Image Credits: Pixabay
Nowadays, when you converse with your friends and co-workers, you are bound to hear the words “blockchain” and “cryptocurrency.” Although they have been around us for quite some time, it is only recently that these terminologies have gained a lot of traction. You would have also heard the “next biggest financial revolution.” If you are wondering what people are talking about, it’s regarding blockchain technology and everything it has to offer to that industry. Major banks all around the world are testing blockchain technology, due to its numerous benefits.
Let’s take a closer look at all the advantages blockchain technology has for the finance industry:
One of the many advantages that blockchain technology has to offer is transparency. When the finance industry implements blockchain technology, it improves transparency significantly. For example, if regulators can access blockchains, then they can keep track of all the transactions going on within the blockchain. As a result of this, it will improve regulatory monitoring and reporting considerably.
The biggest advantage that blockchain technology has for the financial industry is the reduction of costs. International payments are one area where banks will cut costs as it speeds up the transaction process significantly. Under the traditional system, international payments have a maximum time frame of four days for settlement. The main reason why international payments take such a long time is that central authorities have to verify the on-going transactions. Verification is a time-consuming process, which turns out to be expensive for banks.
However, blockchain technology eliminates the need for central authorities. Instead, the parties involved in the transaction can verify it, resulting in a quicker agreement. Due to the possession of blockchain ledger by both parties, the whole process of verification will be instantaneous. All computers that are on the blockchain network will be able to verify the payment quickly. Thanks to the swift verification, the transaction will be considered valid.
Decrease in fraud
It is a well-known fact that a large number of financial institutions have to deal with fraud every year. Most of the banks use a centralized database in their banking systems, making it more vulnerable to cybercrimes. For example, if hackers are able to gain entry, they have access to the entire system.
However, with blockchains, the ball game changes completely. Ever block has a timestamp and the details about all the individual transactions that took place. It also holds the link to the previous block. Due to this technology, it has the potential to decrease fraud.
Improved optimization of capital
Another area that blockchain technology will have an impact is optimization of capital. As discussed earlier, there is no longer a need for a trusted third party to verify the transaction between two parties. Due to this, peer-to-peer transactions become possible under blockchain technology.
In the finance industry, clearers and custodian banks charge fees for conducting transactions between various parties. Blockchains remove this fees, allowing banks to optimize their capital efficiently. Operational costs will come down significantly, should banks choose to share their blockchains with one another. Although the costs will be higher, all the banks will share it amongst themselves, which will bring down it down significantly.
Instant and 24/7 spot trading
When you think about spot trading, you assume it happens instantaneously. However, due to the current architecture, it takes at least a day or two before the settlement of the transaction. The major reason why there is a delay in this settlement is that third parties are involved in all types of transactions. On top of that, if you wish for spot trading during the weekend, it won’t be possible due to these third parties.
Blockchain technology offers the solution to this problem, as it allows clients to directly trade between themselves, eliminating the need for third-party transaction settlement. Blockchain technology allows instant settlement of trade contracts, allowing trade to occur even on the weekends. There is a reduction in the cost of the settlement, thanks to blockchains. Also, risk due to the counterparty will almost be negligible with this technology. In other words, defaulting during the time of transactions comes down significantly.
Reduction in reconciliation and errors
Once data is entered in the blockchain, no one can change it unless the majority of the computers in the network agree with the alteration. Also, tracking the data in the blockchain can be done in real-time, which is a major advantage. There is a proper audit trail that the authorities can take a look it, giving complete information on all the parties involved in the transaction. As you can imagine, this will reduce reconciliation and errors considerably.
These are the six advantages that blockchain technology has to offer to the finance industry. It isn’t a surprise that banks from all over the world are excited about this wonderful technology.
Brought to you by BlockchainSingapore