Blockchain – a disruptive innovation in FinTech

Of Srinivas L

The financial system worldwide serves billions of people and facilitates transactions worth trillions of dollars every day. But the behemoth system has a list of problems to deal with for years without respite. To name a few: redundant paperwork, settlement delays, transaction fees, lack of security against fraud and the constant increase in regulatory costs, which remain a pain point for bankers. Ultimately, all of this affects consumers who have to bear the brunt of the climbing costs.

Blockchain technology, stuck with its archaic methods for too long, came in as a breath of fresh air to bring about a much-needed change in the financial sector. What began during the 2008 global financial crisis as Bitcoin’s operational backbone, blockchain’s distributed ledger technology (DLT) plays a catalytic role in providing safety and security as data is transferred and cataloged.

Still young and new, blockchain technology is a game-changing innovation that has the potential to completely transform the financial sector.

Blockchain is here to change the world of finance

Here are some of the ways blockchain could change the financial system:

– Blockchain applications are relatively cost-effective. It provides real-time transaction data, which means a lot in the financial world.

– Blockchain technology can significantly reduce the cost of issuing digital payments by removing the third-party verification required during transactions and eliminating the transaction fee charged by financial institutions.

– Bank transactions are monitored by a central authority. But blockchain relies on the collective approval of all participating nodes to process a transaction. A semi-permissive implementation can democratize the existing system to adopt innovation while providing regulatory oversight. DLT solves many problems affecting the financial industry today, such as lack of security and inefficiency.

– Blockchain enables an immediate and direct settlement of transactions. It is estimated that banks will save huge sums annually on settlement fees and other costs associated with it by adopting blockchain technology.

– In a stock exchange, to complete a transaction, the parties involved are brokers, banks, central securities firms and clearing houses, which make purchases and sales of securities. This takes too much time and is vulnerable to inaccuracy and fraud due to the many parties involved during the transaction. Blockchain can reduce the dependency of intermediaries and brokers, saving huge amounts of processing costs.

– During a stock trade, smart contracts, known to be blockchain’s most impactful application, eliminate potential cases of fraud by adding layers of security.

– Blockchain also enables financial companies to tokenize assets such as stocks and bonds, etc., which allows them to streamline online transactions.

– Trade finance, which traditionally requires a lot of paperwork, involves intermediaries to update and manage the ledger. Typically, a ledger can be viewed and updated by all parties involved in a single international trade. But by using blockchain technology in trade finance, processes can be streamlined, eliminating the drudgery of irrelevant paperwork and potential problems caused by red tape.

– Blockchain technology makes international money transfers time-efficient and affordable. As a global ledger, blockchain is not limited by international borders and does not need intermediaries to complete a transaction.

– Blockchain can also help auditors reduce processing time and costs by enabling automatic validation of the vital data of financial accounts. It also simplifies verifying the integrity of electronic files.

Blockchain can enable the true transformation of the financial services industry.

For example, using traditional methods, companies looking for funding approach angel investors initially and then venture capitalists before finally engaging in an initial public offering (IPO) on a stock exchange. This process includes several intermediaries, such as auditors, lawyers, investment banks, crowdfunding platforms, stock exchange operators, etc.

Blockchain completely changes this equation by enabling companies, regardless of size, to raise funding using peer-to-peer methods via what are called initial coin offerings (ICOs).

The radical transformation of the venture capital world is just a small indication of what blockchain technology is capable of. Blockchain as a technology is not a threat to financial institutions, but a new paradigm ready to revolutionize the entire financial sector. What remains to be seen is who will lead the revolution.

The author is CEO and CTO, Rooba.Finance

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