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How blockchain is being used in the finance industry
The last few years have seen an explosion in the popularity of cryptocurrency. This is now a market that has gone from relative obscurity to being worth trillions of dollars. While crypto in itself is hugely popular, what has also led to such an increase in popularity, is the underlying technology that is used: blockchain.
Investors and developers alike are awash with excitement when it comes to blockchain. We are only now really starting to tap into its full potential and, the truth is, there is so much more to come. Seeing as how blockchain was originally created for the purpose of allowing the use of digital currency, it perhaps makes sense that it has continued to be developed to have a wider impact on the financial industry as a whole.
What blockchain has to offer this industry is the ability to offer cheaper, faster, and more secure transactions. This is something that all financial institutions will want to be a part of and that is what makes blockchain such an exciting opportunity. Read on to find more about the impact that has already been witnessed and discover more about what is to come.
A closer look at the uses of blockchain
It is, perhaps, common knowledge that blockchain technology is used for cryptocurrency and NFTs (non-fungible tokens). What perhaps isn’t so well known is that major companies have begun to adopt this tech for other purposes. This has seen it being used as a way of time stamping important data, monitoring supply chains, and even assisting with the development of self-driving cars. While these uses are all nothing short of spectacular, the use of blockchain in the financial sector sees it being taken back to its roots.
Just some of the ways that this technology is used in the finance industry include:
- Transferring money
- Additional security
- Automation
- Storing customer data
While some of these uses may appear obvious, others may require an explanation. Let’s take a look at these in turn and explain exactly how the finance industry could implement blockchain for these purposes and, more importantly, why they would want to:
Transferring money
Blockchain was developed with the purpose of moving funds from one place to another. Its original use was to allow Bitcoin to be transferred without the need to have a central governing body involved. Being decentralised, blockchain isn’t controlled by any particular company, individual, or institution. The technology has continued to develop since its creation and is now able to offer transactions that are much quicker, and cheaper than they originally were. Certainly, they perform significantly better than traditional financial institutions such as banks.
For traditional financial institutions to move forward they could implement the use of blockchain technology. This would allow them to offer money transfers that are much more efficient. Businesses grow frustrated by the time it takes to move money, especially overseas where this can take days. The use of blockchain would allow such transfers to take just a matter of seconds.
Additional security
Where money is involved, there is always a real risk of fraud. Financial institutions will always be targets for this and we have seen an increase in this in recent years. Certainly, when you consider digital payments there are significant risks. There always exists the possibility that, as a transaction passes through a payment processor, the information will be stolen. Blockchain mitigates this risk.
Blockchain processes and records transaction blocks by using cryptographic algorithms. By tapping into this cryptography, financial institutions are able to significantly lower the level of risk that exists when they are processing transactions.
Automation
This automation is through the use of smart contracts. Back in 2015, Ethereum was launched. This launch saw blockchain technology take major strides forward in terms of its development. It became the very first blockchain to introduce smart contracts. These are contracts that are automated. They self-execute, but only when a pre-set number of conditions have been met.
When you look at financial services, contracts are a major part of their operation. The truth is that the time spent on these contracts is a drain when resources could be redeployed to other areas and/or savings could be made. By harnessing the power of self-executing contracts, a company could hugely increase its efficiency.
A practical application of how this could work can be seen by considering insurance companies. Let’s say a client makes a claim. Rather than annually review everything, the claim would be checked automatically. Assuming that the claim was valid, and all conditions were met, the contract would be executed and the payment would be made automatically.
Storing customer data
In order to prevent fraud and money laundering, financial companies have a process to go through that allows them to identify their customers. While this process is time-consuming and costs money, it is a requirement set down in law. These companies have no choice other than to carry out these checks. However, blockchain technology could offer an alternative way of doing this that is much more efficient.
Customer information could quite easily be stored on a blockchain. As soon as one company goes through the know your customer (KYC) process, the information could then be added to the blockchain. The next time that this customer approaches a financial company, that company could simply access the KYC information on the blockchain. There would be no need for every company down the line to spend the time, and the money, repeating the process.
How will blockchain impact the finance sector?
Hopefully, you now know a little more about what blockchain has to offer. With this in mind, it is clear to see that the potential impact on the finance sector is nothing short of huge. Some of the main benefits that will be brought about include:
Efficiency
The whole payment process will be so much more efficient. There are numerous blockchains that exist that are capable of settling a transaction in a matter of seconds rather than the hours or days that are currently experienced. Blockchain can also do this at a cost of around $0.01 or even less. This can lead to massive savings for institutions and customers alike.
International transactions
For businesses, one of their biggest issues with the finance industry can be seen by looking at sending funds abroad. Whether it’s to pay a supplier or a remote worker, the time it takes, and the fees involved are a constant issue. Blockchain provides the solution here and it is estimated that by 2030 it will have saved banks around $27 billion on cross border transactions. These savings can be passed on to those using the service.
Accurate records
The records created by blockchain are inalterable. They provide a record of transactions that have taken place and show a clear chronological order. This means that blockchain can assist financial institutions when it comes to reporting to regulatory agencies – they will have a transparent record of all that has taken place.
Overall speed
We’ve already looked at how blockchain can allow faster settlements. This means that when it comes to the likes of a loan, lenders will be able to fund this much more quickly. That means that the borrower can access the funds faster too. It also allows for stock exchanges to be able to Estelle security purchases and sales in an instant.
Are there any challenges being faced by blockchain?
While the benefits that blockchain can bring to the finance industry are indisputable, a balanced view also has to consider some of the obstacles that exist. Some of the major challenges faced by blockchain, and its continued growth, include:
A need for widespread adoption
In financial services, there are numerous companies that work together. This means that those using blockchain can’t operate in a vacuum. If one back wants to use blockchain to transfer funds then other banks involved also need to be using it. This widespread adoption may take time.
Differing blockchains
There is more than one blockchain and one issue is that they are unable to communicate with each other. That being said, there are already blockchains, such as Polkadot, that are working on these issues so that interoperability becomes the norm.
Blockchain’s future in finance
Those behind blockchain technology are lining themselves up to ensure that the impact on financial services is huge. Work is well underway in terms of developing blockchains that are scalable. The likes of Solana, for instance, have reached the point where it can process some 65,000 transactions every single second. Developments such as these will only continue.
There are already hundreds of financial companies that have embraced blockchain technology. These companies are leading the charge and showing the rest of the industry exactly what can be achieved. The industry certainly understands the potential benefits that are on offer. These trailblazing companies are the ones that are demonstrating exactly how it all works in practice.
