Over the last few years Blockchain technology has been knocking on doors in nearly all industries. One thing is for sure, in a world that was already enveloped in the process of digitization, Blockchain’s rise and its promise for future was the highlight. Blockchain’s penetration in nearly all industries has been influential and business communities are realizing the value of what the technology can offer.
Even though many industries are realizing Blockchain’s efficacy, the financial services are on the forefront. Blockchain technology when viewed through the lens of finance offer something that’s quite extraordinary. The technology’s innate nature along with the scope of financial services is opening up ways that can completely revamp the finance sector. To truly understand the impact of Blockchain Industry, we first need to know a bit about Blockchain technology itself:
What’s the Fuss about?
We’re always hearing about Blockchain whether it’s on the news or when some tech giant begins to express his admiration for the technology. The traction Blockchain receives is because of a reason as it has the potential to change the way businesses operate. Of course, it’s a highly complex technology but in simple words we can view it as a strand of blocks interconnected with each other. Hence the technology is named as Blockchain technology as it represents blocks that are interlinked with each other in the form of a chain.
Dissecting Blockchain’s Architecture:
A single block of Blockchain technology holds the key in understanding its nature and implications in the finance sector. In order to understand how the technology works, we need to look at how a single block works and what it is composed of. The following are some of the main elements in Blockchain’s architecture:
Nodes: A node can be described as a user within the framework of Blockchain. Typically, a node is a device such as a computer. You can imagine it as a small server that exists within the larger framework of Blockchain.
Transaction: A Transaction can be seen as the smallest building block within Blockchain. In essence, a transaction is a form of information that is to be digitally stored in a block.
Block: A block is a data structure that contains a list of transactions that are delivered to the nodes. This block is a complex data structure that contains data, information regarding the transaction and a hash is assigned to each block. A hash (#) in simple terms contain all the information in the form of a code.
Chain: Each block is interconnected with the previous one. Hence, this forms a chain of blocks.
Other important elements in its architecture include Miners & Consensus. Miners in actuality are nodes that verify each block. Whereas Consensus plays an integral part in defining the rules and arrangement of the entire Blockchain process. Each element in Blockchain’s architecture has a specific role that it needs to play. With each block being interconnected with the previous one, the data structure formed is correlated with each other.
Blockchain’s nature allows a peer to peer network to be formed that is decentralized and acts as a distributed ledger. This feature allows the technology to record all transactions in way that’s permanent and verifiable. The records contained in Blockchain are transparent and no changes can be made, this offers security as well.
Here’s how Blockchain can change the face of the Finance industry completely:
A cross-border payment is a form of money transfer where the sender and receiver are located in two separate countries. In traditional banking methods, the process for a cross-border transfer is prone to errors, late payments and long reversals if such a case occurs. For financial institutions cross-border payments are a hassle to begin with, as security protocols make the entire process laborious.
Blockchain technology negates all these negative aspects as cross-border payments are virtually secure, fast and transparent. Some banks have already adopted Blockchain and in doing so have made cross-border payments a reality. The technology isn’t only beneficial from a banking perspective, even consumers can simply make these payments from their mobile apps. Who needs to visit and stand in a money transfer facility for hours to make a transaction when you have Blockchain technology?
Financial Crime Evasion:
In 2019, nearly 1.7 million financial crimes were committed related to financial fraud in the US alone. This is a staggering number considering the fact that the US is one of those countries where laws governing financial security are well-intact. However, as financial institutions are run under a centralized banking system this means that they will always be prone to cyber-attacks. Besides financial crimes such as identity theft, insurance fraud, money laundering & embezzlement are carried out on an extremely large scale all over the world. Blockchain technology with its decentralized ledger enables a transparent medium of financial activity. As each cryptographic key in a Block contains information that contains transaction details and is duly verified by the previous block. The ledger itself is a publicly viewed one and hence any transaction that occur needs to be verified by each participant in the Blockchain.
What happens if someone submits wrong information? If such a case occurs, then all the participants within the Blockchain must verify it individually in order to get it approved. Which of course will not be the case if someone decides to try submitting wrong information. The decentralized public ledger largely reduces any chances of wrongful information to be submitted without getting caught.
Bookkeeping – Think of it as an Electronic Notary:
In nearly all companies bookkeeping and accounting departments are present. The work itself has a lot of room for error and can get laborious. Of course, the days of huge stacks of physical paperwork are long gone and the field of accounting has been digitized to a certain extent. But one thing that still remains constant is that it still is prone to human error. Validating the data in a solely digitized accounting realm is a tough ask. As to validate data, the data itself needs to undergo a series of protocols that makes the process long and arduous.
Blockchain technology hence can be a viable option to streamline the accounting realm as it presents a solution where major forms of human error are easily eradicated. Think of Blockchain as an electronic notary where companies can write all their records on a single electronic repository which is protected cryptographically. This ensures data transparency and privacy, leaving no room for fraudulent activities and greatly reduces chances of errors.
Credit Approval for Loans:
Credit approval through traditional banking methods or financial intermediaries is a process that takes a lot of time and costs. Doing a background check for an SME or even an individual requires resources and is expensive. This is the reason why a lot of credit approvals take months and that can put a halt into an Entrepreneurs plans. Blockchain on the other hand offers a way to handle information which makes the process faster and efficient.
It would be interesting to see how fast financial institutions fully adopt Blockchain. Regardless of how much time it takes, reality is that the Blockchain takeover is inevitable sooner or later and companies must adapt accordingly.