the completion of a specific task can trigger payment. Again, payment trigger related operations such as delivery. It eliminates the use of manual confirmations and intermediaries.
Most financial systems are susceptible to cyber-attacks because of their centralized database layout. Consequently, it only takes one successful hacking attempt to gain access to the entire system. Additionally, 45% of intermediaries in the financial system such as money transfer services and stock exchangers become victims of fraud annually.
Blockchain’s distributed database, and high encryption makes it tamperproof and secure. Besides, it is impossible to access the entire database because it is essentially a distributed ledger.
Curbing money laundering:
Curbing money laundering and terrorist activities is a major challenge to most financial institutions. They spend about $60 million to $ 500 million annually in keeping up with Know Your Customer, KYC regulations.
As it currently stands, each business has to verify their client’s finances individually. For example, if Mr. X does business with five banks, all the banking institutions have to spend money and time reviewing his details. Blockchain would make this cheaper by making the verification of a client by one organization available to all the others.
Secure shared trading:
Blockchain would make the use of trading platforms more secure. It will promote trade accuracy and hasten the payment processing. NASDAQ and the Australian Securities Exchange are some of the trading platforms that are already considering the viability of this technology.
Blockchain technology has the potential of transforming the financial sector. There can be no imagining of what it can achieve in the industry once the challenges such as power consumption and regulation are overcome.