5 ways blockchain is revolutionizing the financial industry

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The global financial system serves billions of people and facilitates trillions of
dollars in daily transactions. It is a complex network of stakeholders including
national treasuries, central banks, International Financial Institutions, local
banks, and investors.

The financial sector performs important tasks such as authenticating identity,
storing and moving value, lending, borrowing, investing, and insuring. It acts
as a blood-stream for our globalized world, connecting people, goods, and
services.

Even though our financial system undertakes these indispensable tasks of
managing our money every day, the sector is plagued with issues such as
high costs, fees, delays, and friction. The system is rife with fraud,
misappropriation, and financial crime at each level of bureaucracy — from
clerks to Prime Ministers of entire nations.

Read how Malaysian ex-PM Najib Razak siphoned off millions of dollars from
state funds for personal gain.

Despite its countless issues, the financial sector was never the best candidate
for disruption. Our archaic financial processes have remained unchanged
since the advent of Double Entry Accounting. Banks and financial institutions
have always dictated terms and consumers have always listened.

“(Our present financial system) is antiquated, a kludge of industrial
technologies and paper-based processes dressed up in a digital wrapper.”
-Don Tapscott

There never was a challenger or a disrupting force for the financial industry,
until recently. What started as a nine-page whitepaper from an anonymous
‘Satoshi Nakamoto’, has today turned into one of the biggest disruptors of our
financial sector. Almost a decade later, today Bitcoin and cryptocurrencies
have become a household name in the farthest reaches of our world, because
of the immense promise the technology holds for everyone.

The original use case for Bitcoin was the ability to facilitate the exchange of
money. However, the advent of Ethereum and other ‘programmable’ Digital
currencies has opened up further opportunities for blockchain technology to
disrupt the financial sector. The promise of blockchain for the financial sector
is immense. Everything the banks and financial institutions do, in theory,
could be replaced by a set of distributed applications, smart contracts, and
autonomous agents. Blockchain can do better on costs, risk management,
speed, and adaptability.

Here are 5 ways blockchain is transforming our financial sector.

- Reducing Costs
Blockchain eliminates vast back-office expenses for banks and financial
institutions. With the help of blockchain technology, P2P transactions can
happen seamlessly in real-time. There is no need for expensive resources or
software to maintain accounts and ledgers. Spanish bank Santander
estimates that banks can reduce up to $20 Bn in costs annually if
they shift to blockchain systems.
Additionally, the costs of financial fraud and crime also add up According to a
PwC report, 45% of financial intermediaries such as banks, money
transfer services, and payment networks suffer from economic crime
every year.
These reduced costs can be eventually trickled down to the public and reduce
banking fees around the world.

-Financial Inclusion for everyone
Globally, 1.7 billion individuals still have no access to banking
services. In many underdeveloped nations, individuals still have to pay huge
fees to access an inadequate banking system.
Blockchain technology holds a huge promise for the unbanked. With
blockchain technologies, everyone with a smartphone can instantly open and
operate their own bank.

-Speed
The present financial system has countless moving cogs. The inoperability/lag
of any of these cogs slows down the present financial system, especially in
the case of international transfers and cross-border payments.

“In the banking world, where you have a sender in one network and a
receiver in another, you have to go through multiple ledgers, multiple
intermediaries, multiple hops.”
Chris Larsen , Co-Founder and CEO, Ripple Labs

At present, international payments work with SWIFT (Society for Worldwide
Interbank Financial Telecommunications). Each bank that participates in the
system is assigned a SWIFT code, which identifies the bank, the country it’s
in, and the branch ID. The SWIFT system handles around 16 mn payments in
a day.
The present system is extremely inefficient as a financial backbone for the
world. For instance, the SWIFT system is reported to have 180+ red days in
a calendar year globally including local holidays, weekends, downtimes, etc.
Typically a cross-border payment through traditional banks takes around 3–7
days to settle. A Bitcoin transaction on the other hand takes only
around 8 minutes to settle. Other emerging blockchains are even faster,
settling transactions almost in real-time.

- Open Source solutions
The present structure of the financial institutions makes it almost impossible
to pivot and make necessary changes. Banks and financial institutions are
centralized and towers of bureaucracy make it extremely difficult to
implement changes fast enough. On the other hand, blockchains are open
source and quick to adopt.
Many blockchain projects are in fact governed by the community that runs
them and adapt to changes as frequently as every week.

- Transparency and audits
Presently, financial institutions conduct their business behind closed doors.
Financial audits are a periodic affair and happen quarterly/yearly.
With blockchain technology, all transactions across the world are available for
everyone to see. Everyone can verify whether an entity exists and has the
balance to deliver and stand good on its financial promise.
Because transactions are updated real-time blockchain systems provide for a
much more transparent way of checking financial history, eliminating the
need for a ‘single source of truth’.

What the future holds for blockchain and Web3

I don’t know what’s going to succeed. What I’m certain of is that we are going
to see blockchain solutions, peer-to-peer solutions emerging in our industry
and we want to be close to that development.
Simon McNamara, Chief Administrative Officer, RBS

We live in exciting times. Blockchain and Web3 projects are evolving at warp
speed and new and innovative use cases are coming up every day. The total
market capitalization of cryptocurrencies has crossed $2 trillion globally. This
scale and promise have made it impossible for Web3 to go unnoticed by
incumbents. Financial giants such as JP Morgan and Goldman Sachs have
already jumped on the bandwagon and are heavily invested to be on the
blockchain side of disruption. Reserve banks of countries such as India and
China are already working on making blockchain-based Central Bank Digital
Currencies (CBDCs). Web3 is still in its nascent stages but it is certain that
blockchain technology will continue to revolutionize the financial industry and how we transact globally.

Sources
>https://mackinstitute.wharton.upenn.edu/2018/blockchain-research-
institute-tapscott/
>https://hbr.org/2017/03/how-blockchain-is-changing-finance

>https://www.pwc.com/gx/en/services/forensics/economic-crime-survey.html
>Blockchain Revolution: How the Technology Behind Bitcoin and Other
Cryptocurrencies is Changing the World — Tapscott Don, Tapscott Alex

Image Credits

Dmitry Demidko