On the back of the recent significant growth, the cryptocurrency market is now worth trillions of dollars. Much of this success comes from all the potential uses of the underlying blockchain technology. Since blockchains were first introduced with digital currencies, it makes sense that applications of blockchain in finance would be one of its most promising uses.
A simple explanation for the blockchain is that it is a decentralized ledger that records transactions. For financial services companies, this technology can be a path to faster and cheaper transactions, automated contracts, and greater security. Although blockchain technology still has a long way to go for widespread adoption, it is already being used by quite a few financial institutions.
Uses of blockchain in the financial services industry
Here are just a few of the many uses of blockchain in the finance industry:
- Money transfer
- Transaction security added
- Automation through smart contracts
- Store customer data
Let’s take a closer look at how financial companies can implement blockchain for the above uses – and why they want to.
Money transfer: from the start with Bitcoin (CRYPTO: BTC)Blockchain technology is designed to move funds from point A to point B without a central governing body. With the development of the blockchain, they are able to make transactions much faster and cheaper.
One notable example is Ripple, a company that uses blockchain technology for RippleNet, a global payments network. RippleNet transactions are processed within five seconds and cost only a fraction of a cent.
Financial institutions that use blockchain technology can provide more efficient money transfers. These international money transfers that sometimes take hours or days can happen in a matter of seconds and without exorbitant fees.
Transaction security added: Financial companies are always targets of fraud. Digital payments, in particular, carry the risk of information being stolen during the transaction process when it passes through payment processors and banks.
The blockchain uses cryptographic algorithms to process and record blocks of transactions. This encryption can be a way for financial companies to reduce the level of risk when processing transactions.
Automation through smart contracts: The launch of the .. the launch of the .. the take off of the Ethereum (CRYPTO: ETH) The year 2015 was a huge step forward for blockchain technology. The first blockchain was to have smart contracts, which are contracts that self-execute when conditions are met.
Contracts are a huge part of the financial services industry, and companies spend a lot of time in them. A self-executing contract can make this process more efficient.
For example, an insurance company can use smart contracts to speed up the claims process. When a customer submits a claim, it will be automatically reviewed by the tokens programmed into the blockchain. If true, the smart contract and payment will be executed for the customer.
Customer data storage: Most financial companies need to perform identity verification with their clients to prevent fraud and money laundering. This takes time and money, but it is the cost of doing business.
An alternative would be to store customer data on a blockchain that many financial companies have access to. After a company goes through a Know Your Customer (KYC) process with a new customer, it will add that customer’s data to the blockchain.
Other companies can then use that KYC data instead of going through the process alone. This will also save time for the customer, who will not need to go through the KYC process for each new financial account.
The impact of blockchain on the financial services industry
With the advantages it offers, the blockchain can have a huge impact on the financial services industry. Here are the main benefits of blockchain in finance:
- It can make the payment process more efficient. Many blockchains are able to settle transactions in seconds at a cost of $0.01 or less, saving money for both the financial companies and the customers involved.
- Financial institutions can help save on international transactions. Blockchain deployments are expected to save banks $27 billion in cross-border transactions by the end of 2030.
- Since block chains provide a distributed and immutable record of transactions, financial institutions can use them for record keeping and reporting to regulators.
- Faster transaction settlements offered by blockchain technology can improve various types of financial services. Lenders will be able to finance loans more quickly, sellers will receive payments earlier, and exchanges can settle purchases and sales of securities almost instantly.
Financial companies promoting the use of blockchain
Blockchain technology is rapidly gaining acceptance in the finance industry. There are dozens of financial companies – from small companies to the biggest names in the industry – that are investing in blockchain stocks and/or promoting the use of blockchain.
Visa (NYSE: V) It is one of the largest payment processors in the world, and was also one of the first major financial companies to adopt blockchain technology. Here’s how Visa uses and develops it:
- In 2015, Visa was part of a $30 million investment in blockchain developer Chain.com.
- In 2017, Visa launched B2B Connect, which uses the blockchain for international business-to-business payments.
- I have worked with cryptocurrency exchanges to launch crypto debit and credit cards.
- Visa became the first major payment network to settle cryptocurrency transactions in March 2021.
Barclays plc (NYSE: BCS) It is a multinational bank that has conducted extensive research into blockchain technology in the field of finance. I have tested the use of smart contracts for trading derivatives such as futures and options. If exchanges start using smart contracts for derivatives, they may reduce the time it takes to create these contracts. The bank also filed for a patent in 2018 to use blockchain to simplify the know your customer process.
Along with other major banks, Barclays is an investor in Fnality, a venture to create digital versions of the US dollar and several other major currencies. Its goal is to take advantage of blockchain technology for faster and cheaper transactions.
American Express (NYSE: AXP) It is a payment network and financial institution that offers credit cards, charge cards, banking services, and loans. In recent years, it has worked to integrate blockchain into the popular Membership Rewards program.
Working with Hyperledger, American Express built its own in-house blockchain that it tested using Boxed, an online grocery delivery platform. This technology allowed the merchant to offer more points based on a variety of factors such as the product purchased or the time of day. When a customer makes a purchase that satisfies the conditions, American Express deposits them points and bills the merchant through a smart contract.
Challenges of implementing blockchain for financial companies
We have looked at the uses and advantages of blockchain in the finance industry, but there are also many challenges to implementing blockchain:
- For best results, the blockchain needs widespread adoption. This is especially true in the financial services industry where many companies work with each other and need a method that they can all use to handle transactions. To give a direct example, for banks to transfer funds using blockchain, each bank involved in the transfer needs to be certified.
- Adding to the previous challenge is the lack of interoperability between different block chains, which makes them unable to communicate with each other. To solve this problem, several interoperability-focused blockchain networks are under development, including dotted (CRYPTO: DOT) And Cosmos (CRYPTO: ATOM).
- The transition to blockchain technology can be costly and time-consuming, especially since skilled blockchain developers are in short supply. Some finance companies, particularly small businesses, may be reluctant to commit to reforming systems that are already in place.
- Blockchain data cannot be changed. Although this is an advantage of using a blockchain, it also has a disadvantage for financial companies who often need to modify stored data. To implement the blockchain, these companies will need to adjust their methodology.
- Since blockchain technology is relatively new and developing so fast, regulators have yet to catch up. Governments are more likely to put in place policies that affect the blockchain and the companies that use it.
The future of blockchain in finance
At this point, we are still in the early stages of developing and using blockchain in the financial services industry. Two of the biggest blockchain developments to look for are improvements in transaction processing and interoperability, both of which will make it more useful for financial institutions.
Previous block chains were limited in terms of transaction processing. Bitcoin can only process about three to five transactions per second, and Ethereum can currently handle about 10 to 15. That is not nearly enough to compete with major payment processors like Visa, which can handle about 1,700 transactions per second.
Newer block chains have prioritized scalability through faster transactions. One of the most prominent cryptocurrency projects in this regard Solana (CRYPTO: SOL), which has peak transaction times of 65,000 per second.
Another change we are seeing is the shift towards interoperability. Most blockchains up to this point have been stand-alone projects. However, many projects have emerged with the aim of facilitating communication between those different blockchains.
Blockchains won’t completely replace existing financial systems anytime soon. Instead, expect financial companies to use blockchain in their testing process to see its capabilities and then gradually integrate it as a complement to their existing systems.
The application of blockchain technology comes with its difficulties. Despite the challenges, hundreds of financial companies have started using it, and blockchain stocks have become a popular investment opportunity. It is clear that the industry is aware of the potential advantages and that blockchain will be an increasing part of financial services in the future.