How Blockchain Technology Is Transforming Financial Services
Blockchain technology refers to a public, dispersed and distributed ledger utilised for recording transactions beyond many computers under a network. Blockchain technology is considered secure and transparent, and people can’t change it only because of its properties and designs. This rapidly growing technological advancement in the financial sector has allowed currency transfer with so much confidence that it has made transactions reliable and secure. This technology is frequently renowned as the backbone of digital currency. As a decentralised and secure ledger system, it has undoubtedly revolutionised how financial transactions are made and conducted, improving security, minimising cost, and enhancing efficiency. Several properties are discussed below, which ensure the advantages of blockchain technology in the financial sector.
- Immutability – Blockchain technology gives a chronological as well as an accurate history of the transactions made, due to which every individual in the financial network has a copy, which is almost impossible to delete, change or add any information which has yet to be confirmed. If this happens, it will unlikely attack all the coordinated computers within the network.
- Distribution – Several copies of the ledger persist within the network. Whenever a new transaction is made, and new blocks are added, every individual working within the network receives a copy of the transaction. A single unit does not manage and control the ledger; however, the system is designed in a way which aids in providing the same information to every individual in the market.
Some of the features of why blockchain technology has been considered to transform the financial sector are discussed below –
- Efficient system of payments – Making payments efficiently is one of the important features of blockchain technology. By eradicating the requirements for the channel, a payment system based on blockchain technology can make it faster, more affordable and more secure across cross-border transactions. An example of Ripple, a global payment network, has been built on blockchain technology and helps financial institutions with the payment process in real-time with almost minor fees. This further provides a cost-effective and coherent alternative to the traditional process of payments. Increased usage of blockchain technology leads to an extreme shift in the landscape of global payments, which further encourages individuals and businesses to make transactions more smoothly across different borders.
- Increasing the finance of trade – Finance is an essential element in international trade. It mainly suffers from a cumbersome and slow process; it is also vulnerable to fraud and uses vast amounts of paperwork. However, the rapidly growing evolvement of blockchain technology has helped address these challenges and complexities by digitising the documents of trade, making efficient processes for payments and offering a tamper-proof environment for making secure transactions. For instance, organisations such as MarcoPolo use blockchain technology to provide more secure, transparent and faster solutions for trade finance; adopting blockchain technology in financial trade aids in promoting enhanced collaboration among trading partners.
- Changing asset management – Adopting blockchain technology can be advantageous for asset management in many ways. Programmable agreements and smart contracts are automatically implemented when the predefined conditions are fulfilled. This further automates different procedures in the management of assets, like settlement and clearing of draft, which minimises operational risks and costs. Moreover, converting the real world’s assets into digital tokens on blockchain technology, referred to as tokenisation, aids in increasing liquidity. It also provides enhanced access to investment opportunities and promotes fractional ownership. Gradually, as blockchain technology is enhancing each passing day, it can help in restructuring the asset management industry by navigating larger efficiency, transparency, and the participation of investors.
- Transforming insurance – Blockchain technology can transform the industry of insurance, which lies in the adeptness of streamlining the claims processes, increasing transparency and minimising fraud. With the help of smart contracts, the process of claims can be automated by the insurers by storing the claims and policies, which results in faster payments and minimised cost of administrative. Moreover, it also helps in enabling risk assessment in a better way and prices by enabling access to large sets of valid data. As this technological advancement has been adopted in the insurance industry, it has led to a more efficient and customer-centric process. This gives benefits to both policyholders as well as insurers.
- Streamlining regulatory compliance – The financial services industry has a large number of complex regulations, thus becoming a problem for financial institutions. The advancement of blockchain technology has promoted compliance by offering a more transparent, secure, closed and protected record for transactions, making it easier for regulators to audit and monitor financial activities. Furthermore, the solutions for the management of identity-based on blockchain technology aid in efficiently enabling anti-money laundering (AML) and onboarding of customers. This technology can reduce the regulatory burden of financial institutions only by the process of streamlining compliance and making sure that appropriate record-keeping is done. This further promotes growth and innovation in the financial industry.
- Fostering financial inclusion – This technological advancement can encourage financial inclusion by enhancing access to financial services for the underbanked and unbanked populations. Platforms for decentralised finance (DeFi), mainly built on blockchain technology, provide a large set of financial services like managing assets, borrowing and lending without needing traditional financial intermediaries such as banks. DeFi platforms aid in bridging the differences between the unbanked and underbanked populations by reducing the entry barriers and offering cost-effective solutions. This ultimately promotes greater development of the economy and financial inclusion.
Some of the financial organisations which utilise blockchain technology
Financial services have rapidly increased the acceptance of blockchain technology. Many companies have adopted this advanced technology, invested in blockchain stocks, and are encouraged to utilise it more.
American Express is a company which is a financial institution and payment network providing services for loans, banks, charges and credit cards. Recently, it has implemented blockchain technology into the popular program of the company called Membership Rewards. This company has built its blockchain in-house while working with Hyperledger and examined with Boxed, an online platform for the delivery of groceries. Adopting this technology also helped merchants to provide more points depending on a more significant number of factors, like the products bought. The company credits points to the customers whenever they purchase any product that meets the company’s conditions, and the merchant is billed with the help of smart contracts.
Barclays PLC is one of the multinational banks which has done a lot of research before implementing blockchain technology. It has examined the utilisation of smart contracts in the company so that it can trade derivatives like options and futures. If stock exchanges use smart contracts for derivatives, it will cut down the time to set up the contracts. Further, the banks filed a legal application to utilise blockchain technology in the smoothening of the process of KYC. The bank, along with several other banks, is an investor in Fnality, which is a project that helps create digital currency in the US versions and some other currencies. The company’s main goal is to enable and adopt blockchain technology for cheaper and faster transactions.
Blockchain technology has been playing an important role in restructuring the landscape of financial services. This is so as financial services are continuously adapting to the digitalised era. It has helped streamline the system of payment and regulatory compliance. It also can modify the models and practices utilised in the business, ultimately giving rise to a new era in financial services by promoting transparency, efficiency and security. Moreover, this technology can encourage financial inclusion and foster economic growth, which enhances the productivity of businesses by creating benefits. It also helps society and individuals. Adopting blockchain technology has gained so much encouragement and has motivated financial services to adopt this advancement. It will surely help financial services industries reshape themselves in the future.
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