How Blockchain Technology is Reshaping The Finance Industry
Blockchain, also recognized as Distributed Ledger Technology, is revolutionizing the future of financial institutions. The technology allows peer-to-peer (P2P) transactions within any organization or between organizations. It also records and verifies all transactions on the network so that it's easier for banks to manage their funds and ensure they're not being misused. Finally, it allows for quick transactions through decentralized networks.
Blockchain technology has become the latest disruptive force that senior-level financial executives need to consider when creating long-term plans. As of today, a majority of a CFO's engagement with the technology comes in the payments and banking sector as blockchain gains traction. At the same time, blockchain is moving beyond speculative traders and technology enthusiasts into cross-border payments and capital market structures.
Blockchain is not limited to crypto and companies are moving into using blockchain as a technology to solve operational challenges in finance to improve speed, and reduce the risk of identity theft, traceability of data, and data security.
In this article, we will understand the impact of blockchain technology on traditional finance, and real-world use cases of blockchain-enabled finance.?
It's Distributed
Blockchain is a digital ledger of transactions on a peer-to-peer network. Every participant in a blockchain network holds a distributed ledger of transactions. Participants are mutually able to access all the blocks' information. In its simplest form, a blockchain can be considered to be a distributed ledger that contains the relevant details for every transaction that has ever been processed. The validity and authenticity of each transaction are protected by digital signatures.
Participants are liable to maintain the ledger and participate in the validation process. Everything is mutual and solely protocol-based; no participant can avail of special treatments from the network.??
By design, blockchains are inherently resistant to modification of any stored data. Functionally, a blockchain can serve as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable. Blockchain can be used as a source of verification for reported transactions
It's Immutable
Any validation process or verified transaction blocks can't be altered, removed, or manipulated once updated. This immutability feature makes blockchain the safest among technologies.?
Blockchain processes through a validation and verification process. Adding a new transaction to a network requires validity and verification from the existing nodes. Without the majority's consent, a new transaction can't be added to the network. Likewise, blockchain restricts any suspicious and vague transaction from entering its boundary through validators and saves data from being misplaced or misused.?
It's Secure
Blockchain technology adds multiple levels of security to its individual transaction record nodes. Every block is individually encrypted and secured using a hashing system.?
Encryption with cryptographically hashed techniques prevents blockchain from hacking and malware attacks. Each block holds its own and the previous block's hash code. This feature connects every block cryptographically, and it'll take years for hackers to break down the hashcode chain and enter that network.?
It's Fast
One of the major fallouts of traditional banking systems is slow processing speed. Because of the centralized authority or sets of intermediates, processes like loan sanctioning, claiming insurance, and MF money withdrawal takes loads of paperwork, hence time and money resources.?
Implementing blockchain technology into the traditional financial ecosystem can bring down processing speed. Any financial settlement can be completed within a fraction of a second without office visits, paperwork, and other problems.?
Real-World Blockchain Use Cases in Finance?
Banking: The institutional banking systems mainly manage a few economic activities like loans, mortgages, payments, and transactions.?
The loophole in the traditional banking industry is backdated manual systems. Processes like credit calculation, securing loans, and mortgages for small and medium business enterprises ( big enterprises get leverage while borrowing loans and mortgages from banking institutions) require nearly one month to settle everything, let alone the failed requests.?
Altogether, blockchain-enabled banking systems can go further, reducing settlement days, automating financial recording and analyzing methods, and providing security over inter-party risks.?
Asset Management
Assets like stocks and reserve assets are managed by asset management funds, and people can't spare time to manage their assets depending on these asset management firms. Tasks like raising funds, real estate buying and selling, and portfolio management are becoming tougher, as people's demands and economic protocols are more variable today.?
Banks and other institutions handle money and securities administration for users. Blockchain aids end-to-end fund transactions, automating financial events such as dividend proceedings, coupons, holding rights, fund maturity, and pricing.?
Blockchain-infused asset management systems can embrace new possibilities for managing liability risk, reducing process complexity, and more like -?
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Other than these features, efficient capital management and automated fund administration like facilities can embrace constantly evolving blockchain technology.?
Capital Market
The current capital market infrastructure can handle a safe, seamless, and streamlined flow of money, information, assets, and value across global markets. However, it is subject to various commonly faced challenges, including greed, misinformation, low returns on investment, economic downturn, high cost of transactions, and lack of transparency.?
This is where distributed ledger technology comes in and offers a way out of long-standing operational and functional challenges. Simultaneously, presenting an ambitious scope to modernize and redefine the current capital market infrastructure. Blockchain has also shown a proven potential to transform payments, settlements, clearing, issuance, and other such services with the power of decentralized transparency and access.?
The capital markets are witnessing Blockchain revolutionizing financial Markets. Large financial institutions are leveraging Blockchain to remodel investing and accounting services. Such as banks, stock markets, insurance, and asset management to significantly improve efficiency, security, and transparency.?
Capital markets regularly face an upcoming number of capital demands among the new establishing startup ideas. Likewise, traditional businesses are also gaining momentum toward new-age technology. On a bigger perspective, the capital market is currently at the peak of complexity and demand for new-age entrepreneurs.?
On the contrary, emerging stringent security protocols, low liquidity rates, slow settlement process, interest rate, and risk volatility are also a part of reality. These extremes are creating turmoil in the whole capital market, hence adding new challenges for the capital market players. Rising and developing economies largely face capital market regulation problems, reducing transparency and?
Payments
Providing fast and cheap money transfers. It is especially true for cross-border transfers and micropayments, where bank fees can be comparable to the transfer amount. While in banks, such transactions take a long time (up to 3-5 business days) and are expensive (from 1% of the amount). On a global scale, this is a considerable expense. In cryptocurrency networks, transfers take several minutes and are significantly cheaper.
In the domestic and global payments market, blockchain has eased the payment process. Blockchain-enabled payment has reduced two nightmares like heavy processing fees and long processing time, etc.?
Blockchain helps the cross-border payment system by limiting the number of intermediates in the chain. Smart Contracts and dApps automate processes like immutable recording, providing edging security, so third-party surveillance and maintenance are unnecessary.?
Governance & Security:
Blockchain makes it possible to get rid of complex workflows. It improves traceability and interoperability between systems. The technology guarantees the security of the data while excluding the human factor. There are already projects on the blockchain that issue loans, identify customers, and implement corporate financing.?
Besides recording and processing transactions from all groups, blockchain builds stronger trust between groups doing business together. The immutable record of all the transaction history, which is available in real-time, allows regulators to govern, audit, and disable any breach in the documents that could harm the organization.?
Digital Identity:
Identity verification of users is crucial for the security of the data flowing in and out of the blockchain. The distributed ledger records and processes the users' identities through the network for KYC purposes. Blockchain enables users to have greater control over their own digital identities. With the user's consent, banks and other organizations can use their identity, lowering the risk of identity compromise.?
Auditing:
For auditing purposes, blockchain is a very secure and flexible surveillance system. Blockchain-enabled systems can transform once-a-year auditing processes into real-time monitoring systems. Moreover, transactions being recorded in a blockchain ledger are immutable, and the real-time process will record every minute detail to bring attention to them. Auditing processes will be easy to maintain, less costly, and full transparency to organizations over ownership of the historical data records.?
Audit engagements are an important part of any business, as they help identify potential losses and fraud, which can lead to significant financial loss for businesses. This is why it is vital for businesses to be able to audit their own operations and processes in order to prevent fraudulent activities from occurring.
The use of blockchain technology has helped auditors achieve this objective by verifying transactions and records with a high degree of accuracy. Blockchain technology has allowed businesses to increase their ability to record and verify transactions, which has led them to increase their confidence levels when conducting audits.
CeDefi :?
Cefi is the traditional centralized version of financial systems, and Defi is decentralized finance, CeDefi is a Centralized Decentralized Finance system created on blockchain to create a layer of centralization to manage and govern business operations. CeDefi, an emerging system, bridging the best of both worlds.?
The main purpose of CeDefi is to establish centralization over the blockchain systems without reducing blockchain capabilities. Financial companies can't allow any permissionless system to reduce its confidentiality, which can be a threat to the economy. With CeDefi, companies can define the nature of their governance model - risks, collaboration, data security and benefit from the best of both worlds.?
Conclusion
A discussion over blockchain's contribution to the traditional finance industry requires openness and vision; it's only affirmative that with time blockchain will contribute in a big way to solving nibbling problems of traditional finance and banking institutions. As blockchain solves some of the complex problems of financial institutions, it would be safe to say that it is an enabler not a disruptor of traditional finance and banking. CeDeFi can truly bridge the gap between traditional organization structures with decentralized finance. Although the discussion on crypto will continue to create a wall, which is a different debate as crypto is just a small application of blockchain. In a way, discussion around crypto and decentralization has made traditional finance, banking and investment companies take necessary steps and leverage the ‘good’ that comes out of blockchain and be prepared for any surprises.?
SoluLab works with leading financial institutions and banks to identify use cases and build a roadmap for blockchain and web3 implementation. We conduct regular discovery workshops with CxO’s and financial leaders. Contact us to know more.?