One of the most discussed topics in the financial services industry today is blockchain technology. We are beginning to understand what a blockchain is, but how can we best use this technology within our business? In this series we describe 5 blockchain use cases, such as smart contracts, identity management and share trading. We hope they will enhance your understanding of the opportunities and challenges of this technology, and we welcome your feedback and further discussion.
What is a blockchain?
Most parties in the financial sector already have a grasp of concepts such as bitcoins and other cryptocurrencies. These concepts work on the blockchain technology, which is a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’ computers. All parties can review previous entries and record new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks (the ‘blockchain’). The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority – a ‘middleman’.
Cross-border payments
The blockchain can improve many processes within the financial sector, such as cross-border payments. The transfer of value has always been an expensive and slow process. This is particularly true for cross-border payments. For instance, if a person wants to transfer money from Europe to their family in the Philippines, who have an account with a local bank, it takes a number of banks (and currencies) before the money can be collected. Using services like Western Union for the same transaction is faster but very expensive.
Faster and more affordable
The blockchain can speed up and simplify this process, cutting out many of the traditional middlemen. At the same time, it makes money remittance more affordable. Until now, the costs of remittance were 5-20%. The blockchain reduces the costs to 2-3% of the total amount and provides guaranteed, real time transactions across borders.
A few hurdles
This is why the blockchain is gaining territory in the field of money remittance. Of course, there are a few hurdles to be taken. The most important one is lack of regulation for cryptocurrencies. If money is transferred from one country to another using blockchain wallets, and one of wallet providers goes bankrupt or the wallet is attacked by hackers, the cryptocurrency stored will be lost and there is no central authority like a bank to reimburse the loss.
Cryptocurrency exchange
There is also the problem of exchanging the cryptocurrency back into locally accepted (fiat) money at the destination. This will often require the use of a cryptocurrency exchange where e.g. Bitcoin is traded for US dollars. Using such an exchange can add extra complexity and runs the risk of fluctuating exchange rates (which can be extreme for cryptocurrencies). Still, many people are willing to take these risks, as the benefits outweigh the drawbacks. Their numbers have the potential to go up once more beneficial regulations are developed.
Regulators
When regulation has been implemented, the blockchain will also be an interesting option for corporate cross-border payments. As hard as it is for individual clients to lose their money when parties go bankrupt, it is even more disturbing for corporates transferring large amounts of money through cross-border payments. With the proper regulation, banks will be able to offer their corporate clients interesting propositions based on the blockchain. They are already building their understanding of blockchain technology and developing proofs of concept.
Innovative climate
On a global scale, more and more countries are improving regulation in the field of cryptocurrency, as they acknowledge its importance for an innovative climate. Until now, Europe has been more conservative. For instance, only a few years ago, Dutch regulator DNB claimed that virtual currency is ‘no currency at all’, comparing bitcoins to the tulip bulb bubble that caused a huge collapse of the Dutch economy in the 17th century, when tulips became the new gold – for a while.
Experiments
However, the benefits of cryptocurrencies and other blockchain applications have become clear in the last few years and both Fintech startups and banks are actively experimenting with the technology and pressing regulators for action. With even DNB itself experimenting internally to become more familiar with cryptocurrencies in the form of a ‘DNB-coin’, clearer rules for banks, corporates and individuals are only a matter of time.
What are the possibilities for your organisation?
Do you want to discuss the possibilities for your organisation? Please contact UMAR ASGHAR via +923231411234 / [email protected] or SYED JAWAD HAIDER via +923328363467 or [email protected]
#1. Blockchain – speeding up and simplifying cross-border payments
The transfer of value has always been an expensive and slow process. This is particularly true for cross-border payments. The blockchain is able to speed up and simplify this process - and also reduces the costs significantly.
#2. Blockchain – the future of share trading
Share trading will soon be impacted by the blockchain. Utilizing blockchain technology allows for greater trade accuracy, and a shorter settlement process.
#3. Blockchain – the benefits of smart contracts
One of the most promising applications of blockchain technology is the smart contract. It can execute commercial transactions and agreements automatically. It also enforces the obligations of all parties in a contract – without the added expense of a middleman.
#4. Blockchain – how to improve online identity management
When identity management is moved to the blockchain, users are able to choose how to identify themselves and who will be informed. They still need to register their identity on the blockchain somehow, but after that, they can re-use that identification for other services.
#5. Blockchain – loyalty and rewards
More information will follow.
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