With the growing popularity of cryptocurrencies, chances are you’ve come across the term ‘blockchain’ at some point. That’s no surprise, as crypto is what launched blockchain into the spotlight. Blockchain is the technology that makes cryptocurrencies possible, and Bitcoin’s rise to fame is what put blockchain on the map in the first place.
But did you know that blockchain in finance is much bigger than just crypto? This technology has the potential to change the way the financial industry works. If you’ve ever thought blockchain was just a crypto thing, well, think again. Here we’ll understand how blockchain in financial services is changing the scene.
What is Blockchain Technology in Finance?
When we use banks for transactions, they act as an intermediary to verify and record our payments. But there is a different way to do this, a more direct way which eliminates a central authority like a bank, called the blockchain. Blockchain is a digital ledger that records and stores transactions across a network of computers, called nodes, making sure they are secure, transparent, and tamper-proof.
The blockchain in finance does not rely on a single authority, rather it uses a decentralized system where every participant helps verify and store transaction data. This way, even if a single node is compromised or goes offline, the rest of the network continues to function.
The Role of Blockchain in Financial Services
In a nutshell, blockchain in financial services can give us a way to make our transactions fast, more secure, and cost-efficient. Blockchain makes financial systems more transparent as it records every transaction in such a way that everyone involved can see. This helps make things secure and reduces fraud. It also makes payments, especially international ones, faster and cheaper by cutting out middlemen.
As we adopt digital payments more and more, the risk of fraud keeps increasing. Blockchain has strong security features, which help keep data safe from hacking. It can even automate tasks like insurance claims or loan approvals through smart contracts, which work automatically once certain conditions are met.
Benefits of Blockchain in Finance
Have a look at the various benefits of blockchain in financial services:
1. Accurate Reporting
A blockchain is made up of thousands of nodes, which approve the transactions made on the blockchain. Since each node contains a copy of the transaction, the verification process becomes much easier and tamper-proof. If a computer were to be compromised, it still wouldn’t affect the verification because the other nodes in the network would still have accurate copies of the transaction ledger.
2. Fast Transactions
Banks can take days to clear payments, however, for blockchain in the finance industry, the transactions are instantaneous. This is because banks operate on business days and human employees can find it burdensome to process the sheer number of transactions. Blockchain works at all times, which makes transactions more efficient.
3. Reduced Costs
Since there are no intermediaries involved in blockchain, one can save a lot of money spent in banks on transaction verification and processing.
4. Decentralisation
The blockchain data is stored across a large number of computers, which is significantly harder to tamper with compared to the data most other financial institutions store in a central location.
5. Prevents Fraud
Due to the decentralised nature of blockchain, problems like double spending or document tampering can be avoided. Every computer verifies every transaction, which cannot be altered.
6. Anonymous Transactions
Even though the details of each and every transaction are shared on the computers, the identities of the parties involved remain anonymous. However, this anonymity is not 100%. While blockchain does use cryptographic addresses to mask personal identities, techniques like blockchain analysis can sometimes link transactions to people in the real world.
7. Transparency
On public blockchains, one can view all the transactions recorded which helps maintain transparency. Most blockchains are also open source, so anyone can review their code and make sure that the system operates without any hidden manipulations. Developers often study this code to suggest or make improvements to make the service more efficient.
What are the Blockchain Use Cases in Financial Services?
Here are some ways blockchain in financial services can be used:
1. Mode of Payment
As stated above, normal transactions can often take some time to process. For example, if you receive a check on Friday, you may have to wait the whole weekend before the bank processes it and credits the money into your account. Blockchain faces no such problem, as it works around the clock. This ability makes blockchain especially attractive for international payments, for which banks take a long time to process and charge a fee.
2. Settlement and Clearance
Many stock traders have to wait a long time for this process to complete because the usual systems involve third parties, such as brokers, clearinghouses, and banks, to verify and process the trades. This can take a number of days, especially for international trades. Blockchain, however, makes the settlement and clearance process smoother by allowing direct, peer-to-peer transactions.
3. Lending
Blockchain platforms connect lenders with borrowers directly, without any other entities in between. Since it securely stores financial data and transaction histories, it can give lenders accurate information for credit scoring. It also makes loan syndication, underwriting, and disbursement faster and more transparent. Blockchain allows assets like property to be tokenized and recorded securely, which makes them easier to verify and use as collateral for loans.
4. Currency
Cryptocurrencies run on blockchain and have the potential to change the way we think about money. They operate on decentralized networks and eliminate the need for the usual intermediaries like banks, which enables faster, cheaper, and borderless transactions.
5. Smart Contracts
A smart contract is a type of program stored on the blockchain that helps make transactions automatic. It works based on a set of rules or triggers the parties agree on beforehand. Once those rules are met, the smart contract automatically completes the transaction, without the need for middlemen.
6. Insurance
Blockchain can make the insurance process smoother and more efficient. It uses smart contracts technology to help with claims processing and payouts that automatically verify claims and release payments when the agreed conditions are met. Some contracts, like weather-based insurance, can also run on a blockchain, which ensures quick payouts for events like floods or droughts. Blockchain can also improve transparency and trust in reinsurance markets by recording all agreements and transactions between insurers and reinsurers.
How to Implement Blockchain in Financial Services
Blockchain is still not widely used in financial services, but more and more companies are starting to adopt it due to its numerous benefits. To use blockchain in financial services, an institution first figures out specific problems, like delays in payments, fraud, or KYC that blockchain can help solve. Then, they choose a blockchain platform and create smart contracts to automate tasks such as payments or loan approvals.
Before using it fully, they test the system to make sure it works well and follows the regulatory standards. While its use is growing, it still faces some challenges like the high technical skills needed to operate it and regulatory clarity which limit its widespread use.
Conclusion
Blockchain is a decentralised, public ledger that tracks the origin, movement, and transfer of money or assets like cryptocurrency. It allows us to reduce the dependence on a central authority like a bank since it uses approval from all the computers in its network to process payments or transfers.
A network includes a large number of computers or nodes, which makes fraud and hacking much harder. This technology is especially useful for the financial sector because it helps solve major issues like improving security and making processes faster and more efficient. While blockchain in the finance industry is making some noise, its use still remains limited and is far from mainstream.
As the technology becomes more secure and people understand how it works, its use is expected to increase. Its use cases go beyond just finance, things like healthcare, supply chain management, real estate, and even voting systems can be improved by blockchain. Its ability to be transparent, secure, and efficient makes it a valuable tool not only for finance but many other aspects of our lives.
