Every enterprise today that does business in finance, healthcare, and supply chain management is eyeing or adopting blockchain technology. Its impact is opportunistic for these industries as it is a secure ledger system that has numerous applications.
The revolutionizing transactional capabilities of Blockchain in Finance offers prospective gains of over $2 trillion by the end of 2022 as the technology becomes widely available for use in various fields besides being leveraged in the exchange of several valuable cryptocurrencies.
What is a Blockchain?
It is a decentralized ledger system and a form of Distributed Ledger Technology (DLT) containing a chain of blocks, each of which holds programmable digital data within it along with timestamps. The unique timestamped identities present in these blocks are called hash which can serve many beneficial purposes, especially for the finance sector.
These blocks are programmable for containing data immutably while being transparent and publicly available, making transactions that occur on it faster and more secure. Such technology applications on a global scale can significantly reduce the worldwide challenges faced by the current financial system that largely depends on the use of Fiat Money.
Advantages of Blockchain in Finance
The major innovation introduced by the implementation of Blockchain in Finance is the existence of Decentralized Finance (DeFi) Systems, which serve to globalize transactions with the help of smart contracts while removing the intermediaries that typically offer financial services.
These contracts can serve many functions while providing the following benefits that are still unparalleled by the centralized finance systems of different nations.
Security & Transparency
The multi-layered financial services available across the globe are stored in centralized databases involving several intermediaries. Such a model effectively creates a lack of transparency of data by making the security of such data reliant on the trustworthiness of intermediaries and database sites.
While such solutions have witnessed numerous data breaches and data hacks, their continuous usage endangers the public, financial service providers, and nations.
The use of Blockchain in Finance for such cases can contribute to countering these problems while offering the following benefits:
- Immutability: The unchangeability of data stored on blockchain makes it perfect to securely store financial data as such data cannot be altered again. Thus, ensuring the security of data along with offering proof of its authenticity.
- Privacy Access: By assigning two security keys to the data repository, namely a private key and a public key, accessing data becomes simpler without subjecting it to data breaches.
The public key can be shared with every user on the network to help them access their transactions. At the same time, the stakeholders can get the private key to access all the records on the network.
In such a manner, the financial system can become transparent without losing the confidentiality of the stakeholders.
- Non-Disclosure: Verifying the stored financial information is necessary to provide financial services and resources to any applicant. Blockchain technology can facilitate this without needing to disclose complete financial information.
The centralized financial sector that carries out millions of daily transactions needs to invest its money in a recurring manner for the following expenses:
- Purchasing Central Database
- Database Maintenance & Security
- Bookkeeping & Labour Cost
- Value Transfer Systems
- Intermediary Commissions
Financial service providing bodies like banks and equivalent can eliminate a significant proportion of these expenses by implementing blockchain technology infrastructure. It can save them the complete expenses levied towards intermediaries, value transfer systems, bookkeeping, and database maintenance & security.
Better Risk Management
Blockchain in Finance can negate multiple risks involved in loaning capital that arise due to the existence of several intermediaries, the counterparty failing in meeting obligations, and credit risks born of asymmetric information availability.
Keeping track of all the information and the loan usage is mainly unreliable and inefficient for such entities which can instead adopt the blockchain technology which treats each stakeholder as a node for implementation of the following functionalities:
- Engaging in peer-to-peer (P2P) transactions without intermediary participation.
- Risks associated with fund management and credit dissolve due to the transparency of information on the network.
- Smart Contracts carry out defined operations like transaction settlement without requiring human labor.
- The unchangeability of stored financial information serves to impart utmost reliability.
It is fairly known that certain financial transactions can take as long as weeks to settle, if not longer, due to the involvement of multi-layered systems on top of the participation of several intermediaries to finalize the transaction.
Instead of relying on such elaborate systems, harnessing the peer-to-peer transaction system via blockchain technology can make the transactions near-instantaneous, if not lightning fast. It is even possible to make cross-border transactions quicker than they presently are regardless of the sum of money involved in the transaction.
Auditing financial transactions is an intricate and lengthy process that is highly expensive yet also critically important. The lack of transparency in the current money management system may incite compliance officials, auditors, and accountants to reflect the financial information in a manner chosen by them, thereby inviting grounds for unethical representation, dishonesty, and other similar problems.
In contrast, the implementation of Blockchain in Finance for managing audits can be made efficiently honest and completely ethical. The transparency and the immutability of records stored on the blockchain allow compliance officers and systems to verify the authenticity of financial management remotely.
Use Cases of Blockchain in Finance
Now, after understanding the various advantages that can be employed in the financial system using blockchain technology, let’s get an overview of the numerous use cases where applying this technology can grant maximum feasibility.
Borderless Financial Payments
Making cross-border financial transactions towards acquiring or facilitating products and services inevitably demands an additional cost that the banks or financial institutions levy on the initiator. It makes such transactions expensive and slower and sometimes even costlier than the total worth of the trade.
Implementing Blockchain in Finance can change this by allowing users on the network to send and receive payments in minimal time and without the expansive interference of the various intermediaries. The blockchain payment systems like Ripple and Stellar already facilitate such transactions speedily and less expensively.
Independent Lending Platforms
Lending finance traditionally involves inviting the participation or presence of an intermediary to complete the transaction. It is done to establish a trust factor between the borrower and the lending institution. While this is essential to the system, adopting blockchain technology can completely eradicate such practices.
The borrower can directly engage with the lender on the blockchain network to discuss the terms of interest rate, transaction duration, nature of the installment, and other similar elements, which will be programmed into the smart contracts. Such contracts can then manage the transaction thereon without needing input from the lender.
For instance, smart contracts will automatically charge late payment fees to the borrower if they fail to meet the pre-agreed terms of the transaction. Similarly, lending institutions can also seamlessly lend high-costing assets as a smart contract without needing an intermediary.
Globally Transparent Credit System
Analyzing an applicant’s credit score is vital for banks and financial institutions before processing the loan, which is a challenging task when the validity of the credit score isn’t mobile. In translation, a person’s credit scores are presently limited to a particular country or are separate for individual countries.
It creates uncertainty and unreliability, which can be solved by establishing a global credit score system using Blockchain in Finance Credit Score management. It will create transparency within the system and make the financial records such as credit score immutable, which can be modified only by smart contracts that are, in essence, highly secure and not prone to compromise in confidentiality.
Seamless Invoice & Billing Management
Although the creation and updating procedure of invoices and billings related to financial transactions uses modern technology, it still requires a human workforce to complete them. It, therefore, creates room for errors or, at the least, delays in keeping the records updated.
However, blockchain technology can handle such transactions with the use of smart contracts. They can automatically process invoices based on the stored information of the client on blockchain and follow it with updates besides notifying the concerned parties of the state of the transaction. In this manner, blockchain technology can introduce seamless business management.
Inexpensive Capital Investment
It is tedious to go through multiple layers of authorizations and procedures to invest funds into a service, goods, or stock. It is also time-consuming and involves manually filling in the required information, but it can be vastly improved by adopting Blockchain in Finance Investment.
Blockchain can store the user data securely and relay it to the concerned authorities handling the investment process, who themselves can use this technology to obtain information and process the investment via smart contracts seamlessly.
Such a model of completing the investment process can allow convenient data access and transparency and negate the possibility of frauds and errors apart from saving precious time.
The people who pay taxes to the government can accurately keep track of the expenditure made by the various government agencies when the government employs blockchain technology to modernize their public financing activities.
It can further help the government build good relations with the public and prevent fraudulent cases of misuse of money, corruption, and other illegal activities, all of which can improve the functioning of a government.
Robust Financial Management
Organizations and companies rely on software and databases to store confidential information tied to their revenue earnings, dividend distribution, and financial history, which is still prone to compromise in security and transparency.
Instead, using Blockchain in Finance management of such businesses can provide smart contracts that can remotely allow shareholders to access relevant confidential information while allowing the interested organization to view only the data made available to the public.
In this manner, the financial information of organizations and companies can be kept transparent yet also confidential.
Global Stock Exchange
The interconnectedness of the global stock market includes numerous entities like brokers, regulators, and the stock exchange institutions, which collectively add up in building a high cost of running the system and participating in it.
Running the stock exchange on blockchain technology can help manage regulators’ work via smart contracts while maintaining utmost authenticity in recording each transaction in the ledger. Thus creating an environment where the regulators and brokers cannot monopolize the market nor take commissions on each trade.
Initial Public Offering (IPO) Systems
The IPO process is also similarly elaborate and costly as participating in the global stock market because of the high charges levied by private investors, venture capitalists, and banks. Thus, with Blockchain in Finance, the equity market can be decentralized so that the investors can directly interact with the companies without needing go-betweens.
The influence of Blockchain in Finance is rapidly creating a world that relies on decentralized systems to process and manage financial transactions. Leading to the observable success of such a system in the trade of crypto NFTs and enabling the convenience of commerce, several countries have launched or introduced blockchain technology-based Central Bank Digital Currencies.
These digital currencies offer optimal fund administration possibilities and present a whole new tokenomics in the finance sector that is learning to leave behind traditional financial systems to reduce costs and improve efficiency and transparency.