Blockchain and its implications for the financial industry

The brief history of blockchain started with Bitcoin in 1991, a cryptographic currency based on a distributed ledger that allows users to handle secure transactions anonymously via internet. While the Bitcoins have been a highly controversial currency, because of its use for illegal transactions and its high volatile value, the technology behind is gaining a strong momentum. Currently fintech start-ups around the world and leading banks like Santander, J.P. Morgan and UBS or large investment banking companies like BlackRock are investing in blockchain platforms. A recent analysis from Goldman Sachs concluded that the blockchain technology could decrease the worldwide costs of clearing and settlements transaction by $ 6bn a year. Other companies like Capgemini or Santander also concluded through similar research that blockchain applications could save banks and insurances several billions a year. For this reason, a recent article from the Harvard Business School considered that by 2017 around 15% of the banks will be using or testing Blockchain applications.

What is a blockchain and how does it work?

A blockchain is simply a unique sequence of blocks. Each block is ordered chronologically and can contain any type of information. The main advantage of this technology is that neither the sequence nor the information’s inside the blocks can be modified without making the changes visible for the rest of the agents or users from the platform. Therefore, there is no need for a central entity to control the correctness of the information in each block, making therefore this technology almost incorruptible.

Blockchain applications for financial institutions?

Currently the main focus of financial institutions in Blockchain is in how to develop or use a platform that support smart contracts. Smart contracts are transactions that trigger themselves once the required conditions are met. In the case of an acquisition: once an asset is paid by a user, he must receive the legal property of the asset. The payment is the required condition for the transfer of property. Till now, this legal transaction (property transfer) could take several days and have high costs. Smart contracts with blockchain technology have the potential to decrease this transaction time to a few minutes and its costs to a few cents.

Another relevant application of blockchain relies in its ability to process global payments more efficiently. A research published by the World Economic Forum stated that currently the average costs for the money sender is around 7.68% of the amount transferred. The transparent and immutable data that characterizes a blockchain allows global payments to be processed in real time, decrease operation costs and reduce fraudulent transactions. However, it is not clear whether the banks will maintain their current share in this segment, since blockchain platforms facilitate the entrance of newcomers.

Overall, the intrinsic secure nature of blockchain has enabled this technology to grow far beyond Bitcoin and become a trending technology in just a few years. While some smart contract platforms are already under development, significant progress still has to be done so that this technology can reach a mature stage. Currently, there are still critical limitations in both the regulatory and technological aspects that must be solved. Nevertheless, companies that fail to address this technology on time could see their core business become obsolete and lose ground towards fintech who are fighting their way into the market.

Sources:

World Economic Forum: http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf

McKinsey: http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world

Harvard Business School: https://hbr.org/2017/02/a-brief-history-of-blockchain

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