Blockchain in Finance: Real World Application

It stands to reason that blockchain technology was first introduced to breathe new life into the financial sector. Developed as the operational backbone of Bitcoin during the 2008 global financial crisis, blockchain's distributed ledger technology is a safe and secure way to transfer and catalog data.

 

In a nutshell, blockchain is a public ledger that can record the origin, movement, and transfer of any valuable asset. To process a payment or transfer a good, blockchain requires unanimous approval from the individual nodes in the blockchain, as opposed to relying on a central authority, such as banks. The financial sector is most interested in ledger technology because it solves many of the industry's current problems, namely security and efficiency.

 

How Blockchain helps in overcoming financial industry challenges?

 

Blockchain technology is a type of distributed ledger technology (DLT) that is a decentralized ledger. It is a "chain of blocks" in which each block contains timestamped digital data and its own unique identity, as well as the unique identities of the previous blocks. Blockchain in financial services has been regarded as the technology's primary use case since its inception. When it was used for the cryptocurrency Bitcoin in 2009, the technology gained a lot of traction. Blockchain's distinct characteristics have the potential to significantly benefit the finance industry.

 

For a long time, the finance industry has faced numerous challenges. Technology's incredible advancements have resulted in the resolution of numerous problems, but some new technologies have also created new problems. There are numerous fintech solutions available today, making it difficult for financial service providers to determine which solution is best for them. As a result, they seek an all-in-one solution capable of addressing all of the major issues.

 

Also Read | Blockchain in Financial Services: Explained

 

Advantages of using Blockchain in Financial Industry 

 

Blockchain technology, which is frequently referred to as the "backbone" of digital currency, has steadily evolved to become a disruptive force in the financial services industry. Blockchain, as a secure, decentralized, and transparent ledger system, is poised to revolutionize the way financial transactions are conducted, resulting in increased efficiency, lower costs, and enhanced security. 

 

Some of the major pros that blockchain offers for the financial industry have been listed below:- 

 

1. Payment System Simplified

 

One of the most important uses of blockchain technology is to streamline payment systems. Blockchain-based payment systems, by eliminating the need for intermediaries, can enable faster, more secure, and more affordable cross-border transactions. Ripple, a global payment network based on blockchain technology, for example, enables financial institutions to process payments in real time with minimal fees, providing a cost-effective and efficient alternative to traditional payment methods.

 

2. Collateral administration

 

Blockchain technology has proven to be useful for collateral management as well as commodity tracking and tracing.

 

Companies could also use blockchain to track and even trade commodities as they move through a supply chain. They could also trace the chain of custody for insured commodities, which is especially useful in insurance claims for determining when and where losses occurred.

 

3. Asset Management is being transformed.

 

In several ways, the asset management industry can benefit from the adoption of blockchain technology. Smart contracts, which are programmable agreements that execute automatically when predefined conditions are met, can automate various asset management processes such as trade clearing and settlement, lowering operational costs and risks. Furthermore, tokenization, which is the process of converting physical assets into digital tokens on a blockchain, can improve liquidity, facilitate fractional ownership, and increase access to investment opportunities.

 

4. Settlements in a flash

 

Some payments in today's financial system can take up to a week to settle. The presence of multiple intermediaries in the system is primarily to blame.

 

Peer-to-peer (P2P) transactions are possible with blockchain in finance. It implies the abolition of intermediaries because smart contracts will be able to successfully manage transactions. As the system's "layers" are reduced, instant payment settlements will be made possible. Blockchain payment systems can also be used to make cross-border payments happen instantly.

 

5. Regulatory Compliance Modernization

 

A plethora of complex regulations govern the financial services industry, making regulatory compliance a significant challenge for institutions. Blockchain technology can help with compliance by creating a secure, transparent, and tamper-proof record of transactions, making it easier for regulators to monitor and audit financial transactions. Furthermore, blockchain-based identity management solutions can make customer onboarding and anti-money laundering (AML) processes more efficient. 

 

Real life examples of Blockchain in Financial Industry

 

The term "disruptive" is overused these days, particularly in the technology space, but blockchain has the potential to shake the multi-trillion dollar financial industry to its core. 

 

Here are a few examples of blockchain being used in the financial sector to do just that.

 

1. Transfers of funds

 

The figures relating to how much of a developing country's total GDP is due to remittances are quite startling. Haiti has one of the highest remittance-to-GDP ratios in the world, accounting for 29% of its total GDP.
 

It is just over 10% in the Philippines and 2.7% in Mexico. When put into context, remittances account for 0.7% of global GDP each year. This is a massive sum of money, estimated to be in the billions of dollars.

 

2. Blockchain-based Smart Contracts

 

The ability of blockchain to efficiently establish trust through smart contracts is arguably its most impactful application in finance.

 

Smart contracts are similar to physical contracts in that the contract's terms are fulfilled in real time via the blockchain. Smart contracts are advantageous, particularly in the financial sector, for a variety of reasons. These contracts are fulfilled immediately after all stipulations are met, do not require any middlemen, and provide increased security.

 

3. Settlement of Securities

 

The Depository Trust & Clearing Corporation (DTCC), a post-trade financial services company that provides clearing and settlement services to financial markets, has been researching the use of blockchain technology. In 2019, the DTCC announced that it had tested a blockchain-based system for clearing and settling US equity trades, processing more than 100 million trades per day over a multi-day period.

 

4. Trading on the Blockchain

 

Blockchain technology has the potential to transform the stock market by reducing complex and time-consuming processes, as well as high costs and security risks.
 

Investors, brokers, regulatory agencies, and the centralized institution processing investments are all part of a traditional stock market. Because of lag and uncertainty in the process, an investment can take up to three days to process due to communication between intermediaries. Blockchain, with its smart contracts and decentralized process, promises to improve the investment process's speed, accuracy, and efficiency.

 

Also Read | How can Blockchain be used in Financial Services?

 

Summary 

 

Blockchain will revolutionize global finance by making transactions faster, less expensive, and more transparent. It will enable peer-to-peer transactions, use smart contracts to automate complex financial agreements, improve security, and provide a more inclusive financial system. As blockchain technology matures and regulatory frameworks evolve, so will its impact on global finance.