Having depreciated again over the past month, it can’t be denied that Bitcoin is in the middle of an extended period of decline. Now that the Crypto winter has continued for more than 400 days, it may be a good time to ask ourselves: is this a good reason to forget about Blockchain technology altogether? By no means.
Initially just seen as a means for cryptocurrency transactions, it is now starting to gain recognition as something more than simply the mechanism behind Bitcoin. It is a robust and secure technology that various industries have been adopting, from medicine and government sectors, to gaming and trading.
In this article, we’d like to touch on the field that has so far found the greatest use for blockchain - the banking and finance industry.
Blockchain Technology in Financial Services & Banking
Many FinTech companies have already invested in, or plan to contribute to the introduction of blockchain. On the one hand, it offers many opportunities that can drastically change many aspects of financial services. On the other hand, the way it is being used could signal an end to the traditional banking industry as we know it. With the ability to store and send money internationally without the need for middlemen, many proponents of the existing banking structure are understandably running scared.
Although vocal supporters are insistent on the fact that blockchain is a “revolution”, others are much more skeptical as to what extent it will figure into our lives in the next few years. If we take away the emotions associated with the argument and focus on this technology purely in terms of innovation, its future indeed looks bright.
The critical problem is partly down to the lack of success stories. We are becoming used to hearing about a blockchain service that has failed to deliver the value a business has expected. Of course, this is not all blockchain’s fault. It is often down to an unmatchable level of hype that has been brought about by the association to the cryptocurrencies it facilitates. The research and advisory company Gartner confirms this trend: “By 2023, 90% of blockchain-based supply chain initiatives will suffer blockchain fatigue for lack of strong use cases.”
Yet, full-throated denial of this technology is also misguided. А finance industry blockchain partnership could lead to innovations in the sector that have been sorely missing. It can offer increased legitimacy and value to ageing institutions that are being affected by negative consumer sentiment.
Simply put, blockchain is a network of peer computers that can interact with each other. The system consists of a chain of blocks that store cryptographic data about transactions, agreements and contracts. Such networks can be both public (each participant can write and read data) or private (the rights to verify transactions belong to individual participants).
Blockchain provides all business members in a network with equal access rights to the transaction history, the trustworthiness of which is secured by an advanced consensus algorithm. Transactions that are carried out using blockchain technologies have four main advantages by default:
- Economic efficiency
In public blockchains though, there is a major drawback in terms of speed. The most well- known blockchains, those that facilitate Bitcoin and Etherium, are slow to process transactions. Bitcoin, for instance, requires total consensus across all nodes, which translates to roughly 7 Bitcoin transactions per second, while traditional VISA handles about 1700 transactions per second.
FinTech blockchain companies are striving to make up for that flaw and build their blockchain networks and consensus algorithms with transaction speed in mind. An improved blockchain structure and relevant consensus algorithm can simplify traditional banking operations and significantly reduce processing time.
However, it is important to realize that blockchain is not a silver bullet. It can only improve those aspects of an industry that deal with secure information storage. There are five main areas in which it can be an indispensable solution:
- Fraud reduction
- The reliable identification of clients
- The creation of stock exchanges without intermediaries
- Faster international payments
- Faster retail banking
Obsolete processes and piles of documentation can be replaced with a system based on the principles of joint users liability, where fraud and scams become much easier to detect and therefore less prevalent.
TOP-5 Blockchain Applications in Finance
The following list includes applications that you will probably hear a lot more about in the near future.
- MakerDAO. This is a smart contract which runs on the Ethereum blockchain. Its purpose is to create certain tokens in exchange for collateral which is then held in escrow until the borrowed cryptocurrency is returned.
- Fundition. This is a decentralized crowdfunding platform that doesn’t demand any fees from the people that want to host a product on their platform. Furthermore, donations are available quickly and securely.
- Smartsteem. This is an investment and promotion-service for the Steem blockchain. It provides sustainable growth for investors and content creators through the calculated buying/selling of upvotes.
- PROCHAIN PRA Box. This is a Dapp for EOS token distribution. The users can claim a token every 4 hours. The more EPRA tokens you deposit, the less time you have to wait, so you can accumulate more tokens faster.
- MinnowBooster. This is a platform that offers various tools to increase the Steem user experience as well as make it easier to get passive revenue.
Blockchain Use Cases in Financial Services
Stopping money laundering
Money laundering is an insidious process that has so far been able to run without any significant challenge. Many businesses and governments have their own AML (Anti-Money Laundering) systems that are updated periodically and make international collaboration difficult.
With cross border transactions only getting easier, it is obvious that a new system needs to be adopted. An anti-money laundering blockchain system would be secure, decentralized and immutable. A worldwide database could be accessed in real time, and additions made by all participating members.
The transparency provided by blockchain is a key part of the building of automated systems that could flag suspicious activity far more efficiently than a human could, by linking pieces of information quickly, no matter how disparate. The faithful sharing of information between groups is the best bet against fighting money laundering, and blockchain provides the tools to do it.
Audit and regulatory compliance
Blockchain’s very nature makes it an ideal candidate in the area of audit and regulatory compliance. Records are unable to be falsified or changed once they are confirmed in the blockchain ledger. Without having to duplicate files and increase documentation, anyone, anywhere in the world could be given access to a real-time record for scrutiny. A regulator, company/individual, and any third parties will be reading from exactly the same page so to speak, minimizing the chance of errors or document falsification.
Insurance companies famously face many issues, including dealing with third parties, handling huge amounts of data and of course fraudulent claims, of which McKinsey & Company says make up 5-10% of all claims. The increasing amounts of data can be checked, modified and verified by all parties with complete transparency. Automatic verification set up through smart contracts can eliminate, or at the very least reduce intermediary fees. Furthermore, the ability to properly identify someone quickly and gain easy access to historical records will no doubt cut down on fraudulent claims.
Peer-to-peer and international transactions
Nowadays people can make transactions with the help of various providers, whether it is Twint, N26, Paypal and so on. They were all created to enable the transfer of virtual money between individuals and businesses. However, many of these systems have their disadvantages. Here, blockchain can reduce the threat of being hacked.
Cross-border payments can become much easier as well. As there are no intermediaries such as banks, transactions can be executed quicker, and with reduced costs. This is achieved with the help of mutual verification and encryption principles.
In 2016, an Israeli Bank carried out the first live international transaction using blockchain. Thanks to this technology, the whole operation took just four hours, which is incredible, considering that it usually takes a couple of weeks. In this way, the $10 trillion share trading market can become one of the places where blockchain has the potential to be implemented best, due to the current issues of bureaucracy, slowness, and reduced liquidity.
A good idea can’t be utilized unless it is put into practice. In order to become widely used in different aspects of our life, blockchain-based applications need to undergo multiple iterations and real-life testing, just as any other application would. The aforementioned examples show what is possible if financial services were to adopt blockchain. If done correctly, it can change not only the financial landscape but those of many other industries.
We help our clients to deliver high-quality distributed apps and web-apps with blockchain. If you have any questions about how blockchain might benefit your project, feel free to reach out, we offer a free consultation on the topic.