Given that blockchain is changing the dynamics of many industries, it’s no surprise that it has become a buzzword in recent years. Blockchain has revolutionized the way we do business in many areas, including healthcare, retail, banking, government, and more.
Bitcoin was worth nearly twice as much in early 2022 as it was in January 2021, capping off a year in which cryptocurrencies gained both popularity and curiosity among the public.
Considering how much it has and will continue to impact the global financial system, this comes as no surprise. After all, trillions of dollars are moved between billions of people every day using Bitcoin.
Blockchain has a wide range of applications in finance, including but not limited to, transaction tracking and trading. Given the changes in the global financial system, investors should educate themselves on the impact of blockchain on the system and how to participate.
This post will help you understand blockchain’s influence on the financial landscape.
What is Blockchain?
Blockchain is a method of storing data in a way that makes it nearly impossible to change or defraud the system.
A blockchain is a digital log of transactions that is replicated and distributed across the blockchain’s network of computer systems. Each block on the chain comprises a broad range of transactions, and each time a new transaction takes place on the blockchain, it is recorded in each participant’s personal ledger.
There are two types of blockchain: private and public.
A group or organization manages a private blockchain. The group can choose who is invited to the system and can alter the blockchain. This private blockchain technique is similar to an internal data storage system, except for the fact that it is dispersed among multiple nodes to increase security.
The blockchain is open to the public. Anyone can access, publish, and audit the data on a public blockchain. It is nearly impossible to modify transactions registered in a public blockchain since no central authority controls the nodes. Unlike private blockchains, where the identity of the people participating in the transaction is not hidden, public blockchains are generally anonymous.
Here are the 4 ways blockchain technology is impacting the banking industry.
1. International Payments
The most obvious and fundamental application of blockchain technology is as a payment mechanism. Cryptocurrencies are used as a form of digital money as well as a method of sending payments around the globe. These transactions are immediate and all you need is a network connection to complete them. While it is true that it may take a few minutes for a transaction to be completely confirmed, the transaction itself only takes a few seconds.
In contrast, money transfers between countries today require third parties and can take up to several days. These actors also get a piece of the pie in each transaction. This means that the sender may have lost a large sum of money by the time the money reaches the recipient.
As such, both large companies and consumers can benefit from peer-to-peer transactions enabled by blockchain technology.
2. Increasing security
The blockchain also helps with fraud prevention as it creates a transparent audit trail. It also contains several redundancies that make it impossible to change data after it’s been published on this network.
Moreover, there’s not a single point of failure where hackers can attack and change data without leaving any traces. This is because the blockchain is managed by thousands of computers. Given the current global state of ongoing cybercrime and massive ransomware attacks, which can expose sensitive data and cause victims to lose large sums of money, this element of the blockchain is very important.
The blockchain records transactions in a ledger, with each block containing a unique hash that’s linked to the previous block. Each member of the network also receives a copy of the transactions. Because of these features, blockchain technology is resistant to distributed denial-of-service attacks, hacking, and other types of fraud.
Without the possibility of cyberattacks, the cost of doing business goes down, saving everyone money and stress.
3. Data reconciliation
The blockchain has the potential to replace a variety of earlier techniques for data reconciliation by providing a distributed database as the single source of truth. Data reconciliation is becoming increasingly important in many business models, not just in the financial services industry.
Because business partners must agree to match data, many business processes are slow and inefficient for completing transactions. This is because each company independently records the accuracy of the data in its systems. Blockchain is an innovative and novel method of reconciliation as it offers a more holistic approach, with an automatic reconciliation of digital events being one of the key benefits of the technology.
4. Eliminating the middleman
People can trade directly while keeping track of their transactions on a shared ledger. This eliminates the need for intermediaries like banks.
As blockchain continues to grow in popularity, it will most likely have an impact on banks. If they are shut out of the loop, stock prices will certainly fall. The situation is less clear for intermediaries such as stock exchanges, which provide critical services for stock trading.
They may continue to provide liquidity and security to blockchain-based financial institutions, however, with the advent of blockchain technology, the days of generating money via broker fees are likely to be numbered.
The financial sector is taking blockchain technology seriously because it has the potential to transform traditional banking. Because blockchain is decentralized, tamper-proof, and irreversible, it lends itself to a wide range of applications, including payments, securities issuance, asset trading, and retail banking. It’s clear that blockchain technology encompasses much more than bitcoin and currency. While these implementations are disruptive as payment and monetary systems, alternative uses of these unique and powerful properties can create much more upheaval.
There seems to be no doubt that blockchain technology will continue to evolve and influence the way financial institutions do business. We all need to continue to examine how technology will impact our productivity and bottom line, as well as our security.