Five Ways Blockchain Technology is Reinventing Financial Services
Blockchain has the potential to transform the managing principles of money transfer systems. Blockchain, as a technology, is designed to be the foundation of a new set of applications that involve transaction and interactions recorded in the public and private domains. These transactions are recorded in an encrypted and distributed database. Distributed ledgers are built on cryptographic tools supported by distributed consensus mechanism. This was a significant innovation for records management. The distributed ledger is expressed as a tamper-evident electronic ledger for all practical purposes.The electronic ledger is shared within a network of computers. The digital ledger is accessible across the WAN and is not bound to be kept in a single place. The ledger holds a record of transactions between the participating entities. The set of transactions often called as transaction collections are stored in the data segment of a blockchain providing a meaning to the block component of the Blockchain. The blocks in turn are stored chronologically.
Blockchain as a technology was designed for sharing transaction information across interested parties. The technology holds the potential for all participants in a business network to share a system of transaction records.It is expected to be used in a variety of industries and for a variety of reasons. One such domain vertical is the banking and finance vertical. Some of the interesting and novel applications are discussed in brief here.
The Blockchain is promising. Transferring to a Blockchain system would definitely speed up services like worldwide payments,equity clearing, trade finance, and loans
Conventionally, banking and financial transactions were recorded in ledgers which later moved to centralized electronic ledgers. Reconciliation was time consuming, and an example for this is Intra bank cross-border payments. Different parties work with copies of the electronic ledger and transact through messages. The essential strength of Blockchain is the elimination of duplicate data with an improved settlement. Blockchain saves on reconciliation cost between banks and prevents losses due to documentary frauds. It can be used to facilitate payments and settlements in a range of different circumstances, offering near real-time transfer of funds and settlement time reduction.
Banks are conscious of data quality. On a conventional platform transactional data resides in duplicate locations. Interested parties with malicious motive move in for altering the stored data. This can be avoided with Blockchain. A mutual contract struck between any set of transacting entities in the blockchain network is generally termed as a transaction. Blockchain helps in managing the transactional data quality. With Blockchain, the transactions get validated and distributed based on smart contracts. They are fragments of software that spread block chains’ value from a record of financial operations entries to automatically applying terms of multi-party agreements. Each transaction or contract between two or more members in the network requires verification or validation by the network. Validated generic Blockchain transactions are called smart contracts. Smart contracts are embedded in Blockchain networks. These are commonly agreed on terms between parties which automatically execute once conditions are met.
Smart contracts built on electronic ledgers open up a new dimension of financial supply chain transactions. This is another interesting domain of the application area. The smart contracts can be useful for tracking the letters of credit, bills of lading etc. along the financial supply chain downstream and up-stream. Bitcoin technology helps in increased reporting of financial supply chain transactional data.
The conventional banking processes are usually linear, similar to the assembly line of the manufacturing industry, for example,the maker-checker/cross check/approval processes. The purpose of the maker-checker process is to help the banks and financial Institutions to emphasize control leading to decisions.This hierarchical decision process, leads to delays in decision-making, leading to longer processing time. Blockchain simplifies the decision making process, with distributed ledgers.
The Blockchain is promising. Transferring to a Blockchain system would definitely speed up services like worldwide payments, equity clearing, trade finance, and loans.