What Is the Impact of Blockchain on the Financial Sector?
For years, few were paying enough attention to blockchain technology. But now, blockchain has started to emerge from the shadow of Bitcoin, the electronic currency that the mysterious Satoshi Nakamoto created in 2009. Blockchain’s impact on the financial sector will be much bigger than Bitcoin, as the technology promises to be more transparent and easier to use.
But first, what exactly is blockchain? How does it work? Why does it work well enough to become the electronic currency technology of the future? There’s no need for rivers of papers to answer these questions. Banks, who at first saw Bitcoin as a potential threat, began to see opportunities, especially when Bitcoin was rising so quickly at the end of last year.
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The short answer to all three questions is that blockchain can do for the finance industry everything that Bitcoin has done. Blockchain is a new paradigm designed to deeply revolutionize the economic system by modifying the concepts of transaction, property, and anything involving trust.
Investors and banks have paid much attention to Bitcoin. It is a smart mechanism, but it’s no longer an exclusive one. The mainstream world will soon have blockchain in the financial sector, which is outside the scope, where the very idea of electronic currency was born. Notice, I have not called blockchain a “cryptocurrency.”
But what is blockchain? How does the blockchain work? This is not the forum for a detailed explanation, but, suffice it to say, it is a database. Blockchain works by exploiting, or leveraging, peer-to-peer technology that anyone can download from the Web, creating what is known as a network node.
The name derives from its block construction. Each node in the network plays a role in verifying the information. Each node transmits this information to the next node in a chain consisting of blocks. Thus, we have blockchains, as it were.
In other words, this database becomes a veritable ledger, organizing all transactions involving Bitcoin from 2009 (when it first appeared) to the present. Blockchain’s advantage comes courtesy of a coding revolution. It allows, using concatenated blocks of transactions, competitors to share a digital ledger based in a computer network with no need for an authority to control it. (Source: “Wait, What Is Blockchain?,” Fortune, May 23, 2016.)
Therefore, rather than the electronic ledger being based in a single ledger or computer (as in Bitcoin’s case), it is shared. Thus, anyone can use it, and that’s how blockchain in the financial sector can take hold. In a blockchain, there is no central intermediary (as with Bitcoin). It’s a system built on trust, rather than diffidence.
The world functions, from time immemorial, on the basis of the exchange of goods or services that have a certain value. Exchanges, until a few decades ago, could only take place physically. This allowed the parties to manage their own security, using trusted third parties or trusting only themselves.
Blockchain is a kind of digital and simplified version of the traditional money exchange system known as the “Hawala” system. Hawala uses different parties and locations and an “encrypted” message/password to retrieve the funds. With blockchain technology, the exchange can take place with a high level of security certified by the network without the need for a guarantor. (Source: “Hawala,” Investopedia, last accessed April 26, 2017.)
The Blockchain Impact on Financial Sector Explained
Some are comparing blockchain to the Internet. The Internet is a platform for sharing information without a central authority. Similarly, blockchain is an Internet of “value.” Blockchain could do to financial services what Uber Technologies, Inc. did to taxis, or what the Internet did to news, movies, and music.
The financial services industry hasn’t really changed in decades. Even such developments as Paypal Holdings Inc (NASDAQ:PYPL) still require a central authority to govern a transaction. This takes time. Anyone who has ever used the service knows that, after a seller receives the money for an item, PayPal holds it for five—or even seven—days. Only then it releases the funds for transfer to an account of the seller’s choice.
While Bitcoin remains an elusive currency, the sharing nature of blockchain means that no party can tamper with the records. Many leading financial firms have already started to experiment with the technology. There is nothing hidden abut blockchain; basically, that’s how blockchain will affect the financial sector. By offering a transparent and revolutionary technology, blockchain is the closest thing to the financial service of the future.
In contrast, Bitcoin is inflexible. That technology has split opinion in two distinct camps. You either love it or hate it. The detractors focus on the fact that Bitcoin makes it possible to transact without a banking middleman. Thereby, you can buy anything you want cryptographically. Because nobody “has to know,” Bitcoin could be used to buy illegal goods and services.
That’s admittedly rather desirable, from a certain anarchic point of view. But, left like that, Bitcoin cannot progress much further. It would draw too much attention from the law. Thus, the financial services industry would find it unsuitable, at best. Nevertheless, blockchain guarantees a high level of security.
The latest developments have improved the usability of blockchains. They can store large-sized digital objects, such as contracts or property certificates. Thus, not only will blockchain modernize the financial sector, it will revolutionize the way we do business and run our day-to-day lives.
The blockchain technology applications could be limitless. The same process that allows a blockchain to process a payment or preserve a contract can store clinical records. However, banking and financial institutions will probably lead the advancement of blockchain technology applications.
Finance Is Fueling Blockchain, But the Potential Is Limitless
The financial sector is generally the most active for blockchain, but it’s not the only one. There is the “smart city” and the Internet of Things (IoT), where blockchain is very valuable to certify the reliability of information transmitted by objects and sensors. It could make such processes more secure, reducing the risks.
Still, it’s the financial institutions that are studying and adopting blockchain technology faster than expected. As noted above, the technology has much potential, well beyond finance. Naturally, investors have asked themselves where and how to take advantage of the potential profits that blockchain technology could unleash.
There are no clear avenues yet. The technology is being developed by various parties. Blockchain does not require major infrastructure. By 2021, the blockchain market could amount to $2.3 billion.
That doesn’t sound like a whole lot but, in 2016, the estimated value was $210.0 million. A tenfold increase in just six years does sound promising; it marks a 61.5% annual growth rate. (Source: “Blockchain solutions make transactions more transparent and secure,” Cryptonews.xyz, April 4, 2017.)
There are a few startup companies listed on the stock exchange working exclusively in the blockchain sector. One of the most famous is BTCS Inc. It’s the first company specializing in blockchain to be listed in the United States. BTCS offers an online marketplace solution, with which consumers can pay for goods and services using cryptocurrencies, including Bitcoin.
Then there are companies involved in acquiring other companies and patents related to blockchain technology. In many cases, the rules of penny stocks apply. That said, blockchain technology could achieve a great breakthrough within the context of long-established companies. Anyone interested in offering a secure data exchange platform will eventually have a hand in its development.
The world’s banks and financial institutions do not care for Bitcoin’s ability to maintain the anonymity of network users. Rather, they appreciate blockchain’s traceability and post-market verification of online money transfers. That can happen even though anyone can download blockchain from the web and use it from a smartphone. (Source: “Blockchain for Android,” Blockchain Luxembourg S.A, last accessed April 26, 2017.)
Blockchain Can Serve Any Purpose
Blockchain technology applications can serve any purpose involving the need to establish a relationship between multiple people or groups. That’s why it can also accelerate online trading and replace the value of a notarized act. It could even finally help develop online political voting.
Blockchain can do this because each transaction—in the political case, each vote—can be monitored by the network of nodes. These will ensure both the fairness and validity of the vote, as well as its anonymity.
Why does blockchain work, and why it will expand? The answer is more simple than you may think. It’s because those who take part can earn from it, evidently. More and more companies and researchers will study ways to adopt solutions based on new digital communication channels. All sectors, in fact, will be developing tools to facilitate the use of blockchain technology in various fields.
In the beginning was Bitcoin, electronic money that caused a stir in 2009. Bitcoin was associated with the “dark web.” It was an anonymous currency with the potential to be used primarily for illegal purchases. Then Bitcoin’s secret was uncovered. It was nothing more than an application on blockchain technology.
Some smart people wondered: why not use this technology for another purpose? From that moment on, there was a real explosion: academic publications on blockchain multiplied. Then, such companies as Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) started to show interest in the subject.
In short, the times for blockchain are good. Whereas people are afraid of Bitcoin, blockchain—free from the prejudice against cryptocurrency—can emerge as one of the leading technologies of the next few years. This technology brings great benefits in terms of simplification, lowering costs, eliminating third parties, and more—offering total security and a degree of amazing simplicity.
