How could blockchain technology change finances?
6 ways blockchain technology could disrupt the financial economy
As Bitcoin has advanced from the picturesque project of cryptography freaks and libertarian fringe members of society to the more than $ 100 billion market capitalization Phenom, no industry today has been more affected by the disruptions caused by blockchain than the financial sector.
While Bitcoin remains a controversial topic as a viable currency, the fact that the blockchain technology that underpins it's here to stay has the potential to affect many industries and markets is absolutely out of the question.
Financial institutions, central banks, think tanks, governments, consulting firms, and academics around the world are devoting time and money to understanding how blockchain technology could transform finance - its first and most obvious use case.
A number of banks have funded, formed, or joined a variety of consortia to focus on this dilemma. These include R3CEV and the Enterprise Ethereum Alliance with members such as Goldman Sachs, Microsoft, J.P. Morgan, McKinsey and Intel.
The following are the top six financial areas, highlighted most often as the areas with the greatest potential for disruption:
1. Infrastructure for cross-border transactions
The global financial system is worth trillions of dollars. Despite the sheer size of this gigantic industry, the technological backbone of the system has largely resisted innovation. Of course, banks use computers, databases, websites and mobile apps. In fact, they are among the heaviest consumers of IT resources on the planet, but what may surprise you is that a lot of the installations that underlie the system - the background material that isn't actually seen - haven't been since the 1970s / 1980s are more confronted with significant innovations.
One of the most blatant examples of this is cross-border trade. If you have ever tried to send a sum of money to a friend or relative in another country, you will be aware of the difficulties that often come with it.
There are players like Western Union whose only business is international money transfer, but when it comes to banks, the infrastructure they use is muddled at best. Until now, this complexity had to exist because every financial institution had to fall back on highly resilient security systems in its private databases.
Because the security protocols are inconsistent, compatibility issues slow the process. Despite the fact that money is largely digital today, this digitization process could not remove the complexity: it just meant that the information could be sorted into the myriad private databases at a higher speed.
This is the best opportunity for a blockchain to make an immediate and significant improvement in the banking sector. The technology enables institutions to connect directly to each other, eliminating the time, expense and complexity of interacting with intermediaries who act as guarantors of assets.
With a shared ledger that keeps an eye on the execution, clearing and settlement functions of transactions, there is no need for a central database or a central management system. For the first time, banks could formalize and secure all types of digital relationships.
Just like members of the crypto community, banks could do business with one another in a peer-to-peer manner without any friction. Ripple is a leader in this direction and has over 100 banks as customers in its network.
2. Cryptoassets: A Brand New Asset Class?
With the birth of Bitcoin, the first new asset class emerged in 500 years.
Until the blockchain's cryptographic proofing system, no one has been able to figure out how to overcome the simple replication of digital property that, for example, defaced the music industry.
Satoshi's creation of uncopiable digital code has opened up possibilities in the world of bits and bytes that were not possible before, as digital assets now have inherent value. For example, Overstock.com (whose CEO Patrick Byrne is a big fan of Bitcoin) has set up a subsidiary called tØ, which is a blockchain platform. The SEC recently granted it permission to issue public shares.
We also saw the meteoric rise of the ICO market that emerged from the Ethereum blockchain, bringing with it an entirely new form of fundraising for startups.
The number of uses of blockchain technology - as an asset itself or as a platform on which other assets are built - will only increase over time.
3. Markets and Governance
The potential of blockchain technology goes far beyond the possibilities of transaction recording.
Nasdaq has already taken the lead and built a blockchain-based platform that enables private companies to issue and trade stocks.
In the early days of the Bitcoin community, computer programmer and cryptography connoisseur Nick Szabo proposed the concept of smart contracts. This seed of an idea led to the establishment of an ambitious blockchain project called The DAO in 2016 by a man named Christoph Jentzch.
The idea of The DAO, which is based on the Ethereum blockchain, was ambitious but easy to understand: it should be a market characterized by high demand. Potential donors could buy shares (called DAO tokens), and these tokens gave them the right to vote on which projects should be funded in relation to the percentage of tokens they held.
The proceeds from the token sale were the pool of money that was used to fund the projects that the token holders voted on.
4. Reporting and Compliance
Blockchains are perfect for meeting the regulatory and compliance requirements of government agencies: They are completely transparent, easily accessible and cannot be changed.
In addition, it is possible to encode them in such a way that only transactions that comply with regulatory requirements are permitted in the first place.
5. Settlement and clearing
As mentioned at the beginning, the management system under the financial system is very out of date.
Because in the absence of 100% secure digital assets, a paper trail of transactions is required for trading. This means that when a trader clicks the "Buy" or "Sell" button on their Bloomberg terminal, that transaction is not fully ratified. In order to process and clear a transaction, there is usually a waiting period of up to 3 days (in the financial sector: T + 3).
Blockchains will be able to track assets throughout the cycle of a trade, and the cryptographic keys / digital property rights they hold reduce trading latency and counterparty risk.
6. Accounting and auditing
Blockchains are built from their transaction history, while conventional databases can only tell the story of a snapshot of time.
Blockchains are their own context, their history, and their system of recording. Accountants around the world will be happy soon.
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