The Influence Of Blockchain On The Financial Sector And Trading

The Influence Of Blockchain On The Financial Sector And Trading

If you are a small business owner and you’re interested in the financial world or the world of investing, chances are you haven’t been able to go a day without hearing the word “blockchain”.

But whether you think that cryptocurrencies like Bitcoin and Ethereum are the future of investing, or you think that they’re a runaway train doomed to crash, they have brought a number of innovations to the financial sector, and the world of trading and investing. And, paramount on this list is the blockchain.

The blockchain is the building block of every cryptocurrency like Bitcoin – but its usefulness does not end there. As many companies have learned, distributed public ledgers built on blockchain technology could have a number of uses.

In this article, we’ll take a look at the blockchain, explain the basics, and help you understand the impact that this disruptive and innovative technology may have on the financial sector. Let’s get started!

Understanding Blockchain – The Basics

To begin discussing the blockchain, it’s important that you understand exactly what it is – and what it’s not. Here’s a quick, high level overview of a blockchain and how it works.

You may have heard blockchain referred to as a “distributed ledger” technology. If you want to simplify things, you can think of any blockchain as a large, decentralized spreadsheet – one that’s hosted across millions of computers and has millions of duplicates.

In this spreadsheet, transactions of any type can be securely recorded. Everyone who uses the blockchain owns their own copy of the ledger. Each transaction, along with details about ownership, timestamps, and other information is recorded in a data block. These data blocks are then secured with advanced cryptography to prevent tampering.

Finally, these “blocks” are written and linked to each other like a chain – hence the term “blockchain”. Because each individual block is secured with encryption algorithms, and they are all linked together, transactions cannot be tampered with.

If a transaction is falsified, for example, it will simply be compared to the existing blockchain that is spread across millions of computers. If the majority of blockchain copies don’t “agree” on that version of the blockchain, it’s simply rejected.

What Are The Benefits Of A Blockchain?

Now that you understand how a blockchain works, you may be wondering what advantages it has over a traditional database, especially in the financial sector. Let’s discuss a few of the benefits of a decentralized, distributed ledger on the blockchain now.

  • No need to rely on trusted third parties – This has especially major ramifications for the world of trading and banking. A blockchain ensures that transactions are recorded publicly and with full transparency, and because the ledger is public, there is no need to rely on a third-party when signing a contract or making a trade.This could mean that user-built, crowdsourced trading platforms could eventually be built on the blockchain, even for the trading of financial instruments like ETFs, stocks, and bonds.
  • No centralized server or database which can be attacked – Because the blockchain ledger is distributed to such a massive degree, it’s essentially impossible for it to be hacked, destroyed, or breached by a cyber-attack. Unless a hacker somehow manages to modify or take down millions of copies of the blockchain at once, it’s completely safe from any kind of hack or intrusion.
  • Permanent public log of transactions – This may make conflict resolution and financial settlement much more simple. All transactions are recorded in a blockchain, and they can be viewed by anyone. This could impact the financial industry – and even other areas of business like contract and tort law.

With a secure design, permanent record of transactions, and a robust design built to resist hacking, blockchains could be a valuable tool.

This is especially true for banks and financial companies. The slow adoption of technology in the financial sector means that quite a few financial institutions are relying on technology that’s decades-old, and settlement processes that have not been changed for years.

If blockchain technology becomes widespread, there is a huge potential for it to completely revolutionize the way that we do business with banks and trading platforms worldwide.

The Potential Disruptive Potential Of Blockchain – 5 Use Cases

Now that we’ve discussed a few of the benefits of blockchain, as well as the basics about how blockchains work, we can discuss a few of the most disruptive potential use cases for blockchain in the financial and banking industry.

  1. Trade and share settlement – The current process of trading shares on major exchanges can be quite lengthy, as is the time it takes to settle transactions and receive a payout. In addition, the exchanges and trading platforms used often charge a fee for this service.Blockchain-based trading could eliminate these fees and decentralize stock trading for everyone. Settlement and trades would be lightning-fast and require no third-party authentication, due to the secure and public design of the blockchain.
  1. International money transfers – Despite so many advances in financial technology, transferring money between countries and banks is still slow and incredibly expensive. Wire services like Western Union often charge up to 10% of the transaction in fees, in some cases, and the money could take a long time to process.Blockchains could help reduce the time and complexity of sending money internationally. Whether using cryptocurrencies or fiat, a blockchain provides a secure method of authenticating a transaction or transfer and could easily be repurposed by a bank for use as an international exchange medium.
  1. Smart contracts – Smart contracts are one of the most unique aspects of blockchains. Essentially, they allow for a certain action – such as a release of funds – to occur once completion of another action has been completed on the blockchain.Smart contracts are written into the code of the blockchain, making them public and easy to verify – and automatic funds disbursement could make them a very handy way for corporations and banks to conduct business.
  1. Online identity management – The blockchain could have serious potential as an identity management platform. Currently, users of the internet have to trust dozens – or even hundreds – of different websites and corporations with their data, including secured information like Social Security numbers, credit card information, and banking information.Blockchain could change this – and help protect investors and bank users from fraud. Essentially, if our information was logged and encrypted on the blockchain, we could simply present information about that “block” to verify our identity, without having to share our actual personal information.This would help ensure that people using online banking and trading platforms are protected from having their identities stolen, or from serious privacy breaches.
  1. Changes in fundraising and investing – We have already seen the impact that blockchains and cryptocurrencies have made in the world of investing and fundraising. Instead of seeking Series A and B investments from institutional investors, angel investors, and venture capital firms, many companies are using ICOs, or “Initial Coin Offerings” to raise funds.In exchange for a set number of cryptocurrency “tokens”, investors pay into the project, allowing for decentralized funding of startups, financial platforms, and more. This could have a significant effect on how companies raise money, and how stakeholders buy into companies. The democratization and decentralization of the blockchain mean that just about anyone can buy into a project that they care about, or that they think has potential – institutional investors no longer have the first opportunity to invest in a company.

It’s hard to know exactly what effects the blockchain will have on the financial industry, especially since the technology is quite new. But the advantages of using the blockchain are numerous – and there are dozens of reasons that financial companies and banks should be exploring it.


What’s Next – When Will Banks Take Advantage Of The Blockchain?

As mentioned, the financial and banking industries are extremely slow when it comes to change and innovation. Given the trillions of dollars managed by major exchanges and banks, this is understandable – as any glitch or other issue could be completely catastrophic.

Because of this, we shouldn’t expect the blockchain to revolutionize the entire financial sector anytime soon. But given the power of this disruptive technology, it’s no surprise that some cutting-edge companies are already exploring it.

For example, six giant international lenders – Barclay’s, HSBC, Canadian Imperial Bank of Commerce, MUFG, and State Street have joined forces with Swiss bank UBS to develop a blockchain-based digital coin for the settlement of financial transactions.

This is far from the only example. There are hundreds of banks and other institutions exploring how blockchain can be used – and while it will likely take a long time for it to be adopted worldwide, its disruptive potential simply cannot be ignored.