The What, Why, and How of Blockchain in Finance

While not all CFOs view blockchain adoption as their #1 task, Gartner expects this technology to be a crucial part of the BFSI sector by 2025. The unprecedented changes affecting the world of finances leave no space for hesitation. To be ready for the future and whatever challenges it has in store, companies must start introducing innovation right here, right now.

For that reason, blockchain technology's flexibility, transparency, and security are gaining traction and are worth exploring by any leader wishing to secure their success in the future.

What is the role of blockchain in finance?

Blockchain technology is based on a relatively simple concept. It's a non-centralized database shared across a massive network of computers, also known as nodes. Blockchain stores information in blocks strung together into a chain of data (hence the name). It’s a rather stark contrast to more traditional ways of data storage, such as tables. Another difference is that once blockchain data is added, it becomes an immutable part of a timeline.

While its decentralized structure and immutable recordkeeping made blockchain perfect for the cryptocurrency sector, there is more to blockchain than Bitcoin transactions.

As rapid digitization makes paper-reliant approaches less convenient, blockchain technology can help financial organizations abandon bureaucracy and move to a new level of efficiency, safety, and cost-effectiveness.

Benefits of blockchain in finance

Security

There is a common assumption that hackers and phishers are more likely to attack small companies than large corporations. However, the cases of giants like Facebook, Marriott, and even Microsoft show that the size of their target doesn't dissuade hackers. Quite on the contrary, they’re emboldened by it.

This is why cybersecurity remains one of the biggest concerns of CFOs and CIOs across the BFSI, prompting them to expand their safety measures beyond firewalls and antimalware programs.

How can blockchain fintech solutions help with protecting company data?

• Decentralized database
  To hackers, stealing data is like carjacking. They get their hands on the entire database. They sell it on the darknet. They move on to their next target. Therefore, no matter how many firewalls and defenses companies put up, one successful hacking attempt is all it takes to lose valuable data, reputation, and money. Blockchain sabotages hackers' efforts by removing the main vulnerability — a centralized database. Instead, it replaces it with encrypted data, scattered across multiple nodes.

Even if hackers break into one of the nodes, they would only get an encrypted data block for their efforts, which is worth nothing without the rest of the database. To continue with the carjacker analogy, the thieves break into the garage expecting to steal a car, but all they find is a steering wheel. They can keep collecting car parts in hopes to assemble a car — or they can quit and do something more rewarding.

• Data hashing
  To further prevent data hacking, each block of the data chain is protected by hashing – a special code that converts data into a fixed value i.e. unique string of numbers.

Unlike encryption which can be deciphered and tampered with if a third party gets their hands on the key, hashing is a one-way transformation that instantly notifies users whenever there is an attempt to modify the contents of the block. Hashing makes blockchain data more resistant to hacking and ensures immutable recordkeeping.

• Improved privacy
  Another safety point worth mentioning is transparency and privacy of document processing. Blockchain-based ledgers are accessible only by participants with special permission, preventing any third parties from compromising the business. This feature is particularly relieving for trading participants who expect full clarity and safety guarantees.
  
  
• Regulatory compliance
  Blockchain technology helps companies provide solid proof of compliance. For instance, time-stamped recordkeeping provides regulators with solid data audits for compliance verification. Also, blockchain enables regulators to be more proactive, granting them real-time read-only access to the company’s permissioned blockchain. With regulators engaged as participants, companies can optimize the financial and time resources necessary for audit reporting while staying compliant with all required regulations.

While cybercriminals are constantly coming up with new ways to access data, innovation-driven blockchain technology is capable of preventing most modern security threats and ensures safe, responsible, and regulated data processing.

Bureaucracy-free environment

Blockchain’s ability to slice through inefficiency and streamline financial operations makes it great for all areas of financial services.

• Simplified trading processes
  Traditional trading required every participant to collect an individual database containing all the documents related to their current trading operation. In the course of trading, these documents would be exchanged between the participants and expanded according to the trade progress. In addition to generating vast amounts of paperwork, this procedure also generates vast amounts of frustration due to constant duplicates and setbacks. Implementing blockchain in finance curbs bureaucracy, replacing a paper mountain of invoices and shipment documents with just one digital ledger. This ledger keeps track of the trade and is available to all participants, ensuring they all are on the same page regarding trade progress.
  
  
• Back-and-forth transactions
  For many entities and people, cross-border payments meant standing in long lines in the bank, filling out several forms, and waiting for at least five days for the money to arrive. However, the use of blockchain technology in finances managed to break this vicious cycle, introducing clients to faster and safer transactions across the globe. According to Deloitte, companies connected to a blockchain-based platform were able to complete their transactions in three hours, with considerably fewer delays and errors compared to paper-based systems.
  
  
  
  
• Single source of truth
  Reconciliation of data between buyers and suppliers, intracompany data silos often disrupt decision-making. When there isn't enough data or not enough confirmed data, leaders can't get a clear picture of their transactions, so they struggle with outlining future steps and optimizing their relationships with suppliers. Blockchain fintech solutions are capable of facilitating both external and internal company processes by building a solid chain of immutable and confirmed data that is regularly updated and evenly distributed across all systems and departments. With no vital information withheld or missed out, C-level executives have all the data to move forward with decision-making and invest in projects that are guaranteed to pay off.

To put it simply, blockchain thrives in every paper-cluttered industry, removing piles of paperwork and replacing them with fresh and dynamic data that can fuel the company’s processes and accelerate its growth.

Cost efficiency

This advantage stems directly from blockchain’s ability to cut through the bureaucracy, skipping extra steps and focusing on the most important matters. However, there are also more cost-reducing benefits worth mentioning.

• Reduced IT costs
  Supporting an IT department, complete with maintenance expenditures, and hiring more IT experts to keep the expanding network running takes up a large chunk of a company's budget. This leads to CFOs being more reluctant to try new solutions or implement new technologies to preserve their OpEx and CapEx balance. Providing a single string of data across multiple systems, the blockchain-based digital ledger helps companies cut operating and IT expenses. According to PwC, using blockchain in finance can save institutions around $20 billion per year on infrastructure. Additionally, blockchain fintech solutions allow financial institutions to finally let go of cumbersome and outdated legacy systems, freeing more resources and opportunities for improving their tech assets.
  
  
• Budget-friendly operations
  A simplified and consistent data structure brought by blockchain fintech solutions lets companies save up on a number of expensive operations. For instance, post-trade settlement is a rather costly procedure. However, using blockchain for finance procedures like these employees can complete reconciliations and settlements in fewer steps at a lower cost. Given that not all financial and business institutions have regained their footing since 2020, blockchain fintech solutions can be useful for expenditure optimization.
  
  
  

• Increased value
  As digitalization and automation become the future of the BFSI sector and many other areas, manual tasks are logically becoming the way of the past. As blockchain in finance covers processes that used to be handled manually, employees get more time to work on more complicated, value-building tasks. Such features as automated report generation and improved data lineage also ensure better navigation through the business landscape, helping companies avoid pitfalls and make the most relevant decisions. This way, adopting blockchain for finance delivers a revenue boost, while reducing expenses.
  

Compared to more traditional on-premise solutions, blockchain is a guaranteed return on investment, allowing leaders to save money on various financial operations and employee management. At the same time, using blockchain in finance opens the door to numerous opportunities.

Blockchain in finance: use cases

Smart contracts

Smart contracts are the most illustrative example of how blockchain in finance can help companies automate their processes. A smart contract is a codified set of rules that operates on an "if-then" logic. Smart contracts are designed to set the deal into motion once certain conditions, indicated in the rules, are met by all participating sides.

For example, if a smart contract oversees that the payment should be made after the shipment arrives on a specified date and at a specified time, the routine is the following:

1. The shipment arrives within the agreed time period.
2. The smart contract receives a notification that the condition has been fulfilled.
3. The smart contract automatically initiates the payment process.

Smart contracts can be adapted to various procedures, from triggering transactions to service delivery. Their adaptive and flexible nature makes them ideal for banking, trading, and insurance. For instance, Arbol, a fintech company, uses smart contracts for more accurate weather and climate coverage for its clients. Other companies, like Insurwave, found smart contracts to greatly improve their operational efficiency by simplifying and streamlining the transactional process and claims assessments.

Blockchain KYC

Know Your Client (KYC) systems are one of those banking aspects where financial institution leaders find themselves torn between convenience and safety. A traditional KYC system consists of multiple verification steps, obligating clients to provide many documents (ID, credit card information, etc.) to the bank whenever they need to initiate an operation.

While the repetitiveness of these procedures is already enough to increase customer frustration, long waiting times, connectivity issues, and simple human error add up to a bad experience. In the end, potential clients are reluctant to interact with banks — and more likely to switch to an institution offering better client service.

On the one hand, as vexing as KYC systems can be, their design follows a greater purpose — fraud prevention. On the other hand, modern customers vote with their feet, prompting financial leaders to look for the right convenience/safety balance.

The use of blockchain in finance provided solutions that appealed to both financial leaders and clients by introducing new, improved KYC systems. Compared to traditional ones, a blockchain-based KYC doesn't require multiple verification procedures. A client only needs to create a profile once. After this, their data will be safely shared with the bank they want to work with.

Whenever a customer initiates a procedure, their profile will be updated accordingly, helping them keep track of their transactions. Blockchain-based KYC systems also offer configurable privacy settings, letting clients control access to their data.

Fund investment

Nobody likes to be not in control, especially when their money is at stake. This situation is particularly accurate for investors. Since 2020, investors have been demonstrating a growing need for clarity and transparency. They have also become less eager to join hedge funds. Doing so would result in them putting their trust and finances in the hands of a fund manager, who might keep them in the dark about potential operations, transactions, and ROI. As hedge funds aren't legally obligated to disclose such information to investors, there is no way for the latter to secure transparency.

The intervention of blockchain in finance allows putting end to the investors’ concerns by giving them all the control. Blockchain-based funds are platforms where investors can instantly access all necessary data on their progress, invest or withdraw their money, make decisions and evaluate the situation on the market.

This is exactly the transparency that modern investors are searching for, which is why PwC observed at least 38% of hedge funds investing in digital assets.

Blockchain’s impact on global payments

Just a decade ago, SWIFT was considered to be the best thing that could happen to the banking industry. This system has connected over 11,000 financial organizations across 200 countries, building a solid foundation for economic growth and shaping international financial relations.

Nowadays, the pressure of ever-growing and shifting customer expectations exposes SWIFT as an outdated, cumbersome, and high-maintenance system. Naturally, it doesn't mean that SWIFT is going anywhere soon. Nevertheless, the growing presence of blockchain in finances is slowly taking over by countering SWIFT-related pain points with its solutions.

• Instant transactions
  Blockchain makes global transactions a matter of hours rather than days, expanding the number of operations a company can execute within a day. Many blockchain platforms wrap up cross-border payments within 25 minutes.
  
  
• Reduced fees
  A transaction fee is a cut taken by both the sending bank and the receiving bank to verify the procedure. Since blockchain-based P2P transactions are based on disintermediation, clients pay a considerably lower fee (ranging between $0 to $30) since there is no third party to charge customers for transaction verification.
  
  
• Anti-fraud mechanisms
  As an archaic system, SWIFT is particularly vulnerable to fraud. Its less-than-robust encryption system and exploitable flaws make it a welcome target for scammers. One of the most well-known examples is the Bangladesh Bank fraud of 2016, when criminals managed to steal $81 million by altering the SWIFT software on the bank's computers, hiding all traces of transaction fraud. Blockchain data is recorded immutably, making it impossible to alter. In addition, if there is something wrong with the payment process, the system doesn't proceed with the transfer, and both parties receive a notification.
  
  

These benefits make blockchain a viable alternative to SWIFT. Implementing blockchain in finance offers more control to clients, grants them more visibility and provides greater financial inclusion, enabling more people to send cross-border payments for acceptable fees. For that reason, adopting blockchain for finance at a large scale is expected to completely transform the approach to transactions in the future, allowing for a better, safer, and people-centered experience.

Blockchain’s impact on banking and lending

Using blockchain technology in finance innovation resulted in the birth of the brand new approach to banking and lending known as DeFi (decentralized finance). That change marks a new era of intermediary-free banking and lending operations.

With their value going up to $200 billion by 2022, DeFi systems have been making a powerful impact on banking and lending areas, empowering them with a number of innovations.

The potential for disruption is immense. While banking has been more active in harnessing the possibilities delivered by blockchain, the blockchain-based transformation of the lending process is still a work in progress. However, with startups like Bloom productizing innovative ideas, we’re guaranteed to witness revolutionary lending projects in the future.

Companies using blockchain in finance

Overall, blockchain can be applied to a wide range of industries – from healthcare to real estate. But it’s the BFSI sector that was the trailblazer in adopting blockchain technology for various operational needs. Many banks using blockchain started doing it back in 2016 when multiple organizations were still hesitant about embracing the technology. By 2022, the implementation of blockchain in finances has gone beyond banking, taking root in insurance, trade and various financial service areas.

The massive shift of influential industrial figures to blockchain drives the point home — blockchain belongs in finances. It’s here to stay.

The future of blockchain in financial services

So, is the future of blockchain clear? Is blockchain the future? Or are there pitfalls that stand in its way?

Indeed, there is a lot to discover and improve regarding blockchain — modern blockchain platforms are currently hard at work removing flaws like low scalability and high energy consumption. However, multiple companies and businesses worldwide enjoy the benefits of blockchain fintech apps right here, right now — a trend noticed by Gartner, Deloitte, and PwC. So far, they have been accurate in their prognosis. Even though many business leaders used to be on the fence about implementing blockchain in finance, they were growing more accustomed to the idea even before the major digital shift in 2020.

This tendency was observed in 2018 when at least 66% of respondents participating in Deloitte's CFO survey acknowledged that they might lose their competitive edge if they don't start adopting blockchain for finance. Today, when the need for digital transformation has become even more glaring, decision-makers understand that they can no longer afford to merely dabble in blockchain-based platforms — otherwise, their competitors might be the ones to leverage the power of smart contracts and fast transactions.

So, what can be said about the future of blockchain in finance? It still has a long way to go before it gains presence in nearly every area of BFSI. Nevertheless, it’s going steady on its journey from a cryptocurrency bedrock to a BFSI strategy game-changer, and there is no doubt it will evolve into a must-have component of every financial institution by 2026.

What are your thoughts about blockchain in finance?

Incorporating blockchain technology in finance is a guaranteed push towards better client experiences, employee productivity, data security, and operational efficiency. However, much like any disruptive innovation, blockchain needs a calculated and structured implementation strategy that is tailored to specific business needs.

Therefore, if you have been planning to inject more productivity with blockchain, but want to get started the right way, omitting all pitfalls and setbacks – we’re here for you.

Our blockchain developers and consultants will help you with mapping out the right strategy and must-have features of your future blockchain addition and deliver a robust and highly efficient product—seamlessly integrated into your current workflow.

So, if you’re up for transforming your BFSI organization and replacing paper-cluttered environments with cutting-edge digital assets – let’s chat and bring your vision to life.

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