More businesses are turning to blockchain technology in hopes of speeding up transactions and processes, cutting costs, and solving security challenges.
Nearly 60% of large corporations are considering or deploying blockchain technology, according to a 2017 Juniper Research study. Of companies that had reached the proof-of-concept stage, 66% planned to integrate blockchain into their systems by 2018.
Blockchain technology gives businesses the ability to create a single, shared record of transactions. This technology has the potential to transform a number of industries, from financial services to healthcare.
Blockchain is a specific type of distributed ledger technology. This technology enables a database to be shared across multiple computers in a network and includes the following elements:
- Peer-to-peer networking and data storage, which provide all participants with a shared history of transactions
- Cryptography, which allows transactions to be initiated securely
- Consensus algorithms, which provide a process to confirm and add transactions to the single ledger
In blockchain technology, transactions are entered in blocks, connected to the block before and after it, creating an irreversible chain.
Ultimately, blockchains can be used to create a single, secure record of transactions accessible to all involved parties. That gives everyone access to up-to-date information at the same time, which cuts down on costs related to maintaining and verifying separate records.
Additionally, because transactions can’t be altered or deleted once they are entered in blockchain, the technology create an indelible record, which fosters trust.
Blockchain technology was initially developed in 2008 to support the digital currency Bitcoin, but the underlying technology may have a wide variety of applications. The technology is attractive to businesses and government organizations because of its potential to make transactions flow more smoothly.
Blockchain technology can be used for any shared digital record, not just financial transactions. That means healthcare information and personal identification such as drivers’ licenses and passports could be maintained securely and passed as needed to authorized parties. Legal contracts that require shared access for tracking and alteration, as well as secure storage, are also candidates.
Blockchain in finance
The financial services industry has been interested in adopting blockchain technology, particularly to make payments, clearing, and settlement more efficient.
According to 2017 PwC survey, 77% of financial services and financial technology executives expected to adopt the technology by 2020. Additionally, 19% of survey respondents at large financial institutions said blockchain was the most relevant technology to invest in over the coming year.
Here are some areas where blockchain technology may transform financial services:
- Cross-border payments. Several international banks are using blockchain to speed up global payments by giving appropriate parties access to clearing and settlement data. One financial services company is exploring simplifying global B2B payments processing with the technology.
- Digital wallet. Blockchain technology can enable point-of-sale payments. Merchants and consumers gain greater security since the record of digital events associated with a blockchain is irrefutable.
- Tiny transactions. In e-commerce, a micropayment involves a very small sum of money, often less than $1.00, which tends to be too costly for credit card acceptance. Leveraging the blockchain, individuals could pay pennies to buy small items such as one digital newspaper article.
- Assets. Any asset that requires a ledger in order to be transferred—from stocks and bonds to car titles and houses—could benefit. Nasdaq is making the distribution and record-keeping of shares issued by private companies more efficient and secure. Digital Asset Holding aims to shorten settlement times around syndicated loans.
What’s ahead for blockchain
Although many businesses are enthusiastic about the potential of blockchain technology, most aren’t ready to adopt it. According to an AFP survey, only 11% of finance and treasury professionals believe their organizations are well-prepared for new technologies, including blockchain.
Before blockchain becomes mainstream, businesses will need to overcome technology barriers, such as ensuring new systems can connect and exchange information with other ledgers and systems.
Additionally, companies will need to consider whether the benefits of implementing blockchain technology outweigh the costs of replacing existing systems.
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“Nearly 6 in 10 Large Corporations Considering Blockchain Deployment,” Juniper Research: https://www.juniperresearch.com/press/press-releases/6-in-10-large-corporations-considering-blockhain
“Distributed ledger technology in payments, clearing, and settlement,” Federal Reserve Board: https://www.federalreserve.gov/econresdata/feds/2016/files/2016095pap.pdf
“The Use of Distributed Ledger Technologies in Payment, Clearing, and Settlement,” Speech, Governor Lael Brainard: https://www.federalreserve.gov/newsevents/speech/brainard20160414a.htm
“Blockchain 101,” IBM: https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=XI912346USEN&
“Redrawing the lines: FinTech’s growing influence on Financial Services,” PwC: https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2017.pdf
“IBM has a new blockchain for banks to speed up cross-border payments,” CNBC: https://www.cnbc.com/2017/10/16/ibm-has-a-new-blockchain-for-banks-to-speed-up-cross-border-payments.html
“Transforming B2B payments for the Digital Age,” Visa: https://usa.visa.com/visa-everywhere/innovation/visa-b2b-connect.html
“Survey: Only 11% of Organizations Are Ready for Digital Disruption,” PRNewsWire, Association for Financial Professionals: https://www.prnewswire.com/news-releases/survey-only-11-of-organizations-are-ready-for-digital-disruption-300555045.html