The Blockchain has the potential to transform banking infrastructure, speed settlements, and streamline stock exchanges while providing much needed transparency.
Blockchain technology has overcome an initial, generalised disenchantment - created by negative media around the Bitcoin cryptocurrency - from the financial sector. Today it is no longer the preserve of startups and disruptive challengers. Global institutions such as Nasdaq and Barclays are exploring and investing in Blockchain technology. Their motivations including quicker transfer of balances and overcoming the cost and complexity of the post banking crisis regulations.
Blockchain technology adoption in the finance sector has been driven by the security and transparency the technology provides along with the potential savings it could deliver companies in both time and money by improving efficiencies. Costly checks that once took a few days could take a few hours using Blockchain based systems, because no central authority is required. Currently adoption of the technology in this sector aims to improve existing systems and processes through increased security, resource efficiency and trust, with more unique innovations coming in the future.
MONEY TRANSFER SERVICES
Money Transfer Service
A mode of sending electronic payments from one location to another, usually overseas. By sending payments via Bitcoin (which utilises Blockchain technology), companies and individuals can send money abroad whilst avoiding a number of fees normally given to traditional fiat currencies remitted through existing money transfer services. At the moment this application is largely confined to startups offering new types of services to compete with the market’s big players.
When payments are made using fiat currencies there is always a fixed minimum cost for every transaction. As a result small payments for goods or services are often rendered too expensive due to the associated cost. For example sending a small amount of money overseas isn’t feasible due to the minimum cost to transfer and exchange the currency. However by using Bitcoin (which utilises Blockchain technology), very small payments can be sent online because they don’t have the traditional fees added by current money transfer systems. The lack of transfer fees is largely due to the decentralised public ledger used by Bitcoin that records financial transactions without the need for a third party to check and verify.
Blockchain technology and its ability to create public decentralised ledgers is perfect for P2P lending as the entire industry is based on not relying on a central authority such as a financial institutions. It allows the borrower to define their own loan amount, their own rates, and other parameters as well as optional soft credit checks. The lender can choose who they wish to lend to, compare rates of return which are often higher than traditional methods, safe in the knowledge that their money is secure by peer-to-peer reputation system and other checks.
Capital markets are also feeling the effect of Blockchain technology aimed at reducing infrastructure costs significantly by verifying settlement and custody without the need for third party interactions. Blockchains are being used to streamline financial record keeping (such as chronicling trading of stocks) in addition to recording the owners of shares for a given company and how much they own. Imagine someone wants to sell a percentage of shares - a Blockchain based trading platform will match those shares to an investor who wants to buy them, facilitate the transfer, and update the record of the company’s shareholders. A corresponding entry will be made in the ledger with information about the transaction including, but not limited to, the timing and number of shares involved.
COMPANIES USING BLOCKCHAIN
The potential of Blockchain in the finance industry has resulted in the emergence of a host of new fintech startup companies using the technology to either collaborate or compete with existing players. These startups aim to use the Blockchain to bring resource efficiency and trust to their clients through either public or private distributed ledgers. Large financial institutions are also embracing the Blockchain, with the second largest stock-exchange platform in the world adopting the technology at the end of 2015, and a number of prominent banks exploring its potential.
Romit’s remittance software uses Blockchain technology to allow customers to transfer cash instantly without using bitcoins at all. Its model is inexpensive. It charges a flat 4% fee on any amount of transferred funds. So a transfer of $20 costs $0.80 and while $100 costs $4. Big name players - who operate in the same sector - have highly variable rates which can fall anywhere between 7% and 50%. Within traditional remittance models transferring smaller sums of money (e.g. <$200) is also particularly costly, whereas Romit’s service avoids these unwelcome charges.
“Romit enables unprecedented low-cost global money transfers by leveraging Bitcoin’s underlying blockchain technology, while also removing bitcoin from the customer experience,”
Jordan Kelley - Romit CEO
Nasdaq Linq is the Blockchain enabled trading platform of the second largest stock-exchange platform in the world. Nasdaq announced its initial roster of private clients in October 2015. Nasdaq's use of Blockchain technology will offer efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities.
"Through this initial application of blockchain technology, we begin a process that could revolutionise the core of capital markets infrastructure systems. The implications for settlement and outdated administrative functions are profound."
Bob Greifeld - Chief executive of Nasdaq
Changecoin is the company which built and operates the micropayment platform called ChangeTip. ChangeTip works like offline tipping does; only with Bitcoins and online. You can tip with Bitcoins for quality online content. As tips are monetarily small and so are perfect for Bitcoin due to the low transaction fees associated with smaller payments. Tips can be made via social media - and content producers can add Tip buttons to their site or create their own Tip.me page to earn both dollars and Bitcoins. ChangeCoin Inc is one of Nasdaq Linq’s first private company clients to come on board.
"I think it’s really interesting to think about how Bitcoin will allow us to leap-frog over banks and credit cards, particularly in those countries that don’t have well-established (financial) infrastructures."
Nick Sullivan - ChangeCoin CEO
BTCJam is a company specialised in personal loans, also acting - in a broader sense - as a marketplace for borrowers and lenders. The company benefits from Blockchain technology (safe, fast transactions at lower costs) by offering micro-loans at a worldwide scale using Bitcoin as the currency. Operating costs and internal structure are small: less than 50 people work in BTCJam and much of the data processing is done by a decentralised Blockchain network.
"The borrowers, they don’t really care about bitcoin. They need the money. I think, in the future, we’ll use [bitcoin] on a day-to-day basis. But that’s not really the reality right now."
Celso Pitta - BTCJam CEO
ISSUES SOLVED BY THE BLOCKCHAIN
Issues of trust, security and resource efficiency are the primary issues being solved with Blockchain technology at present. It is allowing organisations to provide a better service with reduced costs, and these benefits are being passed on to customers whether it is a P2P lender or an individual sending money home to their family in another country.
REDUCE THE COST OF MONEY TRANSFER
Reduce the Cost of Money Transfer
The decentralised ledger system removes the need for humans and third party recording which is time consuming and costly. This solves a big problem for workers wishing to send money back home to their family because they're able to avoid the large transfer fees by using Blockchain powered money transfer services. This allows them to send more of their money to their families who might be in desperate need of it.
SECURING OWNERSHIP AND TRANSFERS
Securing Ownership and Transfers
A digital ledger can only be updated by consensus of a majority of participants in the system. Once updated, the information is permanent and cannot be erased. One of the key emerging uses of Blockchain technology is ‘smart contracts’ which cryptographically verifies who owns what. Only people with a private key associated with a signature can prove they are the owner. Transfers of ownership are easy to make too as they are recorded in the ledger.
Reduced operation costs, quicker processing of financial services, increased trust, and increased security combined with the global accessibility of cryptocurrencies allows lenders to move into new markets that would otherwise have been too costly and risky. Small businesses who find it difficult to obtain finance from their country’s traditional sources of business finance now have a new channel of lending to use.
POST TRADE ECOSYSTEM
Post Trade Ecosystem
Costly and time consuming processes used in the post-trade industry could be replaced by trusted ledgers built using the Blockchain, providing faster processing, increased security, and lower costs to financial services firms. These firms are under growing regulatory pressure for dissemination of data whilst dealing with falling margins and revenues. Considering the benefits Blockchain could provide, disintermediation is a real threat to the post-trade industry if finance services firms adopt the technology for their internal processes.
Whilst Blockchain technology has initially been focused on optimising internal practices within businesses and domestic markets, future applications could be geared towards strengthening existing global financial systems to create a uniform system of global trade throughout industries. This could bring the cost of global trade down for companies whilst opening up new markets for consumers.
Being able to transfer money globally via money transfer systems built on Blockchain technology could allow real-time international payments at very low costs (potentially with no costs at all). In order to replace the current international payments systems used by banks with one that utilises Blockchain technology, a foreign exchange market system that’s integrated into the new payments system is needed. This will allow the process of currency conversion automatically when transactions are made. However there also needs to be participation from key financial institutions and payment service providers with the new Blockchain based money transfer system to allow global real-time payments via the technology.
USE OF SIDECHAINS
Use of Sidechains
Sidechains are separate Blockchains that can communicate and interact with the main Blockchain used for Bitcoin. This allows development and experimentation of new features for Bitcoin without changing Bitcoin’s underlying code. This also allows each new chain to use Bitcoin, rather than having to develop its own currency. Innovations so far using Sidechain technology have led to faster processes in money transfers for specific industries.
Developers can use the Blockchain to create decentralised applications. Current applications include smart contracts, which are applications that run exactly as programmed without any possible downtime, censorship, fraud or third party interference. Future applications could include international financial systems such as a Blockchain based foreign exchange, which companies such as Lykke and South Korea's KB Kookmin Bank have already started to work on.
Over the years banks have been attempting to digitise and automate their trade processes. However these updated processes are still mainly based around the use of physical documents. A lot of the processes are similar in characteristics however use different IT systems to managed and execute. Through the use of cryptographic keys and multi-signature wallets available via Blockchain, banks could properly automate a number of processes under one technology.
"Blockchain at it's heart is a system that allows people that don't trust each other to trust each other. That's very very useful for a banking system that let's face it, got into trouble because it did not trust each other."
IZABELLA KAMINSKA -
Financial Times Journalist
“The Blockchain is going to bring levels of efficiency to the financial markets that we’ve never seen before… In time, it could be as impactful on the back office as electronic trading was on open outcry.”
BOB GREIFELD -
"Blockchain has the potential to make trading processes more efficient, improve regulatory control and eliminate unnecessary intermediaries."
DAVID DONOVAN -
Managing Director - Sapient Global Markets
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If you know of a practical application of Blockchain technology in the Finance sector that isn’t currently being featured here, please send us your submission. There are many companies and uses of Blockchain technology that we haven’t featured in our initial launch, but we want to build a comprehensive resource outlining the practical applications of Blockchain technology and will be building this resource further in the future.