In today’s fast-paced digital world, blockchain technology has changed everything from healthcare to managing the supply chain. The financial sector, on the other hand, has felt its ability to cause problems more than any other. Banks, payment processors, trading companies, and insurance companies are all using blockchain to make their businesses run better, keep their data safe, and find new ways to make money. This article goes into great detail about 10 ways that blockchain technology is making the financial industry better. We do this by giving real-life examples, expert opinions, and helpful tips for each part.
1. Making it easier and faster to pay
When you send money to another country, you usually have to deal with a lot of different banks, SWIFT messages, and delays in getting the money. It might take two to five business days for the payment to go through. But payment rails that use blockchain can settle transactions almost right away:
- RippleNet’s blockchain platform lets banks send real money across borders. XRP is the currency that connects the two. This speeds up settlements from minutes to seconds and lowers fees by as much as 60% compared to older systems.
- Businesses can quickly move money between accounts on J.P. Morgan’s Onyx network using its JPM Coin. This makes it easier to keep track of money and lowers the risk of working with the wrong person.
- Tokenizing fiat currencies on permissioned blockchains can help banks and other financial institutions speed up the process of matching up transactions and make everything clear from the beginning to the end. Customers are happier, and the business grows as a result.
2. Making security stronger and less likely to fail
Every year, financial fraud costs the world economy billions of dollars. More and more people are stealing other people’s identities, taking over their accounts, and using their money to commit fraud. Blockchain is very safe because it can’t be changed, it’s decentralized, and it uses cryptography to keep data safe.
- You can’t change or delete a transaction once it’s been added to a ledger that can’t be changed. This makes it much less likely that someone will mess with it.
- With a multi-signature wallet, you need more than one private key to sign off on transactions. This stops transfers that aren’t allowed and points of failure that are too easy to find.
- Organizations can be sure that transactions are real without giving away any personal information thanks to zero-knowledge proofs. This keeps things private but still lets audits happen.
- Two of the biggest banks that have tried using blockchain-based KYC (Know Your Customer) and AML (Anti-Money Laundering) platforms to safely share verified customer information are HSBC and BNP Paribas. This has lowered the cost of compliance by up to 30%.
3. Making it easier to get money for business
There is a lot of paperwork, systems that don’t work together, and a high risk of fraud in global trade finance. Blockchain fixes these problems by making trade documents into digital files and letting smart contracts do their jobs:
- We.Trade is a consortium platform that makes trading easier by using IBM’s Hyperledger Fabric and smart contracts. These contracts let payments go through as long as certain conditions are met. This cuts processing times from weeks to days.
- Marco Polo helps exporters and importers lower their risk in real time by turning their debts and receivables into tokens. This is good for the cash flow of both sides.
The end result is that everyone can check their work right away, make fewer mistakes by hand, and have one source of truth that they can trust.
4. Decentralized finance (DeFi) makes it easier for everyone to get money
Decentralized finance (DeFi) platforms use blockchain protocols to create financial tools like lending, borrowing, and derivatives without the need for middlemen.
- People don’t have to ask Aave, Compound, or MakerDAO for permission to use crypto as collateral to borrow money or earn interest. The amount of something and how much people want it automatically set the interest rates.
- Tokenized equity offerings let startups sell small pieces of ownership directly to regular investors on sites like Securitize and Polymath. This helps them get past the people who control venture capital.
People in developing countries who haven’t been able to borrow money or invest before can now do so thanks to this change. This will help the world be more open to money.
5. Changing the way assets are turned into tokens
You can make digital tokens out of almost anything, including real estate and art. This makes it a lot easier to trade them.
- RealT gives out ERC-20 tokens that are worth real estate in the U.S. Investors can make money from rent depending on how much property they own.
- tZERO is a security token exchange that lets you buy and sell tokenized shares of private equity and venture capital deals. This lets people trade these shares again, and it only takes a few minutes to settle instead of weeks.
Tokenizing assets makes it easier for people to invest, splits ownership into smaller parts, and gives traditional banks access to new markets and ways to make money.
6. Making clearing and settlement more open
In the old way of clearing and settling trades in securities, there are a lot of people in the middle. Some of these are clearinghouses, custodians, and central counterparties (CCPs). It takes more time and money to do each one. There is only one clear ledger that uses blockchain:
- The Australian Securities Exchange (ASX) moved from its CHESS clearing system to a distributed ledger platform in the hopes of saving more than AUD 50 million a year.
- DTCC’s Project Ion is looking into how blockchain could speed up and simplify post-trade processes in the U.S. stock markets. The goal is to cut the settlement cycle from T+2 to real time.
By making reconciliation easier and cutting down on the need for manual work, institutions can lower counterparty risk and operating costs.
7. Making it easier to report and follow the rules
Regulators all over the world want to know about every transaction in detail and in real time so they can find market abuse and systemic risk. It’s easier to follow the rules with blockchain’s unchangeable audit trail:
- The European Investment Bank (EIB) made RegChain. It uses DLT to issue bonds and smart contracts that send reports to regulators on their own.
- The Bank of Canada and the Monetary Authority of Singapore (MAS) worked together on Project Jasper-Ubin to find out how CBDCs can work together across borders while making sure they follow the rules with built-in monitoring tools.
Institutions can make regulatory reports in real time, cut down on paperwork, and be better ready for audits, all while keeping data private.
8. Save money by cutting out the middleman
Banks that act as correspondents, clearinghouses, and settlement agents are all middlemen in financial transactions, and they charge a lot of money. With blockchain, these middlemen are no longer necessary:
- Borrowers and lenders can talk to each other directly on ETHLend and other peer-to-peer lending sites, so brokers aren’t needed.
- Smart bond platforms use blockchain to issue, manage, and redeem corporate debt without having to pay custodial fees. This saves issuers 20% to 30%.
Companies that are willing to use DLT (Distributed Ledger Technology) can give customers better rates and make more money.
9. Setting the rules for Central Bank Digital Currencies (CBDCs)
Central banks all over the world are looking into or testing digital currencies to improve their payment systems and monetary policy.
- The Bahamas’ Sand Dollar became the first fully functional CBDC in the world in 2020. It helped people on islands far away get cash.
- To make things clearer and less dependent on private payment apps, the People’s Bank of China has started using its e-CNY in big cities.
- The European Central Bank and the Federal Reserve are still looking into the idea of a digital euro and a digital dollar. These could change the way people talk about money policy and how money moves between countries.
CBDCs promise money that can be programmed, faster payments between countries, and more ways to get financial help. But they also make people worry about their safety and privacy.
10. Making new kinds of insurance work
Insurance is all about sharing risks and getting claims paid as soon as possible. Blockchain-based parametric insurance automatically pays out when certain objective data triggers happen.
- Etherisc sells hurricane insurance that automatically pays out when weather stations say the wind speed has gone above a certain level.
- AXA’s Fizzy platform used Ethereum smart contracts to sell insurance that would pay out if your flight was delayed. It took care of claims and gave out money on its own, without any help from people.
The end result is that claims are handled faster, the company saves money, and customers have more faith in them.
The End
Blockchain technology isn’t just a buzzword; it’s a whole new way to think about, give, and run financial services. DLT is changing the way money works in many ways. For example, it lets payments happen in real time, stops fraud, tokenizes assets, and creates decentralized finance (DeFi) and central bank digital currencies (CBDCs). Companies that use these new tools will save a lot of money, get more done, and keep their customers coming back. You might not be able to do anything useful if you don’t.
Questions People Ask a Lot (FAQs)
Question 1: What is blockchain, in reality?
A blockchain is a kind of distributed ledger technology that connects blocks of transactions that can’t be changed with cryptographic hashes. Every node has a copy of the ledger, which keeps it safe and easy to read.
Q2: How does blockchain improve security?
Blockchain uses cryptography, decentralization, and consensus mechanisms to make sure that people can’t change data without permission. You would need to control most of the network’s computing power to change a block after it has been checked and added.
Q3: Do you have to use cryptocurrencies to make blockchain apps that deal with money?
Not all the time. Blockchains that need permission can change real money into tokens without having their own cryptocurrency tokens. But a lot of the time, public blockchains use tokens to get people to want to keep the network safe.
Q4: What do you mean by “intelligent contracts”?
Smart contracts are pieces of code that live on the blockchain and run on their own when certain things happen. They stop fights and cut out the middlemen.
Q5: Do the rules apply to blockchain?
Regulators are putting in a lot of effort to create frameworks. KYC/AML modules, permissioned access, and built-in monitoring tools can help platforms follow the rules that are already in place for finance.
Q6: What are some of the problems that blockchain has in finance?
One of the biggest problems is making sure networks can talk to each other. Other problems are not knowing the rules and being worried about cybersecurity. These problems are getting better thanks to ongoing research and development and efforts to standardize.
References
- “What Is Ripple? How Does XRP Work?” Investopedia. https://www.investopedia.com/terms/r/ripple.asp
- “JPM Coin: The Insider’s Guide to Overcoming Frictions in Institutional Payments,” J.P. Morgan. https://www.jpmorgan.com/insights/technology/jpm-coin
- Narayanan, A. et al., Bitcoin and Cryptocurrency Technologies, Princeton University Press, 2016.
- “Multi-signature wallets: how they work and why you need one,” Coinbase. https://www.coinbase.com/learn/crypto-basics/what-are-multisig-wallets
- Bünz, B., et al., “Bulletproofs: Short Proofs for Confidential Transactions and More,” IEEE Symposium on Security and Privacy, 2018.
- “HSBC tests blockchain for KYC to slash compliance costs,” Reuters, April 2021. https://www.reuters.com/article/hsbc-blockchain-kyc-idUSKBN2CA1B8
- “We.Trade: A Blockchain Trade Finance Platform,” IBM. https://www.ibm.com/case-studies/we-trade
- “Marco Polo Network,” TradeLens. https://www.marcopolonetwork.com
- “Aave Documentation,” https://docs.aave.com
- “Security Token Offerings: A Primer,” Securitize. https://securitize.io/security-token-offerings
