Forget the Batmobile, Get on the Blockchain: How this Tech is Securing Finance
Disclaimer: The information provided in this blog is for informational purposes only and should not be construed as financial or investment advice. It is always recommended to conduct thorough research and consult with a professional before making any financial decisions.
WHAT IS A BLOCKCHAIN?
A blockchain is a distributed database or ledger shared among a computer network’s nodes. They are best known for their crucial role in cryptocurrency systems for maintaining a secure and decentralized record of transactions, but they are not limited to cryptocurrency uses. Blockchains can be used to make data in any industry immutable—the term used to describe the inability to be altered. Because there is no way to change a block, the only trust needed is at the point where a user or program enters data. This aspect reduces the need for trusted third parties, which are usually auditors or other humans that add costs and make mistakes.
HOW A BLOCKCHAIN WORKS
WHAT ARE THE BENEFITS OF BLOCKCHAIN IN FINANCE?
1. Security
Its distributed consensus based architecture eliminates single points of failure and reduces the need for data intermediaries such as transfer agents, messaging system operators and inefficient monopolistic utilities. It also enables implementation of secure application code designed to be tamper-proof against fraud and malicious third parties — making it virtually impossible to hack or manipulate.
2. Transparency
It employs mutualized standards, protocols, and shared processes, acting as a single shared source of truth for network participants.
3. Trust
Its transparent and immutable ledger makes it easy for different parties in a business network to collaborate, manage data, and reach agreements.
4. Programmability
It supports the creation and execution of smart contracts — tamper proof, deterministic software that automates business logic – creating increased trust and efficiency.
5. Privacy
It provides market-leading tools for granular data privacy across every layer of the software stack, allowing selective sharing of data in business networks. This dramatically improves transparency, trust and efficiency while maintaining privacy and confidentiality.
6. High-Performance
It’s private and hybrid networks are engineered to sustain hundreds of transactions per second and periodic surges in network activity.
7. Scalability
It supports interoperability between private and public chains, offering each enterprise solution the global reach, tremendous resilience, and high integrity of the main net.
IMPACT OF DIGITIZATION OF FINANCIAL INSTRUMENTS
The digitization of financial instruments – comprising digital assets, smart contracts and programmable money – takes the benefits of blockchain further by forging unprecedented levels of connectivity and programmability between products, services, assets and holdings. These digitized instruments will redefine the processes of commercial and financial markets, creating a new paradigm where value is brought at every touch point. Digital financial instruments offer the following business benefits:
AUTHENTICITY AND SCARCITY
Digitization ensures data integrity and enables asset provenance and full transaction history in a single
shared source of truth.
PROGRAMMABLE CAPABILITIES
Code that addresses governance, compliance, data privacy, identity (KYC/AML attributes), system
incentives, and features that manage stakeholder participation (for voting and other rights) — can be built into the assets themselves.
STREAMLINED PROCESS
Heightened automation increases
overall operational efficiency. It enables real-time settlement, audit, and reporting; and it reduces processing times, the potential for error and delay, and the number of steps and intermediaries required to achieve the same levels of confidence in traditional processes.
ECONOMIC BENEFITS
Automated, more efficient processes trigger reduced infrastructure costs, operation costs, and transaction costs.
MARKET REACTIVITY
Digital securities allow greater customization than standardized securities and can be issued within shorter timeframes. Issuers can create bespoke digital financial instruments directly matched to investor demand.
NEW PRODUCTS AND MARKETS
Secure, scalable, and rapid asset transfers, fractionalized ownership of real-world assets, tokenized micro-economies, and more.
THE FUTURE OF BLOCKCHAIN IN FINANCE
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself in no small part because of Bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap, with fewer middlemen.
As we head into the third decade of blockchain, it’s no longer a question of if legacy companies will catch on to the technology—it’s a question of when. Today, we see a proliferation of NFTs and the tokenization of assets. As a result, the next decades will prove to be a significant period of growth for blockchain.
challenges of implementing blockchain
WIDESPREAD ADOPTION
For the best results, blockchains need widespread adoption. That’s especially true in the financial services industry where so many companies work with each other and need a method they can all use to handle transactions. To give a straightforward example, for banks to transfer funds using blockchain, each bank involved in the transfer needs to have adopted it.
INTEROPERABILITY
Adding to the previous challenge is a lack of interoperability between different blockchains, leaving them unable to communicate with each other. To solve this issue, several blockchain networks that focus on interoperability solutions are in development, including Polkadot (DOT 0.84%) and Cosmos (ATOM 1.06%).
COSTLY
It can be expensive and time-consuming to switch to blockchain technology, especially since skilled blockchain developers are in short supply. Some finance companies, particularly smaller ones, may be reluctant to commit to overhauling systems already in place.
IMMUTABLE
Blockchain data can’t be altered. Although this is a benefit of using blockchain, it also has drawbacks for financial companies that often need to modify stored data. To implement blockchain, these companies would need to adjust their methodology.
NOVEL
Since blockchain technology is relatively new and developing so quickly, regulators haven’t caught up yet. Governments will most likely institute policies that affect blockchain and the companies using it.
use cases of blockchain in finance
IMPACT OF BLOCKCHAIN IN THE FINANCIAL SERVICE INDUSTRY
With the advantages it offers, blockchain could have a massive impact on the financial services industry. Here are the main benefits of blockchain in finance:
- It can make the payment process more efficient. Many blockchains are capable of settling transactions in seconds at costs of $0.01 or less, saving money for both the financial companies and the customers involved.
- It can help financial institutions save on international transactions. Blockchain deployments are projected to save banks $27 billion on cross-border transactions by the end of 2030.
- Since blockchains provide a distributed, inalterable record of transactions, financial institutions can use them for record keeping and reporting to regulatory agencies.
- The faster transaction settlements offered by blockchain technology can improve various types of financial services. Lenders will be able to fund loans more quickly, vendors will receive payments earlier, and stock exchanges can settle securities purchases and sales almost immediately.
FINANCE COMPANIES WITH THE IMPLEMENTATION OF BLOCKCHAIN
GOLDMAN SACHS AND USDC
Goldman Sachs sees potential in blockchain technology for the financial industry, highlighting its security, transparency, and ability to simplify transactions. They believe collaboration and standardized implementation are crucial for wider adoption. Legal frameworks need to be developed to address liability and security concerns. Goldman Sachs is a leading investor in USDC, a stablecoin pegged to the US dollar, which allows them to leverage the benefits of blockchain without the volatility of other cryptocurrencies.
J.P. MORGAN AND LIINK
J.P. Morgan is a frontrunner in applying blockchain to financial transactions. Their "Confirm" solution tackles slow money transfers by validating beneficiary information between banks on the blockchain in near real-time. They also offer "Liink," a platform enabling secure and speedy data exchange between financial institutions. Liink integrates with existing systems and boasts 382 banks as users already.
HSBC USES R3’S BLOCKCHAIN PLATFORM
HSBC also uses R3’s blockchain platform to enable its Digital Vault, a custody blockchain platform. HSBC has identified the opportunities in blockchain technology to safely store digital assets. On top of that, with the help of blockchain technology, they could reduce the costs of their custody service. Corda’s blockchain technology gives HSBC the opportunity to move more of the transaction lifecycle onto the ledger in the future.
mastercard
HSBC also uses R3’s blockchain platform to enable its Digital Vault, a custody blockchain platform. HSBC has identified the opportunities in blockchain technology to safely store digital assets. On top of that, with the help of blockchain technology, they could reduce the costs of their custody service. Corda’s blockchain technology gives HSBC the opportunity to move more of the transaction lifecycle onto the ledger in the future.
COINBASE
Founded in 2012, Coinbase is a secure online platform for buying, selling, transferring, and storing cryptocurrency. Its mission is to create an open financial system for the world and to be the leading global brand for helping people convert crypto into and out of their local currency. Led by CEO and Co-Founder Brian Armstrong, 245,000 ecosystem partners in over 100 countries use Coinbase to easily and securely invest, spend, save, earn and use crypto.
bank of america
Bank of America (BofA) is making significant strides in the blockchain industry, offering its clients access to a global payments platform and a wealth of blockchain expertise. The bank’s commitment to digital innovation is evident in its publication of a comprehensive digital asset research report titled ‘Digital Assets Primer: Only the first inning.’ This report provides investors with a framework for navigating the rapidly evolving digital asset landscape. Despite its enthusiasm for blockchain, BofA’s CEO revealed in August 2022 that the bank currently does not have permission to engage in cryptocurrencies due to regulatory constraints.
CONCLUSION
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself in no small part because of Bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap, with fewer middlemen.
As we head into the third decade of blockchain, it’s no longer a question of if legacy companies will catch on to the technology—it’s a question of when. Today, we see a proliferation of NFTs and the tokenization of assets. As a result, the next decades will prove to be a significant period of growth for blockchain.
