Blockchain is one of the most important innovations over the past decades. One would say it promises the same level of disruption that Uber brought to private transportation and AirBnB brought to the hospitality industry. A lot has been said about the promises that blockchain brings, particularly in the area of finance and investing.
Blockchain provides a way for untrusted parties to agree on the state of a database, without any middleman, by providing a trusted ledger that doesn’t require administration by a third party, blockchain could be used to provide certain financial services like payments or identity verification without a trusted third party, like a bank. Also, blockchain allows for the use of tools like “smart contracts,” which potentially automates manual processes, — from clearing and claims processing to tokenising commodities.
Some of the applications of blockchain in finance and investing that can cause this revolution, include:
Currently, facilitating payments is very profitable for banks, and it provides very little incentive for them to lower fees. From local bank transfers to cross-border remittances and even letters of credit generate a sizeable part of revenues of banks.
Cryptocurrencies like Bitcoin, Ethereum or Ripple are built on public blockchains where anyone can use them to send and receive value, without a trusted 3rd party. The speed of these transfers could be as fast as seconds, or in dire cases of network congestion, take up to 16 hours — as experienced during the December 2017 price hike. This still presents a better solution to the current ACH system used in most developed countries in the world today. While developers are still working to further optimise the number of transactions per second many blockchains can process, blockchain companies like Bitpay & Fliqpay enable merchants accept cryptocurrencies as a mode of payments at cheaper and faster rates.
Most traded assets are difficult to transfer or subdivide. Buyers and sellers trade paper that represents all of, or a portion of, the asset. They also have to trust third parties to verify the authenticity of these assets, which could be complex, inefficient and can be hard to track. One solution would be ‘Tokenisation’ — the ‘slicing up’ and ‘digitisation’ of assets. This would give investors far easier access to a larger range of asset classes. Commodities, Stocks and other financial assets could be tokenised and traded easily on exchanges.
Faster clearing & settlement
Legacy structures existing for clearing & settlement houses in finance often don’t receive the innovation that they deserve. Thus, the structure hasn’t changed much in decades and, as a result, it hasn’t kept pace with technology. The clearing process is slow. Trades still take up to 48 hours to settle and clear. This introduces an element of risk into the system. The process is also manual and relatively inefficient, with different layers of communication still happening (often by phone) between the clearinghouse and other counter-parties involved.
The use of blockchain has been estimated by Accenture to have the potential to save as much as $10 billion.
With the application of smart contracts, the transparency of transaction data on the blockchain will enable near-instantaneous settlement of trades. This would also make transactions easier to audit and ensure that all parties involved in transactions have fair and equal access to information.
Traditionally, new businesses have to target Venture Capitals, Angel Investors, or even banks. Initial Public Offerings (IPOs) via a stock exchange also came about. However, IPOs are a more advantageous route for self-established businesses. Nearly all these forms of fundraising are infested with many intermediaries including exchange operators, investment bankers, lawyers, auditors and crowd-funding platforms. These often take some time to be complete.
Blockchain technology is transforming this by allowing businesses in spite of size, to raise funds on a peer-to-peer platform through Initial Coin Offerings (ICOs). The startup industry is already under transformation by this new funding mechanism.
The article in this link touches more on this subject.
Know Your Customer procedures are a major pain point for all financial institutions according to Thomson Reuters 2017 KYC report, with the costs ranging in tens of millions of dollars. While there is an emergence of id-techs, such as Shufti Pro, Onfido and others, blockchain could allow for a wider and readily accessible database that all organisations worldwide can use to verify identities, without duplication. This would serve to further reduce the costs.
Blockchain has the potential to reduce costs, accelerate administrative processes and increase trust in financial transactions. To ensure worldwide adoption it needs to surmount the hurdles of legacy systems and regulations.
This article is in partnership with Quidax. Quidax is a European based digital assets exchange with a focus on Africa. We provide a seamless platform for users to send, receive, buy and sell cryptocurrencies using their local currencies.