The absence of clear and transparent rules of financial system functioning makes a company vulnerable and results in systematic failures and false interpretation of the information. This creates a favorable background for the emergence of controversial situations and fraud. Blockchain technology allows to solve the majority of these issues and substantially decrease financial risks.
Advantages of blockchain for business
This technology allows to store digital data – information about transactions, contracts, contact lists, and other information in the form of consequent interconnected blocks. Furthermore, all authorized users can have equal real-time access to this data. It’s impossible to delete or change any piece of the information as the system updates automatically after every action and sends relevant updates to all authorized users. It allows to omit both deliberate fraud and mistakes in calculations.
By using blockchain for transactions, entrepreneurs can substantially decrease operational expenses and increase the turnover capital. The following spheres are the most promising in terms of the blockchain application:
- P2P (Peer-to-Peer) loans;
- settlement of disputes, management of orders, promotion of products;
- accounting of major assets and reconciliation acts.
Which innovations blockchain will bring to financial institutions
This question is thoroughly considered by leading European analytics of international and national banks, financial institutes, consulting firms as well as state institutions around the world. The analysis of Goldman Sachs, McKinsey Consulting as well as the USA, Canada and EU governments reports allows to identify several spheres where major changes will occur. Let’s take a closer look at them.
The development of the infrastructure for the facilitation of international transactions
The digital revolution which has already completely reshuffled the media market has reached the financial industry. Even small banks and financial companies have very long ago grasped the advantages of personal websites and digital databases. The increase in the number of millennial customers resulted in a spike in mobile applications popularity which substantially facilitated the provision of financial services.
Nevertheless, new technologies caused a very superficial impact on international transactions: Western Union and its business model continue to dominate the market while banks carry on using complicated infrastructure for such simple transactions as a transfer of money abroad. This situation is very hard to change as financial institutions have to ensure a high level of clients’ data protection. Thus, the major advantage of digitalization of this sphere is the acceleration of data sorting.
By using blockchain, financial institutions will be able to interact with each other without any intermediaries. For example, the technology of Distributed Ledger Corda developed by R3 provides all participants with equal access to the data, while any changes to the register are updated automatically. Name “Corda” is a play of words “accord” and “cord” (a line between two points of the circle). In this case, the circle consists of banks which use a common register of transactions, contracts, and other important documents. In such a way, they can track in real time the duration of transactions’ performance and clearing, as well as the settlement of deals without the involvement of centralized databases and management systems.
In the nearest future, the application of new technologies will lead to the substantial decrease of time of bank transactions and real-time gross settlements (RTGS). Transactions between parties will take place thanks to centralized Peer-to-Peer (P2P) computer networks. For example, UniCredit and UBS banks use the Ripple platform (protocol) for settlements which allows to conduct international transactions within 3-5 minutes. Goliaths of international money transfer market MoneyGram and Western Union plan to join this system in 2018.
The emergence of the new type of assets – digital property
Before bitcoin entered the market, all digital stuff – files, music albums, etc. could be easily copied with 1 press of the button. Though, cryptocurrencies, notably bitcoin, created something absolutely new – digital code, which can’t be replicated. This is the main value of bitcoin as a currency. It can’t be forged.
Since then, many innovations based on the blockchain technology entered the financial world. For example, after the receipt of authorization from SEC (the main authority regulating the market of securities), the American online-retail giant Overstock announced the sales of company’s public stocks on its own blockchain platform tØ. Furthermore, ICO (Initial Coin Offering) - the new form of investment in startups, as well as a decentralized platform for mobile apps AppCoins emerged.
Management and markets
American non-stock exchange market for the digital trading of high-tech companies securities NASDAQ became one of the first platforms where private companies can sell their stocks through blockchain.
Legislative framework and compliance
Financial institutions work in constantly changing and complicated legislative framework which is aimed at making the banking system more transparent, decreasing risks as well as preventing corruption. For example, currently, American banks are obliged to report to the US Financial Crimes Enforcement Network any transaction which exceeds 10’000 USD. At the same time, the blockchain technology will provide regulatory authorities with complete and permanent access to the necessary information which will facilitate the prevention of money laundering and other financial crimes in real-time mode.
It also concerns compliance sphere where blockchain can have a major impact in the following domains:
- data storage and analysis: symbols (texts, signatures, images), voice and face recognition;
- control of transactions, verification of their compliance with legislative framework, adoption of decisions related to potential risks.
Automation of processes, diminishment of the impact of the human factor, as well as the establishment of universal rules of decision making will allow to save time and money, decrease the number of mistakes during verification of clients’ personal data or processing of large volumes of information.
Clearing and settlements
In the world of “paper” trade, it takes around three days to carry out a transaction upon the completion of the financial operation. The use of blockchain technology will enable simultaneous performance of the whole cycle from the payment to its final settlement. For the owners of digital assets it will have two advantages: decrease of post-operational waiting time as well as of transactional risks.
Accounting and audit
Blockchain has the potential to completely revolutionize these spheres. Currently, accounting operations are conducted separately by each company, and thus data verification requires a lot of time and human resources. Blockchain will solve this problem: information about transactions, agreements, etc. will be added to the general register in real-time mode. The compliance of operations with the legislative framework will be also conducted automatically. It will substantially increase the operational efficiency of organizations.
Reliable and updated accounting records between counteragents will make the audit process more transparent and will substantially decrease the time required for it. Instead of the verification of large amounts of routine transactions, auditors will be able to pay more attention to controversial issues. In such a way, the automation of processes will result not in the disappearance of auditors but in the evolution of their role in the company.
Currently, the widespread use of blockchain is prevented by the absence of comprehensive regulation and standardization rules. Nevertheless, it’s high time for financial specialists and business owners to pay closer attention to opportunities provided by this technology. It’s increasing popularity has already caused the emergence of such services as blockchain consulting and audit of blockchain solutions, - and this is just the beginning of the digital era.