11 ways in which blockchain technology is disrupting the financial world
Huge demand of bitcoin or crypto-currency is based upon absence of centralized banking operator. This feature characterizes the absence of bookkeeper in virtual online system to maintain ledger of expenses. Thus, the fund-flows are transacted through the use of blockchain.
Both parties to transaction – transact through online verification, with several copies of the ledger being sent to bitcoin users, called “miners”, located around the world. On each new transaction, “a fresh block”, is added to the ledger’s chain that is visible or accessible to the network.
Blockchain technology main structure
At its core, blockchain is a network of computers, all of which must approve a transaction, has taken place, before it is recorded, in a “chain” of computer code. The fast pace of transaction and distributive ledger technology may lead to disruption of the centralized third party. Although the same action would ensure that transactions are quicker, efficient, less costly—fewer dime cost-per-transactions, & provide lesser vulnerability to errors and fraud. As with bitcoin the first application of the technology applied to money — cryptography, is used to keep transactions secure, and costs are shared, among those in the network. The details of the transfer are recorded on a public ledger, that anyone on the network can see. The integration of the decentralized nature of distributed ledger technology, still need to find satisfactory solutions to data security concern. Thus, there is no full-proof guarantee, on sanctity and cleanliness, in use of databases in crypto-currency based transactions, with use of larger copies of transactions.
1). Absence of Core-Central-Ledger-Book-keeping
The lack of a central authority is the very feature of bitcoin that provoked consternation among traditional financial institutions. This has come to much criticism, after different scandals emerged, due to absence of regulatory authority in bitcoin technology.
2). Absence of history details KYC Structure in block chain technology
An authentic unforgeable record of identity, including the history of an individual’s transactions, is a key expectation from block chain technology that holds promise on its adoption in financial banking sector. Records in secure distributed ledger can be integrated to store validated ‘know your customer’ data, which can be utilized by insurers, in cross-checking individual actions. These actions can then be utilized to develop a global application, that provides more secure identity data, and help in creating electronic repositories, for storage of database.
3). Banking on the future
Blockchain technology is seen as twin edge technology, which offers a cost-cutting opportunity, or also represents a margin-eroding threat; that would force them out of competitive business scenarios. The solution on these concerns is resolved with use of different approaches—Citigroup formed an in-house model Citicoin, a digital currency that is tested in bank environment. Some financial institutions have decided to invest in specialist organizations to further explore the use of bitcoins. Goldman Sachs has provided for $50m funding to Circle Internet Financial, targeting use of bitcoin in handling consumer payments. Alliance and partnership is next route to explore usage of bitcoins in financial arena. Commonwealth Bank of Australia has build up a team association with open source software provider Ripple, to build a block-chain system, for payments between its subsidiaries. The use of platform such as technology incubator or accelerator programme is also explored by banks Barclays and UBS, to form teams with block-chain start-ups. Also the nature of banking alliances, whether invitation based distributed ledger network or a closed or permission-only networks, hold key to commercial success of bitcoins in financial arena.
4). A question of security
The block-chain technology is still under observation and in testing phase before real-world, practical applications emerge. The robust and secure nature has to be proved on stricter testing regime to get regulatory approval on block chain technology. The decentralized nature of distributed ledger technology is still to be tested on maintenance of databases in block-chain technology. More specially, in instances, where de-centralized architectures are in use, an amicable resolution is yet to be found, in which, each participant has equal rights and cannot enforce a sole decision. The Bank of England is studying the technology and said in a recent paper that “it may be possible in the future — in theory, at least — for the existing infrastructure of the financial system to be gradually replaced by a variety of distributed systems”.
5). High Standards of Technology
Experts feel that high standards need to be set for the performance, robustness and security of block chains. The use of risk management platforms and its integration with block chain technology is also a requirement to ensure better acceptance of block chain technology.
6). Upgrading of Regulation and Legislations
Emerging technologies, such as blockchain, are still under development, and require better support in regulatory environment. Development of better legislation, and upgrading of new regulatory principles, to make block chain technologies, an integral part of the market infrastructure, is an essential step, towards, improving acceptance of block chain technology.
7). Standards and Governance
Industry alignment and opinion building in industry leaders is required at conception stage and on certain design point—
- use of completely open block chain architecture
- use permission-based access requirements
- the interoperability between different networks
- the principles for suitability in interacting with the ledger
These changes can provide for different operational check points, different consensus protocols, and functional safe-guards against coding errors and thus in-turn generate unforeseen knock-on effects.
8). Managing Operational Risk
Use of bitcoins and block chain technology in financial arena, is restricted by need to have minimized operational risk. Thus, a backup or a fallback plan, where, there is a quick recovery of participants, to reach back to a traditional, functional, and system ecosystem, in financial transactions, is required, to ensure maximum acceptance of bitcoins and blockchain technology.
9). Pre-Trade Benefits for Capital Market with block chain technology
- Transparency and verification of holdings
- Reduced credit exposures
- Mutualisation of static data
- Simpler KYC via look through to holding
10). Trade Benefits for Capital Market with blockchain technology:
– Secure, real-time transaction matching, and immediate irrevocable settlement
– Automatic DVP on a cash ledger
– Automatic reporting & more transparent supervision for market authorities
– Higher AML (Anti money laundering) standards
11). Post-Trade Benefits for Capital Market with block chain technology:
- No central clearing for real-time cash transactions
- Reduced margin/ collateral requirements
- Faster innovation and efficient post-trade processing
- Fungible use of assets on blockchains as collateral
- Auto-execution of smart contracts
We hope you enjoyed this article on blockchain technology and how it will transform the financial industry. For regular updates from the world of financial markets, subscribe us via email and we will deliver our next article, right in your mailbox!
