In the world of finance, where trust, precision, and security are non-negotiable, blockchain technology is reshaping the landscape.
Blockchain is a secure, permissionless database shared across a network of participants, where up-to-date information is available to all participants simultaneously, enabling the secure sharing of information.
Every transaction becomes a transparent, tamper-resistant entry within the digital ledgers of blockchain. It's not just about speed and accuracy but a seismic shift in how we perceive and execute financial operations.
Of course, challenges persist. The complexities of integrating blockchain into established systems, the ever-present threat to security, and the energy debate are all part of the narrative. Understanding these hurdles is essential to harnessing the full potential of blockchain in finance.
Yet, the future is promising. As digital banking surges ahead, blockchain is a central innovation pillar. It's not merely about transactions; it's about redefining the concept of assets and the very structure of financial systems.
For finance decision-makers, this exploration offers valuable insights into a technology altering the fabric of their industry. It's an opportunity to stay ahead of the curve, leverage blockchain's capabilities, and guide their organizations toward a future where trust and efficiency go hand in hand.
We’ll look at how blockchain organizes the data, balances privacy with transparency, and works to combat fraud.
Blockchain can increase transparency, decrease fraud, and lower costs in finance. Below are a few ways that blockchain can offer several benefits in this industry:
Blockchain offers full transparency to the transactions of every organization. Each transaction is recorded in a "block" and linked to the previous one, forming a chronological chain. This ledger is distributed to all participants in the network, making it nearly impossible to alter any transaction without consensus from the majority.
Every participant can view and verify transactions, ensuring accuracy and accountability. Additionally, cryptographic techniques secure the data, further enhancing transparency. This transparency deters fraud and provides a real-time, shared view of transaction history, fostering trust among parties involved in financial transactions.
Not only do direct parties have access to the information, but so do the central banks and the regulators that govern them. The more transparency behind every transaction, the harder it is to commit fraud.
Peer-to-peer transactions remove the middleman, making it a more straightforward equation. Financial services companies that rely on clearers or custodian banks may be able to cut out these costs entirely. This technology comes straight from Bitcoin.
Its anonymous developer wanted to reduce the fees of transactions, making it possible to send money back and forth without the hassle.
It can settle transactions near-instantaneously, eliminating the question of whether the numbers will clear after the exchange. It not only saves time, but it can also make it easier for banks to guarantee customers that they won’t be left holding the bill. During emergencies (e.g., natural disasters, etc.), blockchain can change the trajectory of an entire region during the first hours after the event.
Did You Know: The global market for blockchain in conventional BFSI is projected to grow to $22.5 billion by 2026, a 10x increase. [1]
Blockchain was built for Bitcoin, a currency supposed to handle everyday transactions for the entire world. While scalability is still a question for the global use of the ledger, it has enough flexibility and versatility to adapt to most organizations in the financial services industry.
As online transactions continue to rise, it has become more common for scammers to exploit this digital landscape. However, blockchain employs cryptographic algorithms to secure data, making it tamper-proof and resistant to unauthorized alterations. Transactions are recorded in a decentralized and immutable ledger, preventing fraudulent activities.
As mentioned earlier, blockchain’s secure peer-to-peer transactions eliminate the need for intermediaries and their associated security risks. Increasing transparency, as all parties verify transactions, reduces the likelihood of fraudulent activities going unnoticed.
Lastly, blockchain's decentralized nature makes it less vulnerable to single points of failure or cyberattacks, ensuring that financial data remains secure and resilient. These aspects collectively fortify security in financial operations.
By utilizing it for payments and money transfers, transactions can be processed faster and more transparently than traditional banking methods.
The exchange of information between financial intermediaries carries the risk of interception, which makes it vulnerable to fraudulent activities. To address this loophole, blockchain technology's cryptographic algorithms can be employed to ensure secure communication between parties involved in the transaction.
Read More: How Blockchain Technology is Redefining the Healthcare Industry.
The following sectors can use blockchain:
The stock exchange can implement blockchain to record, settle, and clear trades. Considering the market volume, blockchain's use of if/then conditions (known as smart contracts) can reduce the number of invalid transactions.
The Australian Stock Exchange [2] has already implemented it to help settle purchases and sales. There are also adaptations, most noticeably through R3CEV, the largest collaboration of banks and tech firms.
The group announced they were developing technology based on blockchain instead of blockchain itself. It's an important distinction, especially when the group was synonymous with blockchain before the announcement.
Companies are built to help financial institutions balance their financial transaction logs and develop the technology specifically to help them navigate complex and ever-changing regulations.
It can track land ownership and sales, register businesses, and track spending.
Cryptocurrency payments through blockchain. However, because decision-makers can apply the technology to any financial organization, professionals can implement it across sectors.
Blockchain can track the many transactions in the financial services industry and reduce risk. Regulators and internal auditors can verify every event in succession, making it simple to identify where a transaction began to veer off course.
There are some key challenges that organizations and stakeholders may encounter as they embrace the power of blockchain innovation. Potential challenges include the following:
It was designed to prevent fraud, but the environments where it’s placed can open the technology up to variability. Some institutions may find they don’t have the resources to implement the tools without complicating matters.
There is no such thing as true immunity when it comes to security. No matter what systems an organization uses, there are people out there who will stop at nothing to penetrate them. While the security is proven, some publicized attacks may turn some leaders off to the other benefits.
Blockchain takes plenty of power to run, making it a questionable choice for organizations that have committed to green practices. Of course, it’s worth noting that blockchain is still in its infancy and will become more energy-efficient as time goes on.
The future seems bright, particularly as the world moves toward digital banking and faster financial transactions. With more people than ever before using their phones for financial transactions, it’s a way to move money around without opening up the risks of fraud or mayhem.
Blockchain will likely become more pivotal in structured finance by converting an illiquid asset into a token. The owner could sell to different investors. The rise of NFTs showed the financial services industry that they could represent real property on blockchain, inflating prices before their value began to tumble again.
Read More: How Your Brand Can Succeed with High Volume NFTs
This shows how the public reaction can misinterpret these new technologies. The financial services industry will continue experimenting with different solutions, from asset custody to smart contract code, before determining which ones provide the most value to their everyday operations.
Businesses are revolutionizing their operations and customer experiences by embracing the latest advancements in financing technology. Despite the challenges, it seems clear that it will soon become a mainstay in the sector.
When financial institutions increase their risk exponentially by taking days to settle a single transaction (particularly when financial services are like candy for hackers), leaders can’t afford to keep playing the same games when they don’t have to.
If you’re interested in learning more, Gigster provides custom software for companies that are ready for bleeding-edge tech systems. We're here to give our clients the peace of mind they're looking for.
[1] Statista. (2022). Blockchain in banking and financial services market size. [online] Available at: https://www.statista.com/statistics/1229290/blockchain-in-banking-and-financial-services-market-size/.
[2] Caughill, P. (2017). Australia’s stock exchange is the first to use blockchain tech. [online] Futurism. Available at: https://futurism.com/australia-stock-exchange-blockchain.
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