Blockchain technology is a disruptor and there’s more to the disruptive potential of blockchain technology than mere buzzwords and hype. Blockchain is the technology behind cryptocurrencies and the global economic and financial spheres won’t ever remain the same after the debut of Bitcoin.
However, there is more to blockchain technology than cryptocurrencies, Even though traditional financial firms are not keen on cryptocurrencies, they are looking for ways to leverage its disruptive power to improve their competitive advantage. The World Bank hired economist Rossana Chan to lead a team of 60 people in the World Bank Blockchain Group to find potential practical use-case scenarios for Blockchain technology. This piece looks at how Blockchain technology could trigger disruptions across different areas of the financial industry.
Fraud prevention
One of the key selling points of blockchain technology is its ability to promote fraud prevention with its inherently decentralized nature. Banking systems globally are mostly built on centralized models that are vulnerable because they are singular fail points. The decentralized nature of blockchain technology could potentially protect banking and financial systems from cyber attacks because hackers will need to breach all the nodes of the network before they can access the system to perpetrate their heist.
Blockchain technology can also be an important tool for Know Your Customer (KYC) processes and identity management in financial operations. KYC document backed by a digital ID stored on the blockchain can prevent financial fraud because it makes it practically impossible to create multiple accounts using fake names or aliases. Digital ID managed on the blockchain can’t be copied/cloned; adding an extra layer of biometrics to the authentication process could potentially create an impregnable line of defense against hackers.
Payments
Wall Street doesn’t love cryptocurrencies but Wall Street bankers are aware of the threat that cryptocurrencies could pose to traditional financial business models. James Dimon, CEO of JPMorgan Chase notes that “there are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” The only thing stopping cryptocurrencies from displacing fiat currencies for payments right now is that many people are seeing cryptocurrencies as an asset as opposed to a means of exchange.
As the mass-market adoption and transactional uses of cryptocurrencies increases, the payments industry will begin to experience a highly-transformative disruptive process. To begin with, cryptocurrencies will eliminate the intermediaries in the current payment processing systems by enabling peer-to-peer transactions across multiple levels.
Blockchain technology also has the potential to drastically reduce the costs/fees associated with making payments locally or internationally. For instance, Ripple has consistently maintained that it can help banks reduce their costs of global interbank settlements by as much as 60%. In addition, cryptocurrencies bring an unprecedented layer of speed to the payments industry by enabling near-instant transfer of value.
Smart Contracts
Another important disruption that blockchain technology can bring to the financial industry should be expected in the areas of smart contracts. People are fixated on cryptocurrency and the potential for price gains without paying much attention to a massive disruption that is underway in the financial services sector. Smart Contracts are a game changer in the investment banking industry and nobody seems to be paying attention.
To start with, smart contracts has already changed the processes that the businesses need to undergo to raise funding. An ICO (Initial Coin Offering) or Token Sale has become a go-to tool for business that wants to raise funding without jumping through the hoops and hurdles of angel investors, VCs, and investment banks.
More than 1500 companies have raised funding through an ICO and a staggering 80% of those companies are powered by the smart contracts of the Ethereum blockchain. Going forward, the odds are already stacked against investment bankers as the custodian of funding on Wall Street as the rate of market penetration for blockchain technology continues to increase.