Written by: Abishek Raja
Introduction
Blockchain technology is a new up-incoming technology that is widely distributed and used. Its implementations range from new startups to large corporations. Blockchain itself is a decentralized digital ledger that maintains a list of transactions. The technology was first introduced in 2008 and has been integrated into numerous industries and technological ecosystems. Since the original underlying technology behind currencies such as Bitcoin, the first decentralized cryptocurrency, blockchain has evolved to become a transformative technology with applications in a multitude of industries. Although recent collapses of companies such as FTX have led to increased speculation for investors and consumers alike, the applicability of the technology is unparalleled and undisputed. More specifically this technology can be used in finance. Although blockchain has already found applications in many areas, from cross-border payments and smart contracts to identity management and trade finance, there are many other avenues for growth and optimization. However, there are also limitations to current blockchain uses in finance but also ways to optimize these inefficiencies and even expand into different sectors within the industry.
Current Blockchain Uses in Finance
The finance industry itself has catapulted into the technological sphere to improve processes and integrate many blockchain technologies to help ease the work of many employees. Currently, whether new companies in the industry arise or already established firms use these technologies it is impossible to disregard the growth of blockchain in the industry. More specifically, one of the most well-known applications of blockchain in finance is cryptocurrency. Bitcoin was the driver of this exponentiating popularity in cryptocurrency. Cryptocurrency allows for peer-to-peer transactions without the need for intermediaries such as banks. The unnecessary need for a third party makes for a promising expansion of the technology. Other cryptocurrencies like Ethereum, Cardano, XRP, and Litecoin also use blockchain technology to facilitate transactions. Cryptocurrencies have gained a significant following in recent years, with a market capitalization of over $2 trillion as of May 2023.
Although some remain skeptical about the legitimacy of cryptocurrencies, their popularity among investors and traders is undeniable and a clear indication of their potential to disrupt, compound, or assimilate with traditional financial systems. With the growth and boom of “meme coins” such as DogeCoin in May of 2021, this only further increased speculation. However, also demonstrated the power of current-day markets.
Also, other uses of blockchain include use in cross-border payments. Cross-border transactions are payments made across countries where the sender and receiver are located in different countries and include both retail and wholesale payments. Traditional cross-border transactions are often slow and costly as they have multiple intermediaries that take cuts the transaction fees. Blockchain technology can eliminate these dreaded intermediaries and most importantly reduce these increasing transaction costs. In all making cross-border payments faster and more secure. An example of this technology is Ripple which is a blockchain-based payment network that has already partnered with over 200 financial institutions worldwide to provide efficient cross-border payments. Other companies include Veem and Stellar as they use blockchain technology to disrupt traditional cross-border payment systems.
Smart contracts are another application of blockchain in the finance industry. Smart contracts are self-executing computer programs and are intended to automatically execute transactions and contracts with the terms of the agreement between buyer and seller written directly into code. The code and agreements exist on a decentralized blockchain network thus making the agreements transparent, secure, and tamper-proof. Smart contracts can automate a lot of these financial processes, such as escrow agreements, insurance policies, and supply chain management, reducing the need for intermediaries and minimizing fraud.
Limitations of Blockchain in Finance
There are still significant restrictions on the usage of blockchain technology, despite the fact that it has the potential to improve the finance sector. Scalability is one of the primary drawbacks. Blockchain networks like Bitcoin and Ethereum are not ideal for handling high quantities of transactions in real-time since they can only process a certain number of transactions per second. Given that conventional financial systems can perform hundreds of transactions per second, scalability is a major impediment to the mainstream adoption of blockchain technology in the banking sector.
Regulatory ambiguity is another blockchain in finance restriction. Regulators find it challenging to develop clear and simple regulations because traditional financial systems are highly regulated and the usage of blockchain technology in finance is still relatively new. As a result, companies that use blockchain technology in finance may face legal and regulatory challenges, hindering their adoption of blockchain technology.
Widely Used Applications of Blockchain in Finance
Blockchain technology is being used in the finance sector despite these drawbacks. The popularity of cryptocurrencies has grown significantly, and many traders and investors now regard them as a viable asset class. Blockchain-based cross-border payments have the potential to lower transaction costs and boost efficiency. Numerous financial procedures could be automated with the help of smart contracts, which would eliminate the need for middlemen and cut down on fraud. In general, as more businesses investigate its possibilities, the use of blockchain technology in finance is anticipated to rise in the future years.
Cross-border payments are sometimes sluggish, pricey, and susceptible to exorbitant fees and currency rate swings. By eliminating the need for middlemen and offering a safe and transparent method for payment processing, blockchain technology can offer a more effective and affordable platform for cross-border payments. In order to offer quicker and more affordable cross-border payments, Ripple, a blockchain-based payment network, has already partnered with multiple financial institutions.
The issuing and trading of securities is another sector of finance where blockchain technology is being applied. By eliminating the need for middlemen and increasing process efficiency, blockchain technology can offer a secure and transparent method for managing the issuing and trading of securities. Blockchain technology is already being used by businesses like tZERO and Harbor to offer tokenized securities that can be exchanged on blockchain-based exchanges.
Finally, blockchain technology is being used in finance for supply chain management. Supply chain management is a complex process that involves multiple parties and intermediaries, making it slow and prone to errors. Blockchain technology can provide a secure and transparent platform for managing supply chain processes, reducing the need for intermediaries and improving the efficiency and transparency of the process. Companies like IBM and Maersk are already using blockchain technology to provide supply chain management solutions.
Unexplored Areas and New Potential Uses of Blockchain in Finance
There are a lot of uncharted territory and fresh potential applications for blockchain in banking. Identity management is one of these areas. The management of identification in the finance sector has the potential to undergo a revolution thanks to blockchain technology. Identity management is an essential part of financial services since it allows organizations to confirm the legitimacy of their clients and guard against fraud. For speedier and more secure onboarding procedures for financial services, blockchain technology can offer a safe and impenetrable system for maintaining and storing identifying information. Blockchain technology is already being used by businesses like Civic and Evernym to offer decentralized identity management solutions.
Trade finance is another area where blockchain technology has the potential to have a big influence. Since there are many parties and intermediaries involved, trade finance is a labor-intensive, expensive, and error-prone process. By eliminating the need for middlemen and automating a number of the required processes, blockchain technology can offer a secure and transparent platform for handling trade finance activities. The potential of blockchain technology in trade finance is already being investigated by businesses like IBM and R3.
Blockchain technology has the potential to change a wide range of financial sectors, including insurance, asset management, and compliance in addition to identity management and trade finance. Blockchain technology, for instance, can offer a safe and open platform for administering insurance policies, cutting down on fraud, and enhancing customer experience. A safe and impenetrable system for handling asset ownership and transfers can be provided by blockchain technology, which eliminates the need for middlemen and increases productivity. The cost and complexity of regulatory compliance for financial organizations can be reduced by using blockchain technology, which also offers a secure and transparent solution for managing compliance.
Conclusion
Blockchain technology has the potential to revolutionize numerous industries, including banking. Despite the fact that blockchain technology has numerous financial uses, these applications are currently limited by scalability concerns and regulatory uncertainties. Blockchain technology, however, might prove to be a wise investment for financial institutions given its potential for higher productivity, cheaper costs, and enhanced security. Over the next few years, we can expect blockchain technology to be used in new and inventive ways in the finance industry as more companies explore its potential.
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