Even though a number of the most highly positioned financial corporations in the world have started to move towards digitalisation, no one has taken up blockchain as yet.
Blockchain could flip that, accelerating and automating the process by cutting out the middleman, while shrinking transaction costs, providing companies with a huge competitive advantage. Blockchain’s ultimate promise is that it is impossible to change the immutability of data.
Transparency
Blockchain is a transparent, distributed database designed to allow everyone connected in a network to track and verify records with none of the trust associated with third-party intermediaries.
Blockchains provide an immutable audit trail that make goods easier to trace, cut down on counterfeits, and speed up logistics processes – all of which makes a huge contribution to consumer safety and business productivity for firms that rely on supply chains to operate.
Immutability and transparency reinforce security on the blockchain network and, by utilising thousands of computers to verify the transactions – effectively removing all but a tiny amount of human error – these international money transfers are all but immediately settled and ‘cleared’; what previously took days now takes minutes or seconds using blockchain (international settlement).
Security
Blockchain is a single-source-of-the-truth ledger of transactions that cannot be changed. It adds an encryption and hashing operation that make it very hard to alter data, and an agreement rule called the consensus mechanism that requires network participants to agree on each transaction before it can be added to the blockchain.
Finally, the virtual ledger not only bypasses intermediaries but also automates procedures that rely on humans to reduce the risk of errors. And, since the blockchain is programmable, it can handle actions based on rules more speedily – such as a settlement with the bank.
Because they cross political boundaries, blockchain networks enable financial services to the ‘unbanked’ and ‘underbanked’, thus facilitating commerce on the global scale. Blockchain’s global reach also lowers costs and speeds payments even though its scalability concerns remain in play today.
Efficiency
By distributing data across multiple computers, or nodes, on a network – potentially in different countries – no single point of failure can corrupt or delete information stored within, making blockchain not only redundant but also decentralised.
As such, the decentralised structure of blockchain means that third parties who need to act as intermediaries – verifying transactions and obtaining proof of accuracy – are no longer required. This is where the potential to substantially shorten settlement times lies.
Blockchains can also be an enabling technology that provides assurance and a reduction in risk by helping companies, and therefore their customers, to limit fraud and increase transparency, by allowing them a much quicker identification of any problem and an advancement of resolution due to greater visibility end to end, while reducing costs for financial institutions and an increase in operational efficiencies.
Scalability
Normally, for reasons of security (to protect you from fraud) and for verification of the mutually agreed account record (to prevent double payment of the same invoice, for example) there needs to be a whole string of intermediaries present for the transaction – which in turn adds expense and rackety delays, and inevitably their representatives screw up from time to time. But if you were to form a chain of digital signatures by removing all these intermediaries, so as to signify trust, verify accuracy and record the agreement, you could devise a transactional system that works not only cheaply, but also with great rapidity and precision: there would be no middlemen, no fees to remunerate them, no privacy issues to access the records, and no delays in accessing them. Such is the concept of chain-based blockchain.
Because blockchains are spread out across a network of computers, their counterparty systems are less vulnerable to sudden overload or attack than more centralised arrangements of liabilities – which is why they are particularly good at dealing with high volumes of transactions without incurring more costs.
Using the blockchain as a backbone, the world of DeFi applications (decentralised finance; think crypto exchanges, lending protocols, automated smart contracts, etc) is now available to offer better, more secure, more efficient and more transparent ways of conducting financial transactions. Due to this growth of the blockchain, we’re already seeing a radical, positive change in regulated financial constructs – and you can bet the future looks even brighter!
Costs
In traditional banking, intermediaries may cause delays, expense and even inaccuracies. Using blockchain means having a set of computers in an efficient network in which transactions are processed quicker and at lower cost.
The peer-to-peer network of blockchain technology further supports direct and automated transactions to reduce verification fees paid to intermediaries, and reduces transaction costs. Blockchains are open 24/7 compared with financial institutions that operate only during regular business hours. Settlement and clearance times can be reduced relative to financial institutions. As noted, blockchains can be programmed to, among other things, provide immutable ledgers for improved supply chain processes, and improved transparency. For global trade, they offer lower-cost, more efficient ledgers for improved supply chain processes, as well as better transparency – features that make them inexpensive but cost-effective solutions. Decentralised finance (DeFi) supports global initiatives to increase financial inclusion by opening access to previously unavailable services, such as lending or borrowing money to the unbanked.
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