Home News Finance News Blockchain and financial industry

Blockchain and financial industry

blockchain financial market

Share This On Social

Many financial companies have already invested or are planning to invest in the use of blockchain technology. On one hand, the blockchain offers many opportunities to change our foremost way of exchanging valuables. On other hand, it is perceived as a threat to the existing pattern of trade. The changes are not always easy, especially when they are global. However, from the potential of a blockchain it is clear that transformation is inevitable.

The leading organizations such as Deutsche Bank, the US Federal Reserve, Barclays Bank, Citigroup already use a blockchain. One of the reasons is undoubtedly the FOMO (Fear Of Missing Out) phenomenon. According to PwC, 90% of the banks of North America and Europe have spent more than 1.4 billion USD on developing blockchain in 2016.

By the way, the scale of implementation of this technology has not yet reached the mass. Indeed, a large number of banks and insurance companies were dissatisfied with the results and therefore postponed that decision for later stage.

In April this year, the Spanish bank BBVA became the first in the world financial organization to provide a 75 million EUR loan using blockchain technology. It also demonstrates a strategy based on three key elements: realization, environment and experience. The bank is working on building blockchain-based solutions that will deliver the full digital cycles of customer interaction. In addition, they plan to contribute to the development of expertise, the regulatory framework and to study the impact of decentralization of the system as a whole. The company also plans to open a blockchain academy to train its collaborators on the basics of working with the new technology and to prepare them for future changes.

The new technology is structurally a network of peer-to-peer computers that can interact. The system consists of blockchain circuits that store cryptographic data for transactions, agreements, contracts. Such networks may be both public (each participant may enter and read the data) and private (the rights to verify the transactions belong to certain participants).

The blockchain provides all network businesses with equal access rights to the common transaction history, which can not in any way be changed after confirmation. This technology can greatly simplify traditional banking operations – reduce processing time and reduce both the value and the amount of cases, exceptions to the rules. The transactions that are made using block technology have four major benefits: security, transparency, speed and cost-effectiveness.

It is important to understand that the technology is not a versatile approach that can solve all problems. There are, however, four main directions in which it can be an irreplaceable solution.

The financial industry is increasingly suffering from cases of fraud and cyber attacks. The vulnerability is primarily found in centralized databases when the database is stored in one place. An unauthorized intervention can cause a lot of damage to such bases. Blockchain significantly reduces the risks, thanks to the decentralization of the database. Since there are many information nodes, the penetration becomes much more difficult because it is necessary to attack each of them individually.

In the banking sphere, there is the notion of Know Your Customer. This means that companies that deal with private individuals’ finances are required to identify customer before completing the transaction. The financial institutions spend more than 60 million USD annually on customer identification and verification. The purpose of this procedure is to track those with which banks work and to prevent potential financing terrorism and money laundering. Another important reason for the customer’s identification is that it is necessary to check whether the requirements are met in order to avoid administrative sanctions. The blockchain can help significantly reduce operating costs in this direction. This can be achieved by keeping the information on verified customers in a block node that other banks, insurance companies and accredited organizations. With such an approach, the companies will not need to waste time to identify the customer from scratch.

The commercial blockchain platforms allow the need for centralized identification or presence of intermediaries to be avoided. In the case of securities transactions, the risk of double costs can be reduced. Such trading platforms work with digital tokens, which can be transparently tracked on the stock exchange. The digital token acts as a certificate of authenticity and the chance for securities to be counterfeited significantly diminishes.

Using the blockchain technology to make payments between different financial institutions and customers can significantly reduce banks’ costs. It can also increase the level of security and speed of domestic and international payments.

Despite the potential, the usage of blockchain technology does not guarantee a 100% solution to the aforementioned business problems. When creating such solutions, the financial company may face many factors – changing the situation on the market, the amount of operations or regulatory changes. All this can unpredictably affect the system, so we must be ready for possible challenges.

Additionally, as blockchain solutions are used globally, it is very important that the system grows while retaining its effectiveness. This issue is not fully resolved. For example, the popular block platform Ethereum may perform about 10 transactions per second on average, while the Visa financial giant performs 5,000-8,000 transactions for the same time period. Obviously, such a difference in the amount of transactions required imposed certain restrictions. The situation will change very soon. The companies dealing with the development of blockchain technology are already working on this issue. In the meantime, they will offer an infrastructure that can scale up. This will allow for massive use of the platform.

What is the future of the blockchain in the financial sphere? Certainly we have every reason to talk about a revolution that will completely change the industry we know today. The old processes and mountains of paper documents will be replaced by digital innovations based on the principles of cooperation and trust.

At first glance, the implementation of a blockchain may seem risky and dangerous to the financial industry, where even a minor problem can cause billions of dollars in losses. But when you carefully analyze the workflow and the potential of a blockchain, you can confidently say that the changes and opportunities are inevitable. A matter of time and effective cooperation of financial organizations is the construction of a new global infrastructure.