Aspire Thought Leadership! Wondering the role of Blockchain in Finance Industry? Find out more on Blockchain in finance and how fortune 500 companies
Blockchain [What is Blockchain?] is a major innovation in the finance industry [examples of disruptive technology]. It has the potential to reduce fraud, lower transaction times and manage any risks that may occur being an interconnected global financial system [application of blockchain].
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| Blockchain in Finance Industry |
The Benefits of Blockchain in Finance
The benefits are:
Transparency
It has standards in place that keep all users in mind and all processes are shared. All transactions can be viewed via a node or by making use of blockchain explorers [Blockchain and cryptocurrency basics]. Explorers are websites that let you see transactions happening in real time.
Trust
The transparency and fixed nature of the ledger makes it easy for all users to cooperate and be productive.
Privacy
Businesses can be selective of the data they share in a business network [blockchain for enterprise]. They have the choice to keep privileged information private but ensure that all parties have access to the information they need which is in line with transparency but still allows for a level of confidentiality.
Superior performance
On a daily basis, hundreds if not thousands of transactions can be made and recorded on one network. From time to time there is a spike in network activity but it has been built to sustain that.
Security
The blockchain framework eliminates single points of failure and middlemen, so there are less people involved in the assessing and recording of a business's data. The Ethereum blockchain has specialized application code that is fortified. It is almost impossible to hack.
The Possible Drawbacks of Blockchain in Finance
A lot of the transactional tasks that have to be performed by individuals and companies these days are cumbersome. Blockchain has the potential to improve on a lot of those things just by it being automated. It’s important to note though, that the bigger the network gets, the more impractical it becomes to maintain.
The concept of blockchain is rooted in democracy because there is no central authority. Things are also more secure because there is no single point of failure. When a company builds its own blockchain, they are the only ones who have reasons to maintain it. In this way, nodes could become centralized and that is contrary to the purpose of a blockchain.
There is a great level of trust on the Bitcoin blockchain because Bitcoins are mined on it and everyone can see what happens to them from the moment they are mined to the time they end up in a person’s wallet. In the finance industry however, the assets being traded and recorded exist outside of the blockchain [blockchain industry]. Nobody can be 100% certain that all the information being logged on a blockchain is completely accurate and without mistakes. This could be a potential trust issue.
Lastly, Blockchains are completely digital and use up an enormous amount of computing power. One day there may not be enough computer power in the world to sustain them.
How the Digitization of Financial Instruments Could Impact Finance
Blockchain technology works very well in the world of cryptocurrency and has the potential to revolutionize financial services across the board.
Digitization takes the benefits of blockchain and applies them to the financial services sector. The way things work in the financial market will change and new standards will be set, bringing worthwhile changes at every turn [IoT and Blockchain].
Financial instruments in a digital format would offer several benefits. Some of which include:
- Credibility and scarcity: When data is in a digital format, it can be easily verified which makes it easier to trust.
- Programming capacity [Blockchain Programming]: Integrity and effectiveness would be on a whole new level because of tamper-proof software [What is Blockchain Development?] and Smart contracts.
- Efficient processes: Mechanized processes take the efficiency of operations up a notch by reducing waiting times and cutting out intermediaries. Auditing and reporting can be monitored while it's being done, so there’s less room for error.
- Economic benefits: Automation means doing away with a lot of redundant processes in order to achieve the same result. It brings infrastructure and operation costs down and increases liquidity.
- Market reactivity: Digital securities depict ownership of an asset. Should there be a need to alter or review this information it can be done way faster than with standardized securities. Other financial instruments can also be converted into a digital format to suit the needs of different investors.
- New markets and products: New products include fast, safe and adjustable transferal of assets, subdivided ownership of tangible assets and more
The effects of these benefits on operations would be major. Governance systems would be transparent and business models would improve. There would also be minimal operation costs that would free up some capital and increase liquidity.
There are a few companies that have slowly started implementing blockchain technology but they’re still in the experimental phase [blockchain use cases]. If they implemented it and used it at its full capacity it could improve the following:
Payments
Sending money from one country to another the normal way takes time and ends up costing a lot of money in fees. Each party that has a hand in getting the money from point A to B receives a fee. If more people made use of blockchain applications this process would be faster, cheaper, and more secure.
- There would be more than one way to pay. Customers would be able to send Fiat money or cryptocurrency.
- The chances of falling victim to fraud would be significantly lower because of facilities like Know Your Customer (KYC). KYC is a set of standards that was created to protect financial institutions against fraud and money-laundering. There are several steps involved to ascertain customer identity, be sure of the nature of a customer’s activities and ensure that wherever the money’s coming from, it’s legal. They also work to assess the risk of money-laundering with each customer.
- Smart contracts allow for two parties to enter into an agreement and for that information to be stored in the blockchain [smart contracts in blockchain].
Asset Management
Real estate funds, Private equity firms and venture capital companies have to try and keep up with the ever-changing regulations in their sector. It’s a task to stay compliant. Blockchains host of financial services can help them manage their assets and Blockchain security could further safeguard them.
Asset management can be improved through:
- Tokenizing securities and offering more liquidity. Tokenization is turning data like account numbers into an arbitrary string of characters called a token. The token becomes like a reference to the original data but does not expose the actual value of it.
- Confidential transactions having bespoke privacy settings
- Initiating a decline in human error in shareholder voting
- Better administration with more clarity for investors
How Does Blockchain Impact Capital Markets
Capital market is a blanket term that describes all the ways individuals, businesses and government trade financial instruments. They trade through the stock, bond, currency and foreign exchange markets. Most of the world’s biggest markets are located in Hong Kong, London, New York and Singapore. Capital markets have suppliers and entities that make use of funds. Suppliers include retirement funds and companies that have surplus cash. The funds disbursed on capital markets are used mostly by people looking to purchase assets and governments that need financing for operating costs and infrastructure expenditure.
The markets are divided into two categories:
Primary markets
When a company makes an Initial Public Offering (IPO) , it happens in the primary market. When stakeholders acquire securities on the market, the company supplying the securities hires an underwriter to review it and produce an outline that states the price and other details of the securities being supplied. Everything pertaining to the primary market operates under strict regulations. Companies are required to file statements with the Securities and Exchange Commission (SEC) and other agencies before they can go public.
Secondary markets
Secondary markets are divided into Auction and Dealer markets. The auction market is where buyers and sellers gather and state the prices they are willing to buy and sell their securities for. One example is the New York Stock Exchange. Smaller investors trade through the dealer markets because trade mostly happens electronically.
Companies have a number of hurdles in the market. The regulations are stringent which makes it take longer for them to get to market and interest rates are volatile, which threatens their liquidity.
Blockchain improves the way companies are able to operate in the Capital market by removing the single point of failure through decentralization and expediting capital market ventures by ensuring the efficacy of all processes.
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