Blockchain has been at the center stage of the cryptocurrency revolution since the creation of the first cryptocurrency Bitcoin in the year 2009. In earlier days, people used to think that blockchain and cryptocurrencies are synonymous. But soon, as the awareness increased, people started to realize that at its core, the technology of blockchain is just a decentralized database with certain unique characteristics that can actually be implemented for various use-cases beyond the world of cryptocurrencies. One of the first industries that was attracted to the blockchain was the Finance sector.
According to Deltec Bank, Bahamas – “The implementation of blockchain in various facets of finance can ensure more secure, cost-effective and faster financial operations.” In 2015, Santander had published a report in which estimated that with the industry-wide adoption of blockchain, the bank’s operational and infrastructure cost can be reduced by USD $20 billion per annum by the year 2022.
Let us understand what is Blockchain really is and why it has caught the imagination of the Finance sector.
What is Blockchain
The building units of blockchain are called blocks that are linked with each other in a chain, hence the name blockchain. A block is nothing but a record which contains at the least following –
1) Actual Data
2) Hash value of the block, which is a unique identifier of that block
3) Hash value of the previous block in the chain
The characteristic of the block is such that if its data changes, then its hash also changes which means that it is not the same block anymore. So, when someone changes or tampers the data, its hash value will also change. This will invalidate the entire chain because the next block will not find the previous hash value of the earlier block it is holding.
This feature of blockchain adds a layer of security, but it is still prone to tampering by brute force. To avoid this, the same copy of the blockchain is kept on different participating nodes on a distributed network. So, this means, the blockchain can only be modified if all nodes agree and form a consensus. This makes the entire blockchain system decentralized as not one entity owns the authority to change the content of the blockchain, thus making it very difficult to tamper by just one individual.
Another feature of blockchain is smart contracts which are nothing but programs running on the blockchain that defines the rules that must be adhered to while making transactions in the blockchains. This feature is very essential to make the blockchain self-functioning and avoid the involvement of the 3rd party for regulation.
To summarize, blockchain is a decentralized, distributed ledger that can function on its own and is almost immune to tampering. These features could not make more exciting for the finance sector.
Let us see how blockchain is changing the landscape of finance.
Impact of Blockchain in Finance
- The very obvious advantage of blockchain’s decentralized nature is the prevention of fraudulent financial transactions and identity theft. Blockchain also eliminates the needs of reconciliation since the transaction cannot go through if all nodes in the blockchain do not agree to it in the first place.
- Since the smart contracts on blockchain can automatically apply rules, the money transfer across international banks can become more fast, secure and less expensive because many intermediate steps of the traditional processes are eliminated. This is very beneficial for end-users who do not have to pay international transfer fees and neither have to wait for few days for the actual money transfer. Similarly, even the trades can be executed and settled more securely and quickly.
- Blockchain can also be used to regulate the process of KYC. Currently, all banks have to follow their own process for KYC. But if the customer’s KYC information is saved on a blockchain then it can be kept secured and shared between the banks. This eliminates the need for the customer to go through KYC for every bank or financial institute. At the same time, banks can also onboard customers very quickly by referring to the customer details saved on the blockchain. Thus, it is a win-win situation for everyone here.
- As you can see that blockchain is eliminating many intermediate operational processes like the need for KYC or reconciliation at various levels. This effectively brings down the operational costs for the banks and increase their margins.
Blockchain is not about bitcoins or cryptocurrencies but it is a generic technology that can be leveraged by any industry. The decentralized nature and transparency are what make blockchain an exciting prospect for the banking and finance sector. The blockchain-finance space would indeed be something to look out for in the coming times.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.