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If you’re familiar with the crypto space, you’d know blockchain was invented back in 2008 by the mysterious Satoshi Nakamoto the same developer who created the very first cryptocurrency, Bitcoin. Blockchain is essentially a record-keeping technology. It is a distributed ledger made of virtual ‘blocks’ containing data regarding transactions and traders linked together in a virtual ‘chain.’
In the post-Covid world, as everything around us gradually walks the digital road, it’s only natural that the financial sector will need to go virtual to keep up with the users’ demands and requirements. Blockchain is a technology that, combined with the finance industry, can provide solutions to many of the existing pain points of the industry (security issues, increasing frauds, etc.), as well as bring some completely new attributes to the table. In this post, we discuss why blockchain in the financial sector is a good idea and how the technology will affect the finance industry.
What benefits does blockchain in the financial sector have?
Blockchain tech was built to deftly and swiftly handle fund transfers, tokenize assets both digital and tangible, and even for developers to create new projects on top of a blockchain with extraordinary ease. Therefore, blockchain in the financial sector comes fully equipped to enhance this industry.
Here are some qualities of blockchain technology that stand to benefit the finance industry.
- Decentralized ne of the primary features of blockchain is the fact that it is decentralized. The distributed ledger stores users’ financial and personal information across a P2P (peer-to-peer) network of nodes, which does away with the risks of a centralized database.
- Transparency Since blockchain is a ‘distributed’ ledger, all users on the network can see and verify the data stored on a blockchain.
- Maximized security Blockchains are immutable. New blocks are always added at the end of the chain, and since the blocks are cryptographically secured, it’s almost impossible to alter or remove any of the data stored in the blocks on the chain.
- Smart contracts Smart contracts are self-executing programs stored on a blockchain. They are automatically executed once all predetermined terms and conditions are met. This further increases users’ security within the financial markets since a transaction is completed only when all conditions set by the counterparties are met and the terms are visible to all participants throughout, the threats of fraud are almost zero.
- Virtual transparent record keeping Blockchain renders complex paperwork unnecessary, which would definitely prove advantageous within the financial sector.
- Quick transactions Whether you’re making transactions within the country or international ones, blockchain can process any transaction within the little time it takes to add a new block to the chain.
- Quick KYC In traditional finance, every financial institution conducts separate KYC procedures for customers and stores the data in centralized storage. However, with blockchain, once a customer goes through KYC at one financial organization, the data can be made available for all other institutions too, making KYC hassle-free for both consumers and financial institutions.
How blockchain can affect the financial sector
Now that we know what benefits blockchain in the financial sector brings, let’s see how a few different finance sectors can be affected by blockchain.
Blockchain in capital markets
- Improved solvency Since blockchain-based assets can facilitate the division of any illiquid assets and reduce cost barriers, the opportunity for both liquidity and investments are broader not to mention it’s simpler for both issuers and investors to access the markets.
- Tokenization of assets Since blockchain allows the tokenization of assets and financial instruments, they can gain broader market access in token form with better connectivity and even fractionalized ownership. This also increases liquidity and decreases the cost of capital.
- New inventive financial instruments The blockchain tech allows the creation of original asset classes and financial instruments. Blockchain-based cryptos like Bitcoin and Ethereum are examples of this.
- Reduced risks he quick and transparent settlement of funds reduces operational risks of fraud or human error and counterparty risks in general.
- Decreased costs Since blockchain doesn’t necessitate the intervention of third parties in transactions, the expenses associated with the allocation of funds, accounting etc., and trading fees also decrease. Therefore, blockchain in the financial sector facilitates lower costs across capital markets.
Blockchain in asset management
- Enhanced access to the broader market Digitization of portfolio and existing holdings, the global aspect of blockchain, decreased insurance costs and fractionalization make sure of the availability of various assets to bigger investor pools.
- Automation With blockchain, fund launch, fund administration and more functions can be automated.
- Innovative incentive mechanisms Blockchain can allow for the creation and deployment of new incentive mechanisms to promote participation, as well as punish dishonest users.
- Capital table management Blockchain in the financial sector makes for more efficient capital table administration in asset management.
- Better governance Blockchain also allows for superior governance and increases transparency for the stakeholders and investors.
Blockchain in trade finance
- Accelerated transaction process When it comes to the traditional, paper-based transactions, they frequently take quite some time to come through, even more so in international trade. However, blockchain in the financial sector can digitize and accelerate the transaction process and even let multiple stakeholders communicate through the chain while keeping maximum security.
- More dependable logistics services Especially the traders in logistics services can benefit massively from the deployment of blockchain. The technology provides all parties involved with the opportunity to communicate easily, and since blockchain lowers expenses, newer businesses can join in without hesitation.
Blockchain in banking
- Easy KYC/AML Blockchain can help banks register a customer’s information and make it available for other banks on the same blockchain network to check with if necessary, which brings down operational risks.
- Automated and swift processing of funds As mentioned before, blockchain can facilitate the super-fast transfer of funds and decreases both unnecessary delays and transaction costs.
Blockchain in insurance
- Real-time data keeping The data saved on blockchain lets participants find out a product’s origin and ownership at any moment, and the technology also updates kept data in real time.
- Automated procedures Smart contracts allow the processes of buying insurance and paying premiums quicker and easier since it doesn’t require manual intervention.
- Improved peer-to-peer insurance Blockchain can improve an existing P2P model or introduce new P2P models where all policyholders’ choices are arranged and incentivized with native tokens and even staking.
And those were just several of the ways blockchain in the financial sector can affect the industry positively.
According to an IBM report, 91% of the banks worldwide had started investing in blockchain solutions by 2018. As of 2021, financial sectors throughout the globe have come to see the effectiveness of blockchain integration.
The Israeli bank Bank Hapoalim is already collaborating with Microsoft for a blockchain system that would facilitate smooth management of bank transactions. Barclays has come up with multiple blockchain initiatives, including financial transaction tracking, ensuring compliance, etc. Therefore, it’s quite safe to say that we’ll be seeing further innovative implementations of blockchain in the financial sector in the very near future.
Nischal Shetty is the founder and CEO of WazirX, India’s largest cryptocurrency exchange (recently acquired by Binance). He is a huge blockchain advocate and influencer with over 100,000 followers. He has also been featured in Forbes ‘30 under 30’ list in the past. Nischal has been active in the space for a long time with the mission to involve everyone in the blockchain revolution.
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