Throughout history, the finance and banking industry has worked as an intermediary to conduct several financial transactions. They have been giving the trust needed for funds flow. In the finance and banking sector, technology has had a tremendous impact. With the development of information and technology, finance and banking systems have adapted their working style consistently. Now, these industries are connected with different technological networks like SWIFT for the flow of information. That’s why industries entirely depend on technological advancement to perform their daily activities. So, blockchain technology could be an essential catalyst to help the finance and banking sector.
Every day, the banking and finance industry witnesses millions of transactions where transparency, security, and cost efficiency are of utmost priority. Different studies found that nearly 45% of financial intermediaries like stock exchanges, payment networks, and money transfer services suffer because of cybercrime.
Blockchain has gained fantastic acceptance because of its strength in handling secured, cost-efficient, and transparent transaction flow. The technology that started with bitcoin and other cryptocurrencies has expanded into every sector. It has become the biggest accelerator for transformation in financial services like banking, stock market, insurance, and asset management.
What is Blockchain?
Blockchain can be defined as a decentralized, ordered, unchangeable ledger that helps to record transactions in a network. In a block, the trades are stored that are immutable and contain all the necessary transaction information. Any information regarding transactions can be shared within the network. The traditional method of recording transaction information could be more efficient, centralized, redundant, and expensive, and this is where blockchain technology comes into the picture.
Two main characteristics of blockchain are immutability and decentralization. Decentralized means the recorded or stored transaction information is dispersed among different parties rather than stored in just a central ledger system. It helps to build a direct communication network and reduces third-party involvement. Since there is no third party, the operation is much cheaper and faster.
Immutability is another fascinating feature of blockchain. It means once the transaction is stored, it can’t be altered. If you want any change, a new transaction needs to be created and updated to all the networks. In the network, other computers verify the transactions; once verified, they can’t be changed. That’s why it gives higher security.
Because of blockchain’s capability to make digital transactions transparent, secure, and cost-effective, it has gained so much importance. With blockchain, transactions can be done during digital payments without the requirement for intermediaries like clearinghouses, banks, or financial institutions.
Bitcoin: The first Blockchain Technology
In 2008, the pseudonym Satoshi Nakamoto introduced bitcoin in a white paper named “Bitcoin: A peer-to-peer Electronic Cash System.” Bitcoin can be defined as a digital currency that helps to make online payments from one party to another without involving any third party. It was discovered to solve the issues of fiat money and banks. A bitcoin utilizes blockchain technology to record the transaction process.
It is the first and the most famous cryptocurrency. Now, the bitcoin market capitalization is $177.81 billion. And the technology behind it is blockchain. It can be supposed to be an operating system, and bitcoin acts as one of the many applications of blockchain technology. It gives a distributed ledger system to record the transactions of bitcoin, and blockchain technology has several uses beyond bitcoin.
The Rise of Bitcoin
For the first two years, the bitcoin value was near to nothing. The first significant change appeared in July 2010, when bitcoin’s value increased from nearly $0.0008 to $0.08 for a single bitcoin. From 2010, the market grew gradually, and bitcoin started gaining users and retailers. Until 2013, it stayed slow, and at this time, only the value began to be explored like anything. In 2013, the currency was trading for nearly $13.5 per bitcoin. In April, the value of it went to a record high of $220; the value rallied from $100 to $1075, an increment of 975%.
Blockchain can disrupt the banking industry by providing solutions to different challenges. Here are a few ways:
- Enhanced Security and Transparency
One of the most essential features of blockchain technology is its high security. It uses cryptographic strategies to build a tamper-proof ledger. Every block has a cryptographic reference to its previous block, making it very challenging for hackers to change the transaction information. This level of security is very much required in the financial sector, where data fraud and breaches pose a high level of risk.
In addition to that, blockchain technology provides greater transparency. Every single transaction is recorded on a public ledger. All participants present in the work can see it. This transparency eliminates the risk of hacking or fraud and makes sure that transactions are verifiable and traceable.
- Decreased Fraud and Built Identity Verification
Traditional financial systems, including fraudulent transactions and identity theft, are very easy to hack. Cryptographic security features of blockchain can reduce these types of risks. For example, people can have their identities verified securely on blockchain. This verification can be utilized in different financial institutions, simplifying Anti-Money Laundering (AML) and Know Your Customer (KYC) processes.
Intelligent contracts are crucial in reducing fraud in self-executing contracts with some conditions. Automatically, they execute transactions whenever specific needs are met, mitigating the requirement for intermediaries and potential manipulation points.
- Efficient Cross-Border Payments
Cross-border payments have been affected by high fees, delays, and no transparency. This thing is transformed by blockchain by enabling instantaneous cross-border transactions. Different firms are leveraging blockchain technology to build more cost-efficient and faster international payment solutions.
- Financial Inclusion
The capability of blockchain to process other than traditional banking systems makes it a potent tool for finance-related processes. It gives access to different financial services for the underbanked and unbanked individuals needing access to standard baking systems. Blockchain-powered remittances, wallets, and microloans are providing financial assistance to those people who were excluded previously.
- Smart Contracts for Automation
For several financial agreements, smart contracts are a game changer. Whenever conditions are met, these contracts are encoded to execute automatically. For example, when particular events are carried out, insurance payouts are triggered, decreasing the administrative overhead and timing with claims processing.
- Supply Chain Financing
Blockchain technology is being applied in supply chain management, specifically in financing. It gives a tamper-proof as well as transparent ledger of goods. This transparency makes it easy to secure financing based on their receivables and inventory.
- Tokenization of Assets
Blockchain technology helps the digital and physical assets representation as digital tokens. This tokenization process can enable fractional ownership and make high-value assets, like art or real estate, more accessible to a broader range of investors. Also, it simplifies the selling and buying process.
- Central Bank Digital Currencies (CBDCs)
Using blockchain, different central banks are developing their digital currencies. These CBDCs can reduce transaction costs and improve monetary policy execution and financial inclusion by giving a digital option to physical cash.
- Data Privacy
In an age where data privacy is becoming a big concern, blockchain technology gives people more control over their personal information. They can access particular details to trustworthy parties while keeping their other information private, improving privacy and data security.
Blockchain has already had a significant impact on the banking and finance industry. Its potential to reduce fraud, boost security, promote financial inclusion, and streamline transaction processes transforms traditional economic systems. Since blockchain technology is getting broader acceptance, its impact on banking and finance is only expected to advance.
However, difficulties like regulatory compliance, scalability, and interoperability can be addressed for blockchain technology to reach its complete capability in the world of finance. Undoubtedly, blockchain technology is reshaping the future of banking and finance in unbelievable ways.
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