Uploaded by NITIKA PATEL

BLOCKCHAIN IN FINANCIAL MARKETS

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Digital Currency
• Digital Currency: Cryptocurrency acts as a medium of exchange making use of cryptography to make the transaction more secure
and to regulate the creation of additional units of currency. Some of the most popular cryptocurrencies are Bitcoin, Ethereum,
Ripple, Litecoin, etc.
• Cryptocurrencies help us to overcome the identity theft as users have control over their transactions. It protects the merchant
from the risk of fraud as the transactions cannot be reversed once executed and do not possess any personal information with
them. It also allows sending and receiving money anywhere in the world at any given time without the involvement of central
authorities. The transactions are immediately verified and are visible to all participants. Also, the transaction cost involved in
converting into fiat money is very low.
• However, digital currencies have certain limitations. The demand for digital currency is increasing day by day whereas there is
only a limited amount of digital currency. This has led to high volatility and risk in digital currency. The Reserve Bank of India has
also cautioned users of virtual currencies from time to time against potential financial, operational, legal, customer protection and
security related risks.
• Since Cryptocurrencies don’t have any intrinsic value of their own, the holders of currency may face greater risk associated with
price volatility and liquidity. It is difficult to satisfy the Anti-Money Laundering (AML)/ Combating of financing of terrorism (CFT)
requirements in relation to digital currency transactions. The privacy issues related to digital currency schemes has also
discouraged various financial system participants to use it for their own or for their customers.
• From a financial institution’s point of view, cryptocurrencies can be perceived as a threat. However, widespread adoption is still far
from being certain, even though Bitcoin market capitalization is worth 6 billion dollars as of January 2016 [7]. Shifting focus from
cryptocurrency to the technology underneath, it is possible to understand the real potential of blockchains in financial services
KYC
• Banks and financial institutions are strictly concerned about the increasing costs
that they have to bear in order to comply with AML and KYC i.e. Anti-money
Laundering and Know Your Customer norms. All these processes consume a lot of
time and have to be performed individually by all the banks and money based
institutions.
• Currently, banks need to upload the KYC data of a customer into a central registry
which can be used for checking the information of an existing or new customer.
• With the adoption of a blockchain system, the independent verification of each
client by one bank or financial organization would be accessible for other banks
to use so that the KYC process doesn’t have to be restarted again.
• Meaning that the duplication of efforts would be eliminated by the aid of
blockchain technology. Moreover, all the updates of clients’ will be to all financial
institutions in near real-time. This would result in the reduction of administrative
efforts as well as costs for compliance departments.
Fraud reduction
• The involvement of money in any situation leads to increased chances of fraudulent activities
• More than 40% of financial bodies are susceptible to heavy losses relating to economic crimes
annually.
• Reason being the usage of centralized database systems for operations and money management.
A centralized database system is vulnerable and highly prone to cyber attacks as the single point
of failure, such systems can be exploited by hackers.
• Enter Blockchain, a secure, non-corruptible technology operating on a distributed database
system. Since blockchain is distributed, there is no chance of a single point of failure. Each
transaction is stored in the form of a block with a cryptographic mechanism which is extremely
difficult to corrupt.
• Moreover, all the blocks are linked to each other and due to this linking mechanism, if one block is
breached all the other blocks on the blockchain immediately showcase the change. This, in turn,
helps to track the breach and provides the hacker with no time to make changes in the overall
system. With a secure Blockchain system in place, we can eliminate the cyber crimes and attacks
of banking and financial sectors taking place in the current times.
Capital Markets
• Presently various intermediaries are involved in capital market transactions
• They update their respective ledgers based on business transaction that
take place
• This is a time consuming and a costly process
• Sometimes, there is an even additional delay in the transaction settlement
which can be eliminated by using blockchain technology
• Blockchain can also be applied in the initial public offering of shares.
NASDAQ blockchain based service i.e Linq has successfully completed and
recorded a private securities transaction for chain.com
• The technology overcomes challenges of liquidity in private securities by
streamlining payment transactions between multiple parties.
Smart Contracts
• The application of smart contracts can prove particularly important in
the banking and finance sector. A smart contract is a self-executable
piece of code that runs when certain conditions written on it are
completed.
• Smart contracts, when used for financial transactions, would be
helpful in increasing the speed and simplifying complex processes.
This will also ensure the transfer of accurate information as the
transaction will be approved only if all the written conditions of the
code are met. Moreover, as these terms are visible to all the parties
involved in the transactions, the chances of error at the time of
execution are dropped drastically.
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