Blockchain acts as a decentralized ledger where every digital transaction is verified over a network of computers without a central ledger so that the data cannot be forged. Talking about the digital world, lack of trust is there between two parties exchanging a value. To ensure the authenticity of the data that is sent & received, Blockchain Development Services are being used in the fintech industry for the instant risk-free transaction at low expenses.
Conventional financial transactions are often costly due to a high number of risks associated in the process. But with blockchain, the banking industry can achieve many benefits such as lower transaction processing time, cost savings and fraud detection. Analytics process, when combined with blockchain, adds a secured data layer, as the big data based on Blockchain is secure (without forgery) and valuable (structured for perfect analysis). The banks can now identify risky fraudulent transactions on real time to prevent the fraud instead of analysing records after fraud has occurred.
The financial industry witnesses millions of transactions worth trillions of naira every day where security, transparency, and cost-efficiency is a high priority. 45% of financial intermediaries such as payment networks, stock exchanges, and money transfer services suffer from cybercrime every year. Blockchain technology has gained tremendous adoption due to its intrinsic strengths to tackle secured transactions, the transparent and cost-efficient flow of transactions. It is the technology that started with bitcoin and other cryptocurrencies and has expanded into almost every industry. It is a protocol or a way to record transactions using complex algorithms and encryptions that results in the transactions being trusted, irrevocable, and easily available to everyone in the system. Blockchain technology has been the biggest accelerator for the transformation of financial services such as stock market, banking, asset management, and insurance.
Blockchain is the technology that creates a ledger of transactions on the internet that is secure, tamper-proof, and easily accessible. Like the internet, blockchain has no central authority instead, it is a shared record of transactions distributed over a wide network of users. It is made of a series of data blocks each of which records a patch of transactions. The blocks are allegedly chained together and locked up with advanced cryptography.
How Blockchain will change the future of the financial sector
Authenticating Identity and Value: At present trust and identity verification is done by intermediaries and incumbents. Blockchain will shift or even eliminate the trust element to the core. Know Your Customer KYC will be performed as a single digital entry across the network eliminating duplicate entries and verification. Key stakeholders that would be affected by this innovative solution are retail banking, wholesale banking, investment banking, asset managers, broker-dealers, payment networks, lending marketplaces, equity crowdfunding, regulators, and auditors.
Distribution of Value: The financial system moves trillions of Naira daily. Blockchain can be the standard going forward using smart contracts for the distribution of value be it assets, currency, bonds, diamonds, gold, silver, stocks…The distribution of value using blockchain technology will dramatically reduce cost, the speed of payment and counterparty risk as transactions get verified and cleared instantly.
Storage of Value: Banking institutions are the custodians of value (commodities, currency, financial assets) for individuals, institutions, and governments. Blockchain and payment mechanisms combined with permissioned blockchain decentralized cloud storage systems (like YottaCube.io) would be a more efficient way of storing financial assets minimising cybersecurity risks.
Exchanging Value: Financial markets facilitate trillions of Naira daily. The introduction of blockchain within this segment will reduce the transactions settlement times significantly from days and weeks to minutes and seconds.
Insuring Value and Managing Risk: Risk management is a fundamental component of the financial system. Ensuring the protection of individuals and enterprises from losses or catastrophe has been the bread and butter within the system for decades. Managing risk by using blockchain systems to better protect assets, derivatives instruments, and business property will increase transparency and efficiency.
Finance for Value: Finance activities will see a transformational shift. Moving from focusing on manual and heavy lifting transactional activities to a more finance advisory role by identifying and adding value to senior management and organization as a whole.
- Accounting: Digitalisation of the accounting system is still in its infancy compared to other industries, some of which have been massively disrupted by the advances of technology. With the introduction of blockchains and Distributed Ledger Technology (DLT) accounting activities within the finance functions will see a shift from double entry accounting to a triple entry one. Blockchain technology enables complete, conclusive veriﬁcation without a trusted party, all financial records reside in the blockchain for everyone to see and verify.
- Audit: Modern financial accounting is based on a double entry system. Double entry bookkeeping requires the trust of outsiders, independent public auditors to verify the company’s financial information. Each audit is a costly exercise, binding the company’s accountants for long time periods. The Blockchain as a source of trust can also be extremely helpful in today’s accounting structures. By using a digital fingerprint which is immutably time-stamped and tampered-proof when recording transactions in the blockchain, eventually it will remove the need for external auditors. The blockchain will bring transparency and trust so the actual network becomes the auditors and the watchdog ensuring financial integrity.
- Reconciliations: The reconciliations process is the monthly control that ensures balance sheet integrity within a finance function. The introduction of Distributed Leger Technology will enable reconciliation and payment to be performed instantly which will reduce counterparty risk, operational risk, credit risk.
- Reporting & Regulatory Requirements: The distributed ledger would represent a “single version of the truth” on all financial institutions’ reporting. All transaction data will be readily available to the trade repositories and regulators in a unified form and there will no longer be any need for time-consuming reconciliation with the use of smart contracts the quality and transparency of reported transaction data will increase and the reporting costs substantially reduced.
Cybersecurity: Hackers can shut down entire networks, tamper with data, lure unwary users into cyber-traps, steal and carry out other devious attacks by leveraging centralized repositories and single points of failure. Blockchains can increase security by blocking identity theft, preventing data tampering, and stopping Denial of Service attacks. By decentralizing and distributing the data across the entire blockchain network and cryptographically securing every transaction the financial system will become more robust.
Benefits of using Blockchain
There are quite a number of benefits for the financial services industry to be achieved by using Blockchain. Traditionally, the financial services industry is known for its legacy systems and some banks have stacks of legacy systems, some of which 30–40 years old. It is, therefore, not surprising that the financial services industry has embraced Blockchain to improve many of their out-dated systems and, along the way, save a lot of money which, not surprising, might be the main reason for them to move to the Blockchain. Using a Blockchain, banks can trade faster and cheaper and become more efficient. Some of the benefits are:
1. Instant Settlements: Transactions can be done in minutes or seconds. With Blockchain, settlements become user-optimised, which will save a significant amount of time and money, for both parties involved. Blockchain will remove the need for a lot of middle office and back-office staff at banks, as transactions settle instantly. As such, banks have an important drive to explore Blockchain for improving settlements.
2. Improve Capital Optimisation: One of the main features of Blockchain is that it removes the need for a trusted intermediary and makes peer-to-peer transactions possible. When Blockchain is applied in the financial industry, it could render useless the fee-charging intermediaries such as custodian banks (those that transfer money between different banks) or clearers (those vouching for counterparties credit positions). As such, Blockchain offers better capital optimisation, due to a, significant, reduction in operational costs for banks.
3. Reduced Counterparty Risks: When transactions are settled near instantly, it will remove a significant part of the risk that the counter party cannot meet its obligations, which could be a substantial expense for banks.
4. Improved Contractual Performance due to Smart Contracts: When banks and financial institutions are using smart contracts, it will improve contractual term performance as smart contracts execute automatically once certain pre-set conditions have been met. It is important that those smart contracts are firmly rooted in law and comply to any regulatory compliances, across jurisdictions if needed.
5. Increased Transparency: Increased transparency among financial institutions and as such improved regulatory reporting and monitoring by central banks if the regulators also have access to the blockchain.
6. Increased Financial Solutions in terms of Crisis: Increased options for financial solutions in times of crisis due to crypto or digital currencies or tokens. When the Bitfinex hack happened, the solution that they developed was compensating the customers, who all shared equally in the loss, with a tradeable Recovery Right Token (RRT).
7. Reduced Error Handling and Reconciliation: A key feature of Blockchain is that any data recorded is immutable. Any data that is recorded on a blockchain can be tracked in real-time, leaving an incredibly detailed audit trail. As such, it eliminates error handling and reconciliation.
Blockchain in the near future will revolutionize business processes in many industries especially the financial sector, but its adoption requires time and efforts. Nevertheless, soon, we can expect that governments will finally accept blockchain benefits and begin to use it for improving financial and public services. People will get more experience and knowledge on how to use this technology. Blockchain will stimulate people to acquire new skills, while traditional business will have to completely reconsider their processes. The financial industry is moving towards blockchain adoption, it is an innovation that has revolutionized the global financial system and making it more secure and efficient. There are many ways in which blockchain technology is enhancing the global financial service industry. The biggest benefit of blockchain is “instant cross-borders settlements’’, it is an idea of creating a global network through blockchain that is highly cost-efficient and potentially transparent at the same time. It is driving the under cost and providing further values to the service seekers.