The blockchain is a newly adopted technology which was originally described in 1991 but was brought under the spotlight by Satoshi Nakamoto(Name used by an unknown person or a group of unknown people) in 2009 to create the first decentralized cryptocurrency Bitcoin.
Bitcoin is not attached to any government or central issuing authority or regulatory government body. A Bitcoin is just an application that runs on an operating system which is Blockchain.
So what is Blockchain? The blockchain is a distributed ledger, which means it’s open to anyone. All parties to the technology can review previous entries and can record new ones. These transactions are grouped in blocks and are recorded one after the other in a chain. The links between these blocks and content are protected by cryptography, which ensures that the users can only edit the part of the Blockchain that they own. Blockchain technology eliminates the need of any middlemen or central authority thus establishing a Peer-to-Peer Network.
The next question that needs to be answered is What Blockchains can do for the Financial and the Banking sector?
The Blockchain Technology will transform the Financial and the Banking sector. Although there are many barriers to overcome before this technology is fully accepted, the benefits such as affordability and transaction speed are appealing to major financial institutions.
IBM is backing the Hyperledger Fabric Project which is a trade finance platform aimed at international payments utilizing blockchain. IBM’s blockchain platform will run through the IBM Cloud, allowing for inter-connectivity between all parties in a particular secure transaction.
Santander Bank which is a renowned UK bank has become the first major bank in the country to use blockchain for international payments. The bank has created an app which is based on blockchain technology that facilitates global payments. The funds are transferred between the transacting parties within one business day, thus saving a lot of time on transaction processing.
Though the current use of Blockchains is seen in Bitcoin, many institutions are experimenting with this technology. The following are just a few ways in which this technology can be used.
Blockchains have the potential to reduce frauds in the financial sector. Most banks have a centralized database which is more vulnerable to cyber-attacks because it has one point of failure. The blockchain is a distributed ledger where each block contains data with a link (Hash) to the previous block. This technology would eliminate frauds against our financial institutions.
Know Your Customer (KYC)
Financial institutions spend anywhere from $300-500 million per year to keep up with Know your Customer (KYC). Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. There would be a significant reduction in the administrative costs.
Blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys. Blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved.
Blockchain would enable higher security and lower costs for banks to process payment between organizations, their clients and even between themselves. Blockchains would eliminate the need for intermediaries in the payment processing system.
It’s exciting to think about the changes that might occur to our trading platforms if they relied on Blockchain technology. The risk of operational errors and fraud would be reduced. NASDAQ and the Australian Securities Exchange have started exploring blockchain solutions to reduce costs and improve efficiencies.
It is surprising to see a change in the perspective of the people. The technology which was being used to run an unregulated currency is now being studied and improved to revolutionize our entire Financial and Banking sector.
Blockchain will ultimately ensure a more efficient, transparent and secure financial marketplace but there will be a lot of hurdles along the way. A recent report by the World Economic Forum predicts that by 2025, 10% of GDP will be stored on Blockchains or Blockchain-related technology. But these are just predictions. Will the government authorities that monitor each and every transaction related to money, drafts or even goods accept a technology that doesn’t require a central authority? The result can be seen in the near future as the financial institutions are constantly improving this technology to make it accessible and acceptable by the government.