The Impact of Blockchain Technology on Finance

Photo by Karolina Grabowska

Blockchain is altering everything from financial transactions to how money is raised in the private sector. It is also known as digital ledger or cryptographic ledger.

Finance is one of the thriving industries. This industry sees millions of transactions worth trillions of dollars every day. The transactions must prioritise security, transparency, and cost-efficiency. However, every year, financial intermediaries such as payment networks, stock exchanges, and numerous money transfer services are attacked by cybercriminals. To address this issue, numerous organisations are incorporating cryptographic ledger technology into their day-to-day finance operations.

This new technology has the potential to transform the whole economy, and it is already having a huge impact on global financial services. Some technical advances have been made in recent years to help ease the processes and speed the rate at which financial transactions are conducted. Blockchain has stood the test of time and is here to stay.

A digital ledger could provide specific financial services such as payments or securitization by providing a ledger that no one manages. Without the use of a mediator, this ledger allows untrusted parties to agree on the status of a database. 

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Traditional finance systems have a centralised database with a single point of contact. Blockchain technology, on the other hand, enables a distributed database with an ever-increasing number of records. Rather than existing in a single location, the ledger is constantly updated and synchronised across several computers in a network. As a result, every network participant with the appropriate authorisation can read the complete ledger without relying on an intermediary or any single authority. 

Each transaction is chronologically kept in a block, and each block is linked to the one before and after it. To ensure data integrity and security, all network participants must validate each transaction using agreed-upon mathematical formulas known as consensus procedures, and cryptography is used to secure each block.

Furthermore, blockchain enables the use of technologies such as “smart contracts,” which are programmes that are recorded on a digital ledger and run when certain criteria are satisfied. They are frequently used to automate the implementation of an agreement so that all participants know the outcome immediately, with no intermediary involvement or time wasted. They can also automate a workflow, triggering the next operation when certain conditions are met.

Digital ledger enables cryptocurrency to exist (among other things). It includes currency values such as Bitcoin, Dogecoin, and many other currencies that are strong, anonymous, and available to anyone who needs to use them.

Bitcoin is the most well-known cryptocurrency. A cryptocurrency, like the US dollar/Yuan/Naira/Cedis, is a digital medium of exchange that uses encryption techniques to regulate the creation of monetary units and to authenticate fund transfers.

The first digital ledger prototype was created in the early 1990s by computer scientist Stuart Haber, mathematician Dave Bayer, and physicist W. Scott Stornetta, who used cryptographic techniques (used to ensure data secrecy and integrity) in a chain of blocks to protect digital documents from data manipulation. These and other incredible contributions resulted in the creation of Bitcoin, the first decentralised digital currency system.

They were initially known as “cyber currencies” and gained popularity after the introduction of Bitcoin in 2008. Cryptocurrencies have grown in acceptance and prominence in recent years, with more people investing in them. The continued demand for this currency, combined with its limited supply, has caused it to experience continuous price increments as it continues to gain trust among users.

There are more than 1,000 different cryptocurrencies in circulation, and the number keeps growing. Bitcoin is popularly tagged a the first cryptocurrency, while other individual cryptocurrencies are referred to as “altcoins” (a word gotten from “alternative coin”). It’s difficult to say which cryptos are the best, but Bitcoin and some of the largest altcoins are top-tier options due to their scalability, privacy, and the breadth of functionality they support.

Collaborative technology, such as blockchain, promises to improve business processes between companies while drastically lowering the “cost of trust.” As a result, it may provide significantly higher returns on investment dollars than most traditional internal investments.

Financial institutions are looking into how this technology might be used to disrupt everything from clearing and settlement to insurance.

These technology principles represent a promising future for financial organisations. Among them are:

Provision of a secure platform– One of the most pressing issues confronting most financial institutions is the need for a secure platform. Most transactions and other work have now been digitised, and most banks and other affiliated companies are looking for a secure platform that is free of errors or defects. Furthermore, there is a significant increase in the demand for a network that can effectively combat data breach issues, and thus we have blockchain. This platform works by time-stampeding all information or data on it. This ensures complete safety. The implementation of licensed digital ledger networks improves security even further.

Money transfers: Since its inception with Bitcoin, blockchain technology has been designed to transfer funds from point A to point B without the need for a central governing body. This technology has evolved to allow for much faster and less expensive transactions. Financial institutions that use this technology may be able to provide more efficient money transfers. International money transfers, which can sometimes take hours or days, can now be completed in a matter of seconds with no fees.

Automation via smart contracts: The introduction of Ethereum in 2015 was a significant step forward for blockchain technology. It was the first digital ledger to use smart contracts, which are contracts that execute automatically when certain conditions are met.

Contracts are an important part of the financial services industry, and companies devote a lot of time to them. A self-executing contract could greatly improve the efficiency of this process.

An insurance company, for example, could use smart contracts to expedite the claims process. When a client submits a claim, the codes programmed into this ledger will automatically review it. If it is valid, the smart contract will be executed and the client will be paid.

Readily Available Capital, and Lower Business Costs.

Blockchain through consensus mechanisms and smart contracts can reduce the amount of time capital is tied up for a transaction, instead triggering an automatic transfer of funds based on an agreed-upon set of conditions. It will also reduce transaction fees by reducing reliance on third parties, and it will likely free up capital flows as managed fund purchases move to real-time.

KYC Guidelines

The Know-Your-Customer Regulation is a critical policy that all financial institutions must follow. The KYC regulation was implemented to reduce financial crimes and money laundering activities by requiring banks and other financial institutions to identify their customers. 

With the widespread adoption of blockchain technology, each customer’s identity can be verified independently, providing real-time clarity and accuracy. Each customer’s identity can be made available to other financial institutions because it has already been confirmed on the digital ledger network. A digital ledger can serve as a master file of customer data, including contact information, transactions, third-party credit ratings, and more.

This process save financial institutions money and keeps customers from having to go through the KYC process with each financial institution.

Product/Service Administration

Blockchain is equipped with a continuously updated master file of products and services, which can enable supply chain participants to work from the same source of truth. For example, as retailers expand their personalised product offerings, digital ledger is being used to provide reliable, accurate visibility into an increasingly complex inventory. This visibility may also improve SKU forecasting, assisting businesses in reducing lost sales due to out-of-stock products and minimising write-offs due to over-ordering.

Customer Care

Smart contracts can assist in dealing with exceptions and reducing the number of disputes. For example, if a customer places an order for 15 products but gets an incomplete delivery, blockchain transparency would alert all parties to the situation, and a smart contract could trigger automatic payment in the appropriate amount. It reduces dispute levels as all involved can trace the root of the error.

Fund Raising

Raising funds through venture capital is a difficult process. Entrepreneurs build decks, attend countless meetings with partners, and endure lengthy negotiations over equity and valuation in the hopes of exchanging some portion of their company for a check.

In contrast, some businesses are raising funds through initial coin offerings (ICOs), which are powered by public digital ledgers such as Ethereum and Bitcoin.

Tokens, or coins, are sold in exchange for funding during an ICO (often denominated in bitcoin or ether). In theory, the token’s value is linked to the success of the digital ledger company.

Blockchain will undoubtedly have a significant impact on the finance function, and most organisations will gradually adopt the technology as they envision a new financial operating model. Based on the transaction volume in the financial system, cryptographic ledger technology has the potential to fill the gap in security and transparency in daily transactions. The financial system is credible because every transaction is completed quickly and transparently.

Blockchain has the potential to be the technology that will dominate financial services in the future.

Keywords: blockchain, finance, transaction, technology, crypto, digital, currency

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