Anybody who follows finance news must have observed Bitcoin trending for a few years now. While Bitcoin has made people rich overnight, its underlying technology – Blockchain has far-reaching impacts on the finance industry.
Blockchain, with features like immutability, transparency, tamper-proof transactions, consensus-based trust etc., present itself as a potential disruptor in the finance sector. Additionally, it connects various participants like customers, finance institutes, government, etc. in real-time and transparent manner.
Following are some finance domain which blockchain has the potential to disrupt:
Banks have the most potential to leverage blockchain in areas like customer service, asset registry and management, credit scoring, KYC, loans and lending. These functions of a banking system can be done far more accurately using smart contracts and in real-time should they are done on the blockchain.
Smart contracts are a piece of code that lives on blockchain and executes when certain conditions are met. Imagine if all the customer data is migrated to the blockchain, then it will incredibly expedite loan processing by checking credit score, loan history and other such parameters in real-time.
For property management, once the sale of an asset is confirmed, ownership on the registry can be updated and funds can be transferred to the previous owner instantly, all taken care of by smart contract(s). The transfer of assets will be registered on the blockchain and the verification will be done using a consensus-based mechanism. With these process automation, banking industry will claim millions of dollars in cost savings.
Bitcoin currently cannot be used by banks for doing payments due to some of its limitations. Having said that, there exists a project which has leveraged blockchain by introducing its own cryptocurrency and thus revolutionized payment and money transfer system – Ripple. This is a San Francisco based blockchain startup that introduced its own cryptocurrency – XRP, in 2012. This cryptocurrency is used by banks to make payments instantly across borders. Transaction takes no more than 2-5 seconds to complete.
Comparing it to the current scenario, which is roughly 2-3 days, it’s a huge leap towards efficiency. Ripple has done this by setting up a private blockchain network of some of the top international banks and have some protocols that facilitate real-time transfer between these banks.
Most of the transactions in the share market are just clearings and settlements. Currently, they go through a series of intermediaries before arriving at final confirmation. With blockchain and its consensus-based verification mechanism, these intermediaries will no longer be required.
This would lead the way for a ‘no third party, peer-to-peer security exchange’, which will have reduced transaction fees and real-time settlements.
After Banking, trade finance can be the biggest beneficiary of blockchain technology. With multiple parties involved like banks, trade companies, importers, exporters, credit agencies, insurance companies etc., it’s laden with paperwork at every stage of this rather cumbersome process.
Due to the very nature of the process, it’s conclusive to be time-consuming and prone to error. Blockchain network can come to rescue by recording transactions on its immutable ledger at each stage of the process. This makes it easier to track the progress. As earlier stated, payments can be automated using smart contracts. All the paperwork can be digitized and be done in real-time, thus saving the cost and time of all parties.