Benefits of Blockchain in Finance
The Ethereum blockchain allows business networks to be transparent and inclusive. By using the shared operating models and bringing down costs, this model makes the process a lot more efficient and also helps in adding more products as well as services to the financial sector. Blockchain technology also make it easier to issue securities and also offer better customization. It makes it possible to tailor financial instruments as per individual demands which widens the customer market, cuts down issuers’ costs, and reduces counterparty risks. Read more
Technology has advanced greatly over the years, bringing several benefits. Some of them are outlined below:
- Security: The shared consensus-based structure leaves no room for single-point failures. It also slashes the requirement for data intermediaries like transfer agents, messaging system operators, and other utilities that do not contribute to increasing the system’s efficiency. Ethereum allows the implementation of application codes that are secure and are designed in a way that they’re hard to meddle with. These are tamper-proof and difficult to hack.
- Transparency: It works as a common and shared source for all the participants in the network. It uses mutually agreed-upon standards, protocols as well as a set of shared processes.
- Trust: The transparent and non-editable ledger paves way for various entities to collaborate and work together. Managing data and reaching a consensus is no longer a hindrance for business networks.
- Programmability: Increased trust and efficiency is ensured as the platform supports smart contracts. These contracts are tamper-proof and allow automation of business logic.
- Privacy: Confidentiality and privacy are central to the platform. There are efficient tools to ensure privacy across different layers that allow selecting data sharing among business networks. It boosts trust among members as transparency and efficiency are enhanced.
- High-Performance: These networks are private and hybrid. They’re designed in a way that they’ll be able to handle hundreds of transactions per second as well as the spikes in the network activities that happen from time to time.
- Scalability: Interoperability between public and private chains is facilitated. This is a major plus point as every enterprise can enjoy global reach, resilience, and the integrity of the key network.
Ethereum has particularly shown great results and economic gains. In comparison to the already existing technologies, it has demonstrated more than 10X cost advantages. Several financial entities have now admitted that blockchain technologies can help in saving billions of dollars in the financial and banking sectors in the coming years.
Impact The Digitization of Financial Instruments Has On Finance
As financial instruments get digitized, virtual assets like smart contracts, digital money, etc also benefit from the blockchain. The blockchain brings greater connectivity and synchronization between different products and holdings. These revamped instruments will play a major role in redefining the way commercial as well as financial markets function.
Some of the benefits are as follows:
- Authenticity and scarcity: There is data integrity, asset provenance, and access to the entire transaction history in one shared source of truth because of digitization.
- Programmable capabilities: Digitization makes it possible to turn codes into assets. These could be the ones that address governance, compliance, data privacy, identity, system incentives, and factors that manage stakeholder participation (for voting and other rights)
- Streamlined processes: As the system becomes largely automated, the overall efficiency of operations improves. It allows settlements, audits, and reporting in real-time. It smoothes out several procedural issues like the possibility of errors and delays, the different steps that are required when intermediaries are involved, etc.
- Market reactivity: Digital securities make room for more customization. This is less likely with traditional securities. It is also possible to issue digital securities in a short span and there is also room to customize the instruments as per investor demands.
- New products and markets: Quick asset transfers, better security, fractionalized ownership of physical assets, and tokenized micro-economies are some examples.
Benefits & Challenges
Using blockchain technology can have many advantages. Some of them are:
Reduction in settlement period (post-trade)—The time taken between placing an order and finally executing a trade after all the formalities are done is known as the settlement period. This can be cut short with the help of the quick submission of records and verification on the blockchain. It could bring better liquidity in certain trade categories that presently have longer settlement periods. Currently, most if not all financial settlements are done within the banking hours. If there could be a single blockchain where ownership of money and securities were noted; where buyers and sellers would maintain a proper fund balance, transactions could literally take place anytime without any intermediary.
Faster payments—When it comes to global payments, there are numerous regulatory checks and settlement cycles that one has to go through. You may be already aware that the forex market is one that involves many intermediaries. Thus, when the transactions are done through blockchain technology, the entire process of payments can be sped up.
There are two major categories that are challenging for blockchain technology:
- Technical and business
Achieving consensus—All members on the blockchain network have to reach a consensus before any changes can be made in the protocol. This could be made simpler by giving a single or a select group of participants the authority of changing protocols which would then be considered binding for all members. However, for this to happen there must be an enormous amount of faith among the participants.
Standardization—A lot of blockchain network designs lack standardization. This could be a potential problem when it comes to implementation as well as approvals by businesses. There are several organizations around the world that are working to set commonly accepted technical standards.
Interoperability—At present, there are many possible challenges that could occur in terms of the interoperability of blockchain platforms with the existing systems of businesses. It would be interesting to observe how blockchains from different businesses interact with one another.
Scalability—The scalability of shared ledgers is a challenge that particularly affects permissionless blockchains that compete to solve a problem so a transaction can be confirmed. The process demands a lot of time, effort, energy and resources which limits the speed of confirmation for new transactions.
Immutability—When a transaction is added to the blockchain it becomes permanent. Any trading error that must be reversed needs to be addressed by adding an equal or an offsetting trade in the blockchain. This needs to be okayed by both the entities that were involved in the first trade.
Blockchain Use Cases in Financial Services
- Capital Markets
- Sales and trading
- Clearing and settlement
- Post-trade services and infrastructure
- Asset servicing
- Asset Management
- Fund launch
- Cap table management
- Transfer agency in asset management
- Fund administration
- Payments and remittances
- Domestic retail payments
- Domestic wholesale and securities settlement
- Cross border payments
- Tokenized fiat, stablecoins, and cryptocurrency
- Banking and Lending
- Credit prediction and credit scoring
- Loan syndication, underwriting, and disbursement
- Asset collateralization
- Trade Finance
- Letters of credit and bill of lading
- Financing structures
- Claims processing and disbursement
- Parametrized contracts
- Reinsurance markets