5 Case Studies of Blockchain in Financial Services

It is unusual for the technology industry to coin a phrase that accurately explains what a new technology performs in the most basic terms.

One such example is blockchain, which is precisely what the name implies. It is a technology that allows for the creation and storage of information blocks in a chain. When a new block is formed, it is added to this chain, forming what is known as a 'digital ledger.'

While it has always been feasible to establish digital ledgers, blockchain ledgers have several revolutionary advantages over previous techniques.

THE BENEFITS OF BLOCKCHAIN LEDGERS:

Decentralized

Blockchain technology distributes the digital ledger to many independent nodes, eliminating the requirement for transaction data to be processed and maintained by a single third party. Because the data is not stored on a single system with a single security mechanism, it is less likely to be hacked. It also removes the third party's ability to exert control over the transaction. This has the obvious benefit of removing control over transactions, making blockchain applications in finance less expensive and more accessible.

Secure

One of the most significant advantages of blockchain technology is its high level of security. It employs encryption to secure the transaction ledger, allowing only those with a unique key code access to the data. The fact that blockchain transactions are peer-to-peer and hence decentralised makes them significantly more safe. Bitcoin has never been hacked, despite its popularity, because blockchain technology makes this nearly impossible.

Unalterable

The blockchain ledger's brilliance is that once a block is written, it cannot be changed. When used in day-to-day commercial transactions, this provides a plethora of significant benefits. To begin with, this implies that these digital ledgers can be a reliable source of information.

One field where this could be a game changer is drug development, where test findings could be stored in the ledger. They would be unchangeable once written. This means neither neither the medication manufacturer nor anybody else would be able to manipulate the findings in order to portray a specific drug as performing better than it actually did.

Computer processing on a distributed basis

While major corporations have the financial capacity to install huge server systems or to pay an outsource company for the privilege of using theirs, small and medium-sized businesses frequently do not. Fear of escalating expenses may hinder them from creating innovative ways to integrate IT solutions into existing processes/transactions.

Blockchain technology really distributes transaction processing to everyone who satisfies the criteria. These people/companies are frequently referred to as miners. While the power required to process a single blockchain transaction is generally greater than that required by traditional methods (especially as blockchains become more complex), distributed processing means that businesses do not need to invest in large new server systems or pay for processing power that they may not fully require.

KEY STATISTICS FOR BLOCKCHAIN IN FINANCIAL SERVICES

You're probably wondering whether you should invest in blockchain development. Don't wait too long, because many of your peers in the financial services industry are already doing so!

According to a MarketWatch analysis, total investment in blockchain in the banking and financial services sector was $2.3 billion in 2018. According to the analysis, this spending would likely reach $17.47 billion by the end of 2025, with a CAGR of 33.6 percent from 2019 to 2025.

It is worth mentioning an important statistic here, and this one provides the best indication of possible ROI of early blockchain investment. Banks and financial organisations are investing in blockchain platforms as well as services. Market analysts believe that the services component will expand significantly. According to an Allied Market Research analysis, the market would grow at a CAGR of 76.1 percent between 2019 and 2026. This is astounding and unrivalled in almost any other industry segment.

HOW FINANCE IS BEING CHANGED BY BLOCKCHAIN

Companies may employ blockchain in a variety of crucial areas, including financial software and systems. While banks are hesitant to openly explore possible blockchain applications, a number of them have recently commissioned studies to determine where they can. Citibank, Credit Suisse, and the World Economic Forum are among them.

Payments

Blockchain technology has the potential to be used for both domestic and international fund transfers. While banks are likely to oppose using blockchain solutions on a domestic level since they have already invested considerably in old centralised solutions, such a change has the potential to benefit them greatly on a global scale.

The vast divergence between norms and regulations, as well as IT systems, between banks from country to country is why international transfers stand to benefit. While local payments can be completed in minutes to hours, cross-border transfers can take several days or more.

This is due to the banks' requirement to ensure that they are in compliance with all applicable legislation. Furthermore, many developing countries lack the IT infrastructure required to conduct the transaction faster. Customers are sometimes irritated by these poor rates because the receiver is frequently unclear of when or even if a transaction will be completed properly.

Inadequate infrastructure also poses a security risk for many transactions, as these systems are more vulnerable to cyber-attacks. These assaults have the potential to impede payments and potentially reroute funds to a third-party account.

Remittances

The data relating to how much of a developing country's total GDP is due to remittances are pretty startling. Haiti has one of the highest remittance-to-GDP ratios in the world, accounting for over 29 percent of its total GDP.

In the Philippines, it is little more than 10%, whereas in Mexico, it is 2.7 percent. When placed into context, remittances make for 0.7 percent of global GDP each year. This is a massive sum of money, estimated to be in the billions of dollars.

Historically, MTO-model corporations such as Western Union have dominated the remittance sector. Though banks do provide this service, the inherent issues of cross-border remittances, such as finding safe and secure partners where receivers may collect their funds, have made many banks sceptical of the industry.

There are currently a number of companies offering blockchain-based international transfer services. These include Abra, BitPesa, and Circle. While their ideas differ slightly, Circle, for example, focuses on social payments, while BitPesa (Africa Focused) focuses on B2B payments, both allow money to be transmitted from one individual's bank account to another.

Banks have a significant opportunity to make large sums of money managing both small and big-scale remittances. Because these transactions are used by both individuals and businesses, even a minor transaction charge of a few percent might result in a significant revenue stream.

Gateway for payments

A recent successful ICO by company Mycelium raised awareness of how blockchain could be utilised to provide next-generation payment systems. The purpose of the startup is to "connect merchants and consumers together with a blockchain card and mobile wallet."

While the notion of cryptocurrency existed long before Mycelium, the company's choice to use digital tokens as a means of facilitating wealth transfer, as well as to add a payment gateway facility, sparked tremendous interest in its ICO.

. Mycelium's business strategy, which is part of the "FinTech revolution," eliminates the need for traditional bank payment processing. Transactions are also safer and more secure because users can use the Mycelium card to pay for products and services anywhere and at any time utilising decentralised blockchain technology.

Whether they like it or not, technologies like this will compel banks to make a significant transition from traditional computer systems to blockchain-based payment gateways. Banks will need to make the changeover in the near future because traditional payment systems are also less secure.

Finance for Trade

Following the implementation of blockchain technology, the financial services industry will benefit greatly from the automation of transactions needed to trade finance. The use of smart contracts to automate approval workflows and clearing calculations will assist reduce processing times while also allowing banks to significantly reduce the number of staff required for this operation. While this is bad news for their employees, it will assist the banks by reducing the amount of errors caused by human error.

Enhancing record keeping

Trillions of bank records exist in the worldwide finance industry, ranging from personal account data to stock market transaction ledgers that record stock purchases. The vast majority of these transactions may be recorded using blockchain digital ledgers, which are immutable and hence prevent fraud.

Furthermore, the decentralised nature of the transactions would provide banks with greater control over the records. Because the other parties involved in the transaction obtain a record as well, disagreements over missing or incorrect transactions would be a thing of the past.

The process of dealing with clearance and settlement by investment banks is a perfect illustration of where blockchain technology might truly help enhance present systems. Because banks must record information of all loans and securities on their books, a large number of transactions must be documented rapidly and securely.

Already, the Australian Securities Exchange has hired Digital Asset Holdings to create a blockchain-based system for post-trade clearing and settlements. They are not alone in this. Other companies in the United States are racing to use blockchain in order to modernise their slow and frequently antiquated systems.

Identity

Blockchain technology has the potential to help banks finally solve a problem that has plagued them for years. Banks are responsible for authenticating the identities of their customers. These restrictions are in almost every country throughout the world and are intended to assist prevent fraud and money laundering.

Blockchain's cryptographic protection, which requires a secure key to access, ensures that all parties participating in a transaction are explicitly known to the ledger. This feature is vital to all financial transactions because identification is required by law.

A number of organisations are already working furiously to build blockchain technologies that will aid banks and other financial institutions in proving identity. Cambridge Blockchain and R3 are two of these companies.

THE IMPACT OF MASS ADOPTION OF BLOCKCHAIN IN FINANCIAL SERVICES ON THE REGULATORY LANDSCAPE

While blockchain has many potentially disruptive use cases in the financial services sector, governments and regulators must take a cautious approach to allow technology to reach its full potential. Because of its decentralised character, blockchain presents a challenge to central banks and governments. Bitcoin, for example, is uncontrollable by any government, posing a threat to their authority. More information can be found in the article "Blockchain and Related Legal Issues for Emerging Markets."

At the time of writing, countries all over the world are attempting to devise a practical regulatory framework for blockchain and related industries. This paradigm, for example, is rapidly evolving in the United States. Regulators in the United States are progressively providing clarity through regulatory frameworks on the usage of cryptocurrencies, but they are far behind when it comes to blockchain frameworks.

Smaller countries, such as Malta, Belarus, and Gibraltar, have already developed regulatory frameworks for blockchain-based firms. For further information, see “Blockchain and the Law: Regulations Around the World.”

It is critical to note that you must research blockchain-related rules in the country of jurisdiction of your firm in order to comply with them.

Failure to comply may result in prosecution.