Impacts and Opportunities in the Finance Industry Due to Blockchain
At this time a year ago, Bitcoin was poised to skyrocket to almost $20,000 and all things cryptocurrency was dominating the headlines. Lost in most of this fanfare was the underlying blockchain technology that makes digital cryptocurrencies possible. While retail investors had dreams of becoming the next crypto-millionaire, the largest banking and financial institutions in the world were beginning to assess how they could leverage this emerging technology for their benefit.
The Harvard Business Review predicted in March of 2017 that blockchain would change banking and finance the same way the internet disrupted and reinvented media. Many startups in the fintech space also see blockchain as a means to upend the titans of finance and compete on a global scale with a fraction of the resources. Back in the 1990’s, few people had the insight to see just how widespread the impact the internet was going to have on every aspect of our daily lives. Blockchain has this same potential and this time around everyone is scrambling to figure out how to capitalize on this revolution.
How does Blockchain work?
Essentially, the blockchain is a digital ledger that is maintained on a distributed network of computers around the globe. This makes it impossible for one central authority to have exclusive control or manipulate the data. Each node on the network constantly reconciles and confirms with all the other nodes each new block added to the blockchain. Think it of a massive spreadsheet that is always being updated, confirmed, and maintained globally.
Benefits of Blockchain for the Financial Industry.
Financial institutions and retailers have taken a beating the past few years due to massive breaches of sensitive financial and personal data stolen by hackers. The encryption capabilities of the blockchain will allow organizations and the individuals they interact with to share this information securely.
Public Key Infrastructure (PKI) that is commonly used today is particularly vulnerable to DDoS attacks and other hacking techniques. Blockchain utilizes Keyless Security Infrastructure (KSI) that stores data hashes on the blockchain that requires the proper completion of a hashing algorithm to confirm access. Across the board, all simple passwords and login credentials are replaced with private keys that are required to verify transactions, access, and account ownership.
Financial institutions and other large enterprises that are publicly-traded companies are required to report and disclose large amounts of data about their financial activities. Blockchain technology will allow these organizations to share data of all kinds on the public blockchain that is accessible by everyone.
Increased transparency will also improve and simplify regulatory activities by central banks and other government/industry agencies. With new requirements defined and implemented on the blockchain, financial institutions will be required to maintain compliance in real-time and not in a reactionary manner due to a systemic red flag.
Once a transaction or block of data has been completed on the blockchain and consensus of the network confirms it is valid, that record can’t be altered in any way or deleted. It becomes a permanent part of the ongoing blockchain forever.
This ensures that an accurate archive of all transactions will always exist and be able to be examined due to the transparency described above. These elements will eliminate opportunities for bad players in the industry from trying to manipulate systems and data for their financial advantage or try to cover the tracks of their mistakes or misrepresentations and increase the public trust.
Currently, governments or institutions operate, maintain, and control the network’s environment the banking and financial systems operate. Many of the largest financial schemes and government currency failures have occurred because of the centralized nature of the entire network. This allows a small number of people to manipulate or control these systems for their benefit.
These actions are not always illegal, but in the case of governments can lead to currency manipulation and has resulted in hyperinflation and in some cases a complete collapse of a country’s financial system. Venezuela is a prime example where a totalitarian government that controlled every aspect of the economy including banking and finance. The International Monetary Fund (IMF) predicts that the inflation rate will surpass 1,000,000% by the end of 2018.
Decentralization ensures a level playing field for all participants and protects everyone’s interests equally. It also makes it virtually impossible for hackers to gain access to or control of the blockchain. To do so, they would need to simultaneously hack at least 51% of all the nodes on the network. Under current systems, a hacker can find one weak link in the system and be able to attack and bring down the entire network.
In the world of banking and finance, it always comes down to what is best for the bottom line. Present systems require many layers of employees and manager check-offs to confirm transactions. The bigger or more complex the deal, the more people involved in the process.
Each one of these steps is also an opportunity for human error to occur. The blockchain executes each step in the process as defined by the smart contracts built into that transaction. There are no grey areas in this process and also no chance that someone made a data entry error.
While this does mean there will be fewer people doing the current jobs required to complete transactions, it also means more people will be needed to make sure the blockchain process workflows are set-up and maintained properly. IBM already has over 1,000 employees working on blockchain-related initiatives.
Currently, when one person wires money to another individual who has an account at a different bank there are multiple steps that take place and significant amounts of time that transpire. If you factor in an international wire, then the complexity and resources to complete the transaction go up dramatically.
By completing the transaction on the blockchain, all parties involved have simultaneous access to the details and requirements of the transaction to be completed. Now all manner of transactions, large and small, can be completed with a single ledger entry on the universal blockchain with a significant decrease in operational expenses overall and per transaction.
Some legacy systems across the financial and banking world have been in place for over 30 years and are wildly inefficient relative to the technology that has emerged over the past decade. Blockchain represents the opportunity for the entire industry to bring technology infrastructure completely into the 21st century. The new leaders, innovators, and titans of the financial industry will be the ones that are able to harness this newfound superpower to their benefit.