Dynamic shifts are occurring in the finance industry. The business models are changing, the regulations are getting mounted, and the compliance pressure is increasing. People are becoming more concerned about privacy, and customers’ demands are always increasing.
The banking industry is facing several challenges, and it is difficult to transform the legacy system to innovation. However, with blockchain, it is possible. In this article, we will discuss how the blockchain mechanism is securing financial transactions.
What is blockchain?
Cryptocurrency Bitcoin was first created in 2008. The technology was seen with high distrust. Although, it is still considered as such even now up to a certain point. The regulatory agencies and centralized banks are refusing to adopt the technology.
Despite all these, blockchain technology has become the hottest topic for all the financial sectors at present. Almost all the global players are exploring the utility of blockchain mechanisms in the industry for more accurate and faster payment processing, cost reduction, and faster settlement cycles.
Blockchain: For secure financial transaction
Blockchain is a decentralized ledger that helps in tracking the transactions among several parties scattered among all of the stakeholders. It is transparent and offers high security, and reduces the chance of fraudulent transactions.
Blockchain is also called Distributed Ledger Technology. It was developed as a database for tracking Bitcoin transactions. Its design eliminated the need for an intermediary or central bank. The technology makes use of complicated consensus and algorithms among its P2P network for verifying transactions.
Disruptive potential:
In the last few years, financial institutions and banks are exploring this technology and claiming it to be a reliable alternative to the systems that are dependent on third-party and intermediaries for validating transactions. The target is to establish a system that leads to trust decentralization. It will reduce every kind of transaction fee and will ensure short processing timelines.
The disruptive potential of a blockchain development company cannot be ignored and will be going to transform the commercial internet. A vital difference is that the internet facilitates data exchange, but blockchain technology can facilitate value exchange. In short, blockchain will allow the users to perform or carry out commerce and trade across the world without any need for custodians, payment processors, and reconciliation and settlement entities.
Global banks, the world’s biggest financial institutions, government, and other uncountable numbers of financial organizations are deciding to invest internally in proof-of-concept projects. For creating efficiencies, they are making use of trial-and-error deployments having limited parameters.
The primary considerations to explore blockchain solutions and services and blockchain adoption as an important alternative for all the financial sectors are as given below:
- By implementing blockchain, it becomes easy to identify opportunities for making innovations.
- It becomes easy to determine feasibility and the impacts on the legacy systems.
- The proofs of concept become easy to test.
- With blockchain adoption, one can understand the data security and regulatory implications.
- One can plan for the scalability of transactions.
- The financial sectors can form cross-industry and cross-functional collaboration and partnerships.
- The users can dissect the implementation of blockchain: permissioned vs. opened.
Only when the financial institutions and banks will partner together for setting the industry protocols and standards that facilitate interoperability, blockchain technology’s full potential will be unraveled.
Applications of blockchain mechanism in finance and banking:
The principles of blockchain are decentralization, utilization of unique digital signs, and consensus-based validation systems. Blockchain technology for financial sector can be used in areas like:
Records management and KYC/AML: A network-defines, decentralized registry streamlines KYC processes and controls while the client onboards and contributes to AML checks.
Payments: Blockchain can convert digital payments by facilitating real-time settlements and eliminating the need for intermediaries.
Trade finance: The need for manual paperwork and process are eliminated and are replaced with innovative and efficient services of trade finance.
Capital markets: When a consolidated and distributed data repository is developed on a blockchain mechanism, it provides real-time and unifies views to the users about all of the trade-associated information. It accelerates the process of settlement.
Regulatory reporting: The reporting data of the transactions can be easily accessed by the regulators. It reduces the regulatory operating costs of all the market participants.
Syndicated lending: When it comes to syndicated lending, blockchain reduces the settlement process on both the buy-side and sell-side. It saves costs and time.
Implementation of blockchain technology in financial sector, services firms’, and banking’s legacy processes have shown transformative effects. But it is necessary to explore the blockchain technology infrastructure before the banks start to bolster it. According to research, Blockchain technology has high impacts and leads to:
- Global trade seamlessly
- Lower risk in clearance
- Improved trust
- Inexpensive operational costs
- Distributed identity
Conclusion:
The financial sectors must take blockchain mechanisms seriously. The decentralized, tamper-proof, and immutable characteristics of blockchain technology make it perfect for cost reduction and streamlining asset trading, payments, retail banking, securities issuance, and settlements and clearing. Blockchain technology is no more just limited to cryptocurrencies and bitcoin and can be used for securing the financial industries.
