“Something moving 20% overnight doesn’t feel like a unit of account. It serves as a means of fraud. This controversial Bitcoin speech was made by Goldman Sachs Senior Chairman Lloyd Blankfein in 2017. cryptocurrency’s success hasn’t swayed him much. He recently told CNBC that he would be “hyperventilating at the success” and “arming myself to cope with it” if he were a regulator.
These concerns concerning DeFi and cryptocurrency are not entirely unjustified. In the the DeFi space, frauds and hacks cost $240.4 million between January and April 2021.
Although the volatility of cryptocurrencies cannot be disputed, blockchain technology encompasses much more than unsuccessful opportunistic trades. Financial institutions are quickly embracing distributed ledger and blockchain technology.
According to an IBM report, 91% of banks have invested in blockchain solutions by 2018, and the rising adoption rate shows that blockchain usage in the financial sector will soon become more commonplace.
Blockchain can easily help carry out financial services. With the use of this technology, payments, self-executing contracts, and manual operations like compliance and claims become quick and safe. DLT, or distributed ledger technology, can encourage improved data sharing governance.
How blockchain can address the problems facing the financial sector
The financial sector is beset with mountains of paperwork, risky data breaches, and unnecessary procedures, all of which have contributed to the industry’s enormous losses and consumers’ lack of trust. Blockchain technology can significantly help to solve these issues in the banking sector.
Blockchain will bring security and transparency to the financial industry
Centralized financial systems lack transparency and rely on middlemen and databases for security. This implies that until a system has been compromised, nobody will be aware of what is happening.
Blockchain can solve both these problems at one go:
- Immutable: This guarantees that the data is accurate, safe, and hard to fake.
- Privacy:blockchains can use both a public key and a private key system to maintain the safety of access to a network and the privacy of an individual’s transactions.
- Zero-Knowledge Proof: this cryptographic method allows the proof of information without revealing it and separates the data verification from the data. Without having access to the data, financial institutions can do user verification, reducing the likelihood of breaches.
Financial institutions can reduce costs with blockchain technology
Financial firms that are centralized and multi-layered make significant investments in central databases’ acquisition, upkeep, and security. Additional ongoing expenses include personnel, value transfer systems, commissions, and bookkeeping.
According to a Finextra study, By 2022, DLT can cut these overhead expenses by $15 to $20 billion annually. DLT can facilitate this process while simultaneously boosting security and transparency. Banks can use smart contracts to cut back on the costs of paying intermediary commissions, value transfers, and recordkeeping.
Blockchain can control risks associated with financial transactions
The financial sector offers high-risk services like loans, where there is a chance that the counterparty won’t fulfill commitments, and credit risk owing to incomplete information. Since banks must place their trust in outside parties, monitoring and tracking loan usage are equally inefficient.
By transforming every stakeholder into a trustworthy node within the blockchain, the following risks can be effectively eliminated:
- Peer-to-peer (P2P) transactions, which will eliminate intermediaries
- Record and verify all transactions on the blockchain network and reduce credit and fund management risks
- Quick settlement of transactions through smart contracts
Further, data immutability will also increase the reliability of transactions.
Blockchain can carry out instant financial settlements
For cross-border payments, an average financial settlement entails many back-and-forths between a bank’s front and back offices, currency exchangers on the other side of the world, and multiple levels of procedural inspection. That settlements take so long and cost so much makes sense.
In order to speed up financial settlement, smart contracts can circumvent all those time-consuming stages, enable peer-to-peer transactions, and remove all the unnecessary layers.
Without the need of any middlemen, blockchain can also handle immediate cross-border payments.
Blockchain can bring better auditing and promote transparency in financial systems
Auditing is not only a time-consuming and expensive operation, but it also eliminates transparency in a centralized system. In the financial systems in place today, auditors are permitted to reveal some facts while hiding others. This can lead to dishonest behavior and noncompliance.
Due to the immutability of blockchain data, auditors can examine them for compliance and determine what is going on in a financial institution. Not only would it simplify the process, but it will also increase transparency and stop unethical behavior.
These are only a few examples of how blockchain is attacking the banking industry head-on. We’ll examine the blockchain applications in the financial sector in the second half of this essay.
In the near future, blockchain will continue to upend the financial and other markets. You’ll surely fall behind if you don’t incorporate blockchain into your business strategy.