By Srinivas L
The financial system across the world caters to billions of people and facilitates transactions worth trillions of dollars every day. But, the behemoth system has a list of problems dogging it for years without respite. To name a few: redundant paperwork, settlement delays, transactional fees, lack of security against fraud, and the constant increase in regulatory costs, which remain a pain point for bankers. Ultimately, all this bears down on the consumers who have to endure the burden of the climbing cost.
Stuck with its archaic methods for way too long, blockchain technology came in as a breath of fresh air to bring about a much-needed change in the financial sector. What started during the 2008 global financial crisis as Bitcoin’s operational backbone, blockchain’s distributed ledger technology (DLT) plays a catalytic role in providing security and safety while transferring and cataloguing data.
Still young and new, blockchain technology is a game-changing innovation that has the potential to transform the financial sector completely.
Blockchain is here to change the financial world
Here are some of the ways blockchain can change the financial system:
– Blockchain applications are relatively cost-effective. It provides real-time transaction data, which means a lot in the world of finance.
– Blockchain technology can significantly reduce the cost of sending out digital payments by removing the third-party verification that is required during transactions and eliminating the transaction fee charged by financial institutions.
– Bank transactions are overseen by a central authority. But, blockchain relies on collective approval from all participating nodes to process a transaction. A semi-permissioned implementation can democratize the existing system to adopt innovation while providing regulatory oversight. The DLT solves many problems affecting the financial industry today, such as lacking security and inefficiency.
– Blockchain enables an instant and direct settlement of transactions. It is estimated that banks will save enormous sums annually on settlement fees and other costs associated with it by adopting blockchain technology.
– On a stock exchange, presently, to complete a transaction, the parties involved are brokers, banks, central security depositories, and clearinghouses, who conduct the buying and selling of securities. This consumes too much time and is vulnerable to inaccuracy and fraud because of the multiple parties involved during the transaction. Blockchain can reduce the dependency for intermediaries and brokers, saving an enormous amount of processing costs.
– During a stock trade, smart contracts, known to be blockchain’s most impactful application, eliminate potential cases of fraud by adding levels of security.
– Blockchain also enables finance companies to tokenize assets like stocks and bonds, etc., which allows them to streamline online transactions.
– Trade finance, which traditionally requires a lot of paperwork, involves intermediaries to update and manage the ledger. Usually, a ledger can be viewed and updated by all the parties involved in a single international trade. But, by using blockchain technology in trade finance, processes can be streamlined, eliminating the drudgery of irrelevant paperwork and the potential logjams caused by bureaucracy.
– Blockchain technology makes international money transfer time-efficient and inexpensive. Being a global ledger, blockchain is not limited by international borders and does not need intermediaries to complete a transaction.
– Blockchain can also help auditors reduce processing time and costs by enabling automatic validation of the vital data of financial accounts. It also simplifies verifying the integrity of electronic files.
Blockchain can enable the true transformation of the financial industry.
For instance, going by traditional methods, companies looking for funding approach angel investors in the beginning and then venture capitalists before finally engaging in an initial public offering (IPO) on a stock exchange. This process includes several intermediaries, like auditors, lawyers, investment bankers, crowd-funding platforms, exchange operators, etc.
Blockchain changes this equation completely by enabling companies, regardless of their size, to raise funding using peer-to-peer methods via what is called the initial coin offerings (ICO).
The radical transformation of the venture capital world is but a small indication of what blockchain technology is capable of. Blockchain as a technology is not a threat to financial institutions but a new paradigm ready to revolutionize the whole financial sector. What’s to be seen is who is going to lead the revolution.
The author is CEO and CTO, Rooba.Finance
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