Most people think about cryptocurrencies when they hear the word “Blockchain”. It is true that Blockchain technology is what powers cryptocurrencies, but this revolutionary technology has uses in many industries.
Blockchain is a decentralized public ledger, where each transaction is recorded as a “block” in a “chain of blocks” or a “blockchain”. Each block holds timestamped digital data and every participant can view this.
As cryptocurrencies are digital currencies, it wouldn’t be wrong to say that Blockchain’s primary use case was in financial services. The unique features and advantages of this technology could significantly change the finance industry in the coming years.
The financial services industry deals with trillions of dollars each day and serves millions of individuals. Such great heights bring with it many different challenges for the industry. Data breaches, excessive paperwork and high transaction costs are just some of these problems.
The benefits of Blockchain technology provide potential solutions to these challenges in the financial services industry. be a possible solution to the challenges of the global financial system. There are banks and financial institutes around the world that are already making use of enterprise Blockchain solutions to streamline their processes and operations.
The implementation of Blockchain in financial services has also led to the introduction of decentralized finance, which is also referred to as DeFi. Powered by Blockchain technology, DeFi aims at removing intermediaries from financial services by using smart contracts.
We will now look at how Blockchain technology could help solve some of the most common challenges faced by the finance industry.
Security and Transparency
Financial data has to go through multiple intermediaries and it is mostly stored in centralized databases. The safety of the data is dependent on the intermediaries and the level of transparency is very low. Even with maximum protection, the risk of data breaches and servers’ hacking is always there.
Blockchain technology can provide a level of security and transparency that no other method of storing or recording data can match. Moreover, credit card tokenization allows users to make transactions with their card while maintaining this security and transparency.
What is credit card tokenization? Here the primary account number of the user is replaced with a series of numbers and no one can access the sensitive or personal information of the users. The information is encrypted over and over again which makes it impossible to hack into.
Moreover, Blockchain networks are immutable, which means that once data has been recorded, it can not be altered by anyone. This ensures that all the data is accurate, authentic and secure.
When it comes to privacy, you should know that there is a public key and a private key. The public key is available to everyone within the Blockchain network, however, the private key is only shared between the parties involved in a transaction.
While the transaction will be visible to the users in the Blockchain network, the sensitive information will only be visible to those with the private key. This makes sure that transparency is maintained within the network without compromising on security.
Managing finances is not so simple and not so cheap either. Think about it, purchasing and maintaining databases, bookkeeping, security of databases, transfer costs, intermediaries’ commissions and labor costs.
All of these expenses are recurring, and so will have to be paid for at regular time intervals. This makes the system very costly and small human errors could cause huge problems.
With the help of Blockchain technology, costs in financial services can be reduced substantially. Blockchain removes the need and costs of intermediaries and bookkeeping. With the help of smart contracts and removal of third party intermediaries, transaction costs can be greatly reduced as well.
Effective Risk Management
Financial institutions and banks face a lot of risk in providing services like loans. For instance, trusting intermediaries, the counterparty fails to meet its obligations, and credit risk. Third party intermediaries have to monitor and track loans, interest rates, and investments. If something goes wrong, financial institutions or banks will face substantial expenses.
However, with Blockchain there is no need for any third party intermediary and no need to trust anyone else, other than those that are parties to the transaction. The decentralized ledger removes fund management and credit risks as all transactions are accurately recorded.
Moreover, Blockchain technology has introduced new ways of investing, such as yield farming. What is yield farming? It’s like a reward scheme where users can hold onto their investments and earn rewards.
As we have already discussed above, Blockchain technology in finance can increase transparency and reduce expenses while maintaining a high level of security. However, there are many other advantages of incorporating this pragmatic technology.
Blockchain technology can also help settle transactions instantly as there is no need to wait for confirmation from any central authority figure. Moreover, auditing, which is a very long and costly process, can be streamlined with the help of Blockchain. Blockchain technology continues to revolutionize how we transact and store information.