How Blockchain Will Transform Traditional Finance

Since the beginning of organized commerce, centralized financial systems have dominated the market, operating largely as a black box in the eyes of their customers. Aside from a lack of transparency, they have operated in a monopolistic manner, amassing empires by simply acting as an intermediary.

However, as the next iteration of the internet takes shape, these traditional economic and financial systems are being reimagined in ways never seen before. With this next-generation internet, known as Web3, concepts like blockchain, cryptocurrency, and decentralization are rapidly entering the mainstream economy. This paradigm shift heralds the arrival of a new commerce arena that has the potential to fundamentally restructure our global financial system as we know it, making it more transparent, inclusive, and secure. Here are five examples of how blockchain can improve and replace legacy financial systems on which we have become so reliant as a society.

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1. Finance?trading

Commerce finance is a critical component of the global financial system for mitigating risks, expanding credit, and ensuring that importers and exporters may conduct cross-border trade. Trade finance, like other businesses, suffers from logistical constraints caused by outmoded manual documentation methods. Physical letters of credit, for example, are still often generated and transmitted through numerous intermediaries to secure payment.

The adaptability of blockchain technology can provide excellent assistance for international commerce operations that would otherwise be prohibitively expensive owing to trade and paperwork requirements. Companies may digitally confirm transaction data such as country of origin and product information by keeping and safeguarding these activities on-chain (on the blockchain). This would greatly boost confidence in the marketplace between exporters and importers based on extraordinary openness and data security. Furthermore, this might alleviate the most important risks now confronting trade parties, such as errors in paperwork and monitoring around the movement of products, among other uncertainties.

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2. Decentralized identity

Customers must provide personal information such as their passport, driver's license, and different verification papers to TradFi (traditional finance) institutions in order for them to be onboarded. This procedure is known as "Know Your Customer" or "KYC." Traditional financial systems require an average of 24 days to complete this KYC procedure, resulting in a poor customer experience and a lower user retention rate. Banks keep client information centrally, making it vulnerable to numerous breaches.

Customers, on the other hand, might submit their KYC information to a blockchain once and provide continuous authorization for institutional access. By keeping KYC information on-chain as a "Decentralized Identity," or DID, the KYC procedure might be completed in a matter of seconds. Furthermore, financial organizations would no longer be held liable for the long-term security of consumer data, reducing costs and liabilities.

3. Settlement infrastructure

Transferring funds throughout the world is becoming a logistical headache. Before reaching its destination, a simple bank transfer from one country to another must transit through a laborious system of middlemen ranging from custodial services to correspondent banks. Each intermediate increases the processing time and introduces another security risk. Furthermore, the two account balances must be reconciled across a complicated, fragmented financial system.

Institutions, on the other hand, might use blockchain technology as a decentralized ledger to securely trace all transactions. This single source of truth might essentially remove the current network of middlemen by allowing transactions to be settled directly on-chain – a 10x improvement over SWIFT. Furthermore, this might enable "atomic" transactions that clear and settle instantly with a validated payment, removing the multi-day transfer delay on international transfers and the 24-hour transfer time on domestic transfers required by financial service providers.

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4. Modernized recordkeeping

Every day, traditional financial organizations such as Mastercard, JP Morgan, and Blackrock manage vast volumes of sensitive financial data that must be transmitted, examined, and audited. Today, it is both costly and difficult to securely keep and reconcile ledgers.

Instead, institutions may put this information to a private blockchain, which would vastly enhance internal operations by allowing information to move in a chronological, immutable, and transparent manner. Because of the blockchain's traceability feature, which may assist detect fraud and create a believable audit trail, this might significantly increase security.

5. Personal finance

Banks now give a meagre 0.21% APY on savings accounts to clients. Meanwhile, banks are showing a lot greater interest in their clients' money and keeping the lion's share of the earnings.

Blockchain, on the other hand, is based on the creation of a user-first market. Instead, customers may earn 8-15% APY or more by putting their funds in blockchain apps like Aave or Compound.

One of the key reasons individuals have acquired cryptocurrency to far is to battle the excessive inflation that most countries endure. The worldwide inflation rate is currently staggering at 8.8% and is virtually definitely rising. With inflation significantly surpassing bank APYs, customers have little choice except to locate better alternatives or see their money evaporate.

For both of these reasons, the general public will likely shift more of their assets into crypto in the long run, reducing deposits in banks and ultimately resulting to a drop in TradFi income.

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Conclusion

Many people believe that blockchain will completely replace the trade finance business. Others feel that blockchain technology will only enhance existing TradFi infrastructure. Overall, it is unclear how and to what extent the financial industry will embrace blockchain technology. However, one thing is certain: blockchain will usher in a new era of financial openness, justice, and security.