What is blockchain finance?

Blockchain adoption originates back to 2008 with the creation of the digital currency Bitcoin. Since then, blockchain finance has become widely adopted, with El Salvador and Central African Republic recognizing digital currencies as a legal currency. Businesses that are looking to secure payments, streamline processes, and scale will often adopt blockchain technology.

What are the Benefits of Blockchain Technology in Finance?

Moving away from a central authority financial system has widespread benefits for all businesses, even those outside of the finance sector. In many cases, businesses can personalize blockchain to fit their specific objectives. Let’s explore some of the blockchain finance benefits:

• Security – Blockchain is one of the most secure data transmitting systems available in the finance industry. With mutual standards, shared processes, and transparent protocols, businesses can leverage a single shared source of truth.
• Trust – The decentralized nature of blockchain infuses trust in the system. Different parties can easily collaborate, create new agreements, and manage data.
• Privacy – Data privacy is a core component of blockchain. Businesses can leverage selective sharing of data, improve transparency into transactions, and increase efficiency, all while maintaining data privacy.
• Scalability – Unlike other financial products that make it difficult to scale, blockchain allows for unlimited growth. There are no restrictions on transaction levels or interoperability between public and private businesses.
• Performance – Blockchain has the capability to process hundreds of transactions per second, resulting in quick processing and minimized delays.
• Programmability – With the help of artificial intelligence and other disruptive technologies, blockchain can be programmed to fit your business needs.

Blockchain offers dozens of benefits for business owners, regardless of current size. However, businesses should always consider having other safeguards in place, like accounts payable protection.

The Use Cases and Impact of Blockchain Technology in the Finance Industry

The use of blockchain finance extends beyond digital currencies. In fact, blockchain technology has been adopted in numerous sectors of the financial services industry. Let’s break down the use cases of blockchain technology in a few of the financial markets.

Capital Markets

In the capital markets industry, blockchain is used for issuance, sales and trading, clearing and settlement, post-trade services and infrastructure, and asset servicing. The primary goal of capital market businesses is to pair organizations that need capital with investors that fit the risk profile.

Businesses operating in the capital market sector must follow stringent regulations, face interest rate volatility, and ensure secure transactions. Blockchain offers numerous solutions to these problems, including:

• Eliminates single-point failures with decentralized software.
• Streamlines processes, resulting in lower costs and faster settlement times.
• Secures transactions, reducing fraud and human error risks.
• Tokenizes assets to make them easier to store, manage, and trade, including the ability to have fractional ownership.

Asset Management

Asset management businesses use blockchain for fund launches, cap table management, and fund administration. With regulations constantly changing and quick turnaround times for important decisions, many asset management businesses are leveraging blockchain finance in the following ways:

• Automates fund launches, resulting in streamlined asset management.
• Digitizes portfolios to add transparency, expand market access, improve compliance, offer fractional ownership, and increase liquidity.
• Reworks voting and shareholder rights to bolster customer experience, reduce human error, and promote participation.

Insurance

The insurance sector benefits from blockchain when issuing parametrized contracts in the reinsurance markets and working through claims processing and disbursement. Here are other benefits of implementing blockchain in insurance businesses:

• Streamlines smart contracts claim processing and approval with independent verification of documents.
• Uses parameterized contracts to automate disbursements for certain risks.
• Steps away from traditional brokers and fees through the use of tokenized reinsurance markets in open markets.

Payments and Remittances

One of the most widespread blockchain adoptions is found in payment and remittances. Companies use blockchain technology to send and receive domestic payments, facilitate cross-border payments, secure financial transactions, and minimize currency fluctuation risks. Here are some additional ways that the payment and remittance financial sector is using blockchain:

• Secures domestic and cross-border payments, minimizing fraud risks and providing real-time authentication.
• Expedites payments and settlements through numerous payment forms, like tokenized fiat, stablecoin, and cryptocurrency.
• Implements automated auditing, oversight, and compliance features.

Banking and Lending

Blockchain is frequently used in banking and lending to offer credit protection, underwrite loans, and collateralize assets. Not only can blockchain expedite the turnaround time for loans, but it can also streamline all internal activities. Here are a few more of the benefits of blockchain in banking and lending:

• Reduces operational risks and adds real-time verification of documentation.
• Streamlines credit scoring and prediction models using information from user activity.
• Automates underwriting, fund disbursement, and syndicate formation.
• Lowers costs, time delays, and friction of syndication, allowing for real-time asset management, tracking, and regulatory reporting.

Trade Finance

Trade finance benefits from financial services centered on blockchain. The issuance of credit letters and financing structures can easily be facilitated using blockchain. The movement of the trade finance financial services sector to blockchain eliminates security issues associated with paper-based processing. Here are some other advantages the trade finance sector realizes with blockchain:

• Digitizes and authenticates smart contracts, letters of credit, and bills of lading through real-time verification.
• Infuses speed into settlement times through the creation of a shared secure network.
• Creates consistent financing methods throughout the trade lifecycle, minimizing the need to negotiate independent finance vehicles.

Summary

• Blockchain is a decentralized ledger used to process transactions.
• Blockchain offers businesses added security, trust, privacy, scalability, performance, and programming capabilities.

The financial sector has begun to widely adopt blockchain, including businesses in the capital market, asset management, insurance, payments and remittances, banking and lending, and trade finance niches.