Cryptocurrency
Invented back in 2008, the blockchain technology has depicted the change that it can bring in
different business areas. The technology, even in its infancy, has disrupted different industries and
sectors. Various features of Blockchain such as decentralization, immutability, and transparency make it
appealing for business sectors and domains all across the world. One such industry that is leading the
way in exploring the potential of blockchain is the banking and finance industry. Observing the
wide-reaching implications of the technology, companies are constantly researching to find out the ways
of applying blockchain in multiple sectors.
Talking specifically about the banking and finance sector, hundreds and thousands of funds are
being regularly transferred from one region of the world to another within each day. This makes the
global financial system one of the most popular sectors that could be benefited through the application
of Blockchain. Operating on the basis of highly dependent manual networks, the banking and finance
sector is prone to errors and frauds that could lead to a crippled money-management system.
Blockchain was born out of the payments industry and in many ways that is where it remains, as
technologists, start-ups, and engineers iterate on the original concept.
It was first proposed as part of a 2008 white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash
System” authored by an anonymous author (or anonymous group) who went by the nom de plume
“Satoshi Nakamoto.” The paper suggested a “purely peer-to-peer version of electronic cash that would
allow online payments to be sent directly from one party to another without going through a financial
institution.”
However, for people to send and receive payments, there would need to be a substitute for the “trusted
third party” role of a bank.
The solution to the third-party problem, according to Satoshi, was a security and recordkeeping program
that creates computer-generated “blocks” tied together in cryptographically enhanced “chains.” When
connected, these “blockchains” would create an online ledger of transactions that is, theoretically, both
distributed (peer-to-peer) and immutable (cannot be modified). In theory, these ledgers of blockchains
could obviate the need for a bank to confirm transactions, since the algorithm would only transact using
the consensus of the distributed network. Financial executives expect that blockchain will rapidly be
adopted for use in other scenarios involving payments, like capital markets and contracts.
Blockchain for Banking Industry
According to a claim by the Harvard Business Review, blockchain will do to banks what the internet did
to media. When it comes to banks and financial organizations of this day, Blockchain has the potential to
solve a lot of problems. Blockchain technology possesses all the attractive characteristics needed by a
reliable technology involving money matters. It is safe, secure, decentralized, transparent as well as
relatively cheaper.
Blockchain provides a very high level of safety and security when it comes to exchanging data,
information, and money. It also allows users to take advantage of the transparent network infrastructure
along with low operational costs with the aid of decentralization. These characteristics make blockchain
reliable, promising and in-demand solution for the banking and finance industry.
Applications of Blockchain in Finance
With emerging use cases with each passing day, the blockchain technology has the potential to disrupt
the banking and finance sector of current times. A few ways in which blockchain can change the current
face of the banking industry are as follows:
Fraud Reduction
The involvement of money in any situation leads to increased chances of fraudulent activities. And for an
overall sector operating on the very base model of money, security is of utmost importance. 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.
Know Your Customer (KYC)
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.
Smart Assets
Trade finance can become essentially challenging when transactions in the form of assets have to be
recorded with a clear date and time stamp. Supply chains all around the world involve a lot many entities
and components being bought and sold continuously. All paperwork involved in documenting the details
of demand and supply is even more complicated. Blockchain can hold these records of smart assets in
digitised form and get them updated in real-time. A smart asset system would not be limited to the
entries of just objects moving from here to there but it can also have the track of where a particular item
is delivered and where has it come from.
Trade Finance
Trade finance is considered one of the most useful applications of blockchain technology in the banking
sector. All the involved parties such as a complex transaction can be on-boarded on a blockchain
network and the information can be shared by exporters, importers, and banks on one common
distributed ledger. Once certain specified conditions of the deal are met, the smart contracts will
automatically execute themselves and the respective parties can view all the actions performed.
Energy Sector
Societal pressure and emissions policies are speeding up innovation in the world of energy. At the same
time, increasing competition is pushing companies to become more efficient.
Blockchain’s ability to allow peer-to-peer energy transactions could significantly disrupt the energy
sector, particularly by encouraging decentralisation.
The growing use of small renewable energy installations, such as rooftop solar panels, can create stress
on electricity grids that were designed with large, centralised power plants in mind. By allowing
peer-to-peer energy trading and incentivising local consumption at the time of production, blockchain
could stabilise the grid, aiding this decentralisation.
However, with users paying each other directly, many of the traditional market roles could be called into
question, including distribution system operators, retailers, suppliers, metering point operators,
balancing groups and more.
Pilot projects for community energy and peer-to-peer have already been successfully run by the
Brooklyn Microgrid in New York , PowerLedger in Australia, Conjoule in Germany and many more.
However, in Europe these experiments are limited to pilots under regulatory exemptions, or private
microgrids – peer-to-peer remains far from being rolled out universally.
Blockchain could also be used for electricity tracking with at least two purposes: rewards for generating
renewable energy (e.g. SolarCoin) and renewable energy certificates or carbon credits. For those who
want to invest in renewables but lack the funds, blockchain technology could enable collective
investments, ensuring fair and transparent sharing of revenues.
Given properly calibrated and installed smart energy meters, blockchain could ensure the tracking of
electricity in real time and avoid double counting.
As of now, electricity can only officially be called renewable in Europe if accompanied by Guarantee of
Origin (GO) certificates. GOs – for both normal renewable and EKOenergy certified renewable energy –
are issued for every MWh, which can be prohibitive for small producers who may never generate this
much electricity. Blockchain could open the door for these small-scale producers, as well as new
market players such as aggregators, to receive energy certificates.
However, there needs to be a way to make sure that installations that already have GO certificates do
not use blockchain certificates to sell the “greenness” twice. If blockchain is accepted as a solution for
energy tracking, it must be carefully monitored and strict criteria developed.
Copyright Protection
Blockchain can also be used to develop “smart” contracts, ie an agreement or set of rules that apply to a
transaction – it is stored on the blockchain and is executed automatically as part of a transaction. For
example a smart contract might contain a set of rules for how a digital copyright asset such as a digital
photograph is licensed. Bitcoin is also an example of the use of blockchain. Blockchains can be public or
private.
Because blockchains are immutable ledgers of data they have an obvious use in copyright rights
management. Metadata on ownership and other aspects of the digital copyright asset can be stored on
the blockchain. A smart contract can be used to automate who has access to the asset and under what
conditions. The blockchain platform can also handle remuneration through for example the use of a
cryptocurrency like bitcoin. It therefore has the potential to revolutionise how digital copyright assets
are exploited.
Other companies started working on the subject. In the music industry, Spotify acquired Mediachain,
blockchain startup which aims to facilitate the payment of musical artists through cryptocurrencies. The
goal is to identify which songs were played and to pay the right artist accordingly using digital rights
management. The development of these new blockchain based DRM is really encouraging and
constitutes a step toward an efficient protection of copyrighted content in the digital world. According to
Rahul Gautam, Ernst & Young analyst, “the prospect of being able to manage who has the ability to
access that content […] and where that money should go at the end of the transaction is extremely
daunting for existing technologies,” but this goal could be achieved through blockchain.