A recent poll found that an incredible 60% of Americans have heard of bitcoin. This is a phenomenal figure given that barely 6 months earlier the percentage was in the low single digits.
The rise of bitcoin and the cryptocurrency has indeed been meteoric. However, this masks the fact that very few people outside the industry have ever heard the term blockchain, let alone actually know what it means.
Interestingly, a vast amount of people within the industries that stand to benefit most from blockchain are also completely uninformed about it. This is amazing since blockchain technology has the potential to completely revolutionize industries like healthcare and insurance.
Another industry that blockchain stands to benefit enormously is finance. Again, all the current trends indicate that the finance industry has been slow to catch on to this incredible new technology that stands to save them enormous amounts of money by streamlining their processes.
How exactly will blockchain impact on financial services when it is fully adopted and what will its uses be? In this article, I aim to examine the future uses of blockchain in financial services to try to answer this question.
The aim of this article is to spread awareness, hopefully within the financial community, to increase interest in this powerful new technology. It is obvious that at the present time the will and expertise is already suppoorting blockchain development. However, the lack of awareness by the industries that stand to benefit is ultimately delaying the development and implementation of blockchain solutions.
What is blockchain?
It is rare that the technology industry comes up with a term that describes in the simplest terms what exactly a new technology it has created actually does.
Blockchain is one such example as it is exactly what the name suggests. It is a technology that allows blocks of information to be created and stored in a chain. Each time a new block is created it is added to this chain to form what has been called a ‘digital ledger’.
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The advantages of blockchain ledgers:
Blockchain technology allows the digital ledger to be distributed to many different nodes which therefore removes the need for the transaction data to be processed and stored by a sole third party. Not only does this help to prevent the data from being hacked, as it wouldn’t be stored on one system with one security system, but it also removes the controlling element of that third party over the transaction. This has the obvious benefit of helping to remove control over transactions thereby making blockchain solutions cheaper and more accessible.
One of the main advantages of blockchain technology is that it is incredibly secure. It uses encryption to secure the transaction ledger so that only individuals with a unique key code can gain access to the data. The fact that blockchain transactions are peer-to-peer, and are as such decentralized, means that they are far more secure. Despite its popularity, bitcoin has never been hacked because blockchain technology makes this next to impossible.
The beauty of the blockchain ledger is that blocks are unalterable once written. This has a number of enormous advantages when implemented into day-to-day business transactions. To start with, it means that these digital ledgers can be a trusted source of information.
One example of where this could be a game changer is in the drug development industry where test results could be recorded into the ledger. Once written they would be unalterable, meaning that neither the drug company nor anyone else would be able to alter the results in an attempt to represent a particular drug as preforming better than it really did.
4. Distributed computer processing
While large companies have the financial resources to implement large server systems, or otherwise to pay an outsource company for the pleasure of using theirs, small to medium-sized companies often don’t have the finances to do so. This could deter them from developing new ways to implement IT solutions into existing processes/transactions for fear of rising costs.
Blockchain technology actually distributes the processing of transactions to anyone who meets the criteria to do so. These individuals/companies are commonly known as miners. While the power needed to process a single blockchain transaction is generally higher than traditional methods (especially as the blockchains get more complex), distributed processing does mean that companies don’t need to invest in large new server systems or in paying for processing power they may not fully need.
How blockchain is changing finance
There are a number of key areas where companies can use blockchain in financial services. While banks are reluctant to openly discuss potential uses of blockchain, a number of them have recently commissioned studies to identify exactly where they can. These include Citibank, Credit Suisse, and the World Economic Forum.
Blockchain technology could be used in both domestic and international fund transfers. While on the domestic front banks are likely to resist implementing blockchain solutions, given that they have already invested heavily in existing centralized solutions, internationally they stand to benefit enormously from such a change.
The reason international transfers stand to gain is the huge disparity between rules and regulations as well as IT systems between the banks from country to country. While domestic payments take only a matter of minutes to hours, cross-border payments normally take several days at least to complete.
This is because the banks need to make sure they comply with all the necessary regulations. Also many developing countries actually lack the IT infrastructure to process the transaction any faster. These slow speeds are frequently a frustration to customers since the receiver is often unaware of when or even if a transaction will be completed successfully.
Inadequate infrastructure also presents a security concern for many transfers since these systems are more open to cyber-attacks. These attacks could disrupt transfers and even redirect the funds to a third party account.
The figures relating to how much of certain developing countries’ entire GDP is down to remittances are quite an eye-opener. Haiti has one of the world’s highest remittance vs. GDP rates, some 29% of its entire GDP. In the Philippines, it is at just over 10% while Mexico it is 2.7%. When put into perspective, remittances account for 0.7% of the entire world’s GBP each year. This is an enormous amount of money that is somewhere in the region of $1 trillion.
Traditionally, the remittance market has been dominated by MTO-model companies such as Western Union. Though banks do actually offer this service, the inherent problems of cross-border remittances, such as creating safe and secure partners where receivers can collect their money, has made many banks weary of the market.
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There are already a number of companies that are operating blockchain based international transfer services. These include Abra, BitPesa, and Circle. While their models are slightly different, Circle, for example, focuses on social payments, while BitPesa (Africa Focused) on B2B payments, they allow money to be wired from one individual’s bank account, internationally, to another individual’s account. Because the transactions are peer-to-peer based and encrypted they are secure and cannot be interfered with.
The potential for banks to make vast sums of money handling both small scale and large scale remittances is huge. Since not just individuals but companies also rely on these transactions, even leveraging a small transaction fee of just a few percent could result in a huge revenue stream.
A recent successful ICO by startup Mycelium brought attention to how blockchain could be used to facilitate next-generation payment systems. The company’s goal is to “bring merchants and consumers together with a blockchain card and mobile wallet.”
While the concept of the cryptocurrency existed long before Mycelium, the company’s decision to use digital tokens as a way to facilitate the transfer of wealth, as well as to incorporate a payment gateway facility, generated huge interest in its ICO.
Part of the “FinTech revolution”, Mycelium’s business model makes the need for traditional bank payment processing redundant. Since users can use the Mycelium card to pay for goods and services anywhere and at anytime, using decentralized blockchain technology, transactions are also safer and more secure.
Whether they like it or not, technology such as this will force the banks to undertake a major shift from traditional computer systems to blockchain based payment gateways. Since traditional payment systems are also less secure, banks will need to make the switch in the near future.
The automation of transactions essential to trade finance will help the financial services industry make huge savings after blockchain solutions are introduced. The use of smart contracts to automate approval workflows and clearing calculations will help reduce processing times and enable banks to massively reduce the number of employees needed for this task too. While this is not good news for their staff, it will also benefit the banks by helping to reduce the number of errors resulting from human mistakes.
Improving record keeping
The global finance industry holds trillions of bank records that relate to everything from personal account data to stock market transaction ledgers that record stock purchases. A huge majority of these transactions could be recorded using blockchain digital ledgers which would be unalterable and so prevent fraud.
Not only that, the decentralized nature of the transactions would give banks better security over the records. Since the other parties involved in the transaction also receive a record, disputes over such things as missing or incorrect transactions would be a thing of the past.
Investment banks process of dealing with clearance and settlement is a great example of where blockchain technology could really help improve existing systems. Since banks have to record details of all the loans and securities on their books, a huge amount of transactions need to be recorded quickly and securely.
Already the Australian Securities Exchange has retained the services of Digital Asset Holdings to develop a blockchain based system to handle its post-trade clearing and settlements. And they are not alone, here in the U.S other companies are racing to implement blockchain to improve on their slow and often outdated systems.
Blockchain could help banks finally overcome a problem that has been troubling them for years. Banks are held responsible for verifying their customer’s identities. These rules exist in nearly every country in the world and aim to help prevent fraud and money laundering.
The cryptographic protection offered by blockchain, which requires a secure key to access, would ensure that all parties involved in a transaction would be clearly known to the ledger. Since identification is required by law, this feature is essential to all financial transactions.
A number of companies are already working tirelessly to try to develop blockchain technologies that will help banks and other financial institutions with the problem of establishing identity. These companies include Cambridge Blockchain and R3.
My Final Thought
While blockchain for banks might not currently feature high on their list of priorities, if any bank believes that their operations will not at least be partly underlined by this technology 10 years from now, they are very much mistaken.
So monumental could the decision not to hastily begin implementing blockchain technology be, that in the worst case scenario, it could see banks losing their core business, namely the facilitation of monetary transactions. It is my contention that we are at a crossroads where the dreams of those people who are opposed to the domination of the banks could come true.
Should banks lose control of payment transactions then it also stands to reason that they will lose control of our money savings too. Should this happen, they will no longer be able to fund the huge mortgage and loan portions of their portfolios, as they are required to retain at least 10% of the total monetary value of loans in hard cash.
Without question the banks need to retain control over the systems we use to transfer our money or they risk having to dramatically alter their business model or go out of business. The key to avoiding this is in challenging those companies that are already combining innovation with the potential of blockchain technology early and to develop their own alternative systems that allow them to get ahead in the game. Because failure to do so will cost them very heavily indeed.
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