How is blockchain used in finance

A blockchain is a digital public ledger that records the origin, movement, and transfer of anything that has value. Its name comes from the way it stores transaction data. It stores data as blocks that are linked together to form a chain.

The blockchain digital ledger is decentralized and distributed. Therefore, it is democratic. Specifically, it is democratizing operations in the finance sector.

Conventionally, banks played the role of a centralized authority for approval of transactions in the finance sector. In the blockchain technology space, unanimous approval of each individual node in a blockchain is required to process a payment or transfer a good.

A blockchain is simply a distributed database. Each blockchain has a growing list of ordered records called blocks. These blocks are connected and linked to each other using cryptography.

Transactions in a blockchain are recorded across computers simultaneously. A record, once created, cannot be altered without altering all the blocks in the process and without consensus from all parties in the network.

Blockchain is like manna from heaven for the finance sector. It immediately addresses and solves two key problems for the sector: security and efficiency.

Blockchain is a disruptor

Blockchain’s distributed ledger technology (DLT) is expected to grow the global economy significantly during this decade.

The way a blockchain works is that each block in the chain contains a digital fingerprint or unique identifier called a hash. Each block also has timestamped batches of recently valid and recorded transactions. And each block additionally has the hash of the previous transaction. This hash of a previous transaction links the blocks together. So, it prevents any block from being altered. Besides, it also prevents a block from being inserted between two existing blocks. Consequently, a blockchain transaction is at the same time democratic, decentralized, and tamperproof.

Features of blockchain in the finance sector

Four salient features make a blockchain impregnable – and, therefore, a disruptor:

1. The shared ledger: this is an “append-only” distributed system of sharing records across a business network. This means a transaction can only be recorded once. This eliminates duplication, which was a typical pain area in conventional business networks.
2. Permissions: Each transaction is made verifiable, authenticated and secure, through permissions that are granted in a blockchain.
3. Smart contracts: a blockchain can have a set of rules or agreements governing a business transaction. This is called a “smart contract.” When a transaction takes place, the rules in the blockchain approve or reject it automatically.
4. Consensus: This is achieved seamlessly among all parties in a blockchain transaction. This saves time, money and enhances security.

Uses of blockchain in the finance sector

Simplified payment processing

There are two key advantages to processing payments using blockchain technology. One, it happens immediately. And two, data integrity is never compromised.

DLT has removed the need for approval by a centralized institution. So, moving money from one party to another is instantaneous and is literally a function of pressing the “send” button on a device or app. Once a payment process is set into motion, the nodes in the blockchain work seamlessly and simultaneously to either approve or reject the payment.

Cash need not be “sitting idle” while in transit, awaiting approval. Nor are there huge transaction fees.

Blockchain-based currencies, like crypto, have changed the game further. They are neither governed by exchange rates nor limited by the foreign exchange rules of various countries.

Smart contracts

Like in any physical contract, a smart contract is an agreement with explicit rules and clauses that govern an understanding between the parties involved. Except, in a smart contract, the stipulations are verified and approved in real time using blockchain technology.

Smart contracts make business transactions efficient, private, and swift.

Loyalty and rewards programs

In a world besieged by data breaches, blockchain technology offers enhanced security for the management of loyalty programs. Large companies that have embraced blockchain technology are able to reassure their millions of customers that their information is safe. Additionally, blockchain makes earning and claiming loyalty rewards very seamless and very transparent. It also helps companies track customer behavior and target their product and service offerings precisely. This leads to huge cost savings and increased profitability for companies.

Trading and investing

Stock markets globally are being transformed by blockchain technology.

Conventionally, a stock market had a centralized authority for processing and approving investments. The various stakeholders in this system, like investors, brokers, and regulatory players, were dependent on this authority to make transactions happen. An investment, using the legacy stock market system, could take a few days to be completed.

With blockchain technology, particularly with the advent of smart contracts, an investment decision is fulfilled immediately. Blockchain also allows peer-to-peer investing, so an individual can invest in a company directly instead of having to depend on an intermediary like a broker. Tightened security protocols keep transactions secure and private. They have eliminated the risk of a data breach.

The DLT-based system today has brought speed, accuracy, and efficiency to the process of trading and investing.

Digital identity management

As the world becomes more dependent on establishing and verifying digital identities to process financial transactions, data security is sacrosanct. Personal information like social security numbers, biometrics, passport details, mobile numbers, account and card details, and addresses is at huge risk. In 2021, for instance, 2.8 million customers reported cases of fraud amounting to US $ 5.8 billion in losses.

There’s hope, however, with blockchain technology, to prevent data theft and fraud.

DLT’s decentralized mechanisms reduce the risks of data theft and cyber attacks significantly. This is a fact that has been confirmed and endorsed by the World Economic Forum in Davos, Switzerland.

Financial institutions are using blockchain technology to protect the digital identities of their customers. This is not just saving costs, but it is increasing trust in using digital platforms for financial transactions.

In summary

Every once in a while, a new, breakthrough, idea makes our world a better, safer, and efficient place. Blockchain technology is one of those ideas. And the finance sector is already benefiting hugely from having embraced it.