Outdated financial services delivery processes need to be changed. For example, data entry into several systems and manual data aggregation are common problems in the financial and economic sphere. In addition, such a centralized system is increasingly vulnerable to cyberattacks since all information is in one place.
Inefficient technologies, paper documents, and bureaucratic mechanisms must be replaced by digital innovations based on the principles of cooperation, trust, independent values, elimination of intermediaries, and complete security. Blockchain technology meets all these principles today.
What Is Blockchain and How Does It Work?
Blockchain is a distributed database technology based on an ever-growing chain of records. At the beginning of its existence, the blockchain was widely used in cryptocurrencies. This made it possible to carry out chain transactions with a high level of protection against falsification and theft of data, as well as a high speed of transaction processing.
In general, this technology can be represented as an ever-growing sequence of blocks distributed among participants. A timestamp (hash-sum) is added to each block, forming a strictly defined chain. If you try to change such a sequence, the system will reject such a chain because the sequence will be determined to be incorrect.
Blockchain technology uses several protections to prevent the correct hash-sum from being read. The most important is proof of work and ownership. It follows that the participants of transactions cannot deceive each other, and the data is transparent since a database is unified.
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Main Advantages of Blockchain Technology for the Financial Sector
The advantages of blockchain technology include the following:
- There is no server in the chain. Each participant is a server that supports the operation of the entire blockchain;
- Information about transactions is publicly available. This data cannot be changed;
- Theoretical unlimitedness. Theoretically, the chain can be supplemented with records to infinity;
- Only legitimate transactions are recorded. It is impossible to change the hash;
- Blockchain can be used not only in the financial sector but also in other spheres of life (jurisprudence, real estate transactions, insurance, etc.).
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Popular Blockchain Applications in the Financial Sphere
Thanks to its universal technology, blockchain can be used in the field of finance for many purposes. Here is a list of possible use cases:
- International payments. The use of blockchain to make payments between different financial institutions and customers can significantly reduce the costs of banks and remove the need for a complex information structure. In addition, it can increase the level of security and speed of domestic and international payments;
- Securities. The traditional way of trading securities requires rather complex accounting procedures involving such parties as brokers, stock exchanges, depository banks, central securities depositories, etc. The transfer of securities into digital form will increase their liquidity. It will also help to more effectively comply with the implementation of legislation, flexibly transfer and take into account the ownership of such assets;
- Accounting. Every modern firm conducts various accounting operations. Data reconciliation requires time and significant human resources. Blockchain technology can easily solve this challenge. All transaction data will be recorded in real-time in a single registry, so compliance with important legal norms will be checked automatically. This can greatly improve the work efficiency of organizations;
- Audit. Blockchain provides up-to-date and reliable financial statements between counterparties, which makes the audit process more convenient and transparent and reduces the time it takes. Auditors don’t need to review a huge number of daily transactions, so they can focus more on contentious and complex issues;
- Insurance. Insurance companies can implement blockchain technology to instantly share customer data. Thus, if a person insured by different companies changes address, it is enough to send updated information to one of the insurers. Then all data will be transferred to other organizations.
- Electronic commerce. Blockchain guarantees simple and secure payments on the Internet. One of the missions assigned to the blockchain is to change the commercial ecosystem of the Internet. Free micro-markets should replace large marketplaces that make money from mediation. The introduction of BBEP platforms (blockchain-based eCommerce platforms) will enable the seller and the buyer to interact directly;
- Logistics. Blockchain offers process and contract management using algorithmic processes. Every stage of transportation and delivery of goods can be tracked with the help of blockchain technologies. Such logistics applications will make it possible to understand where the order is at a given moment, under what conditions it is stored, and who is responsible for the result. All this makes it possible to bring logistics to a qualitatively new level, reduce costs, eliminate the corruption component, and cancel structures that act as a trusted party in the deal.
In addition to the applications described above, blockchain is widely used today for smart asset and contract management, crowdfunding, government control, etc. It makes the financial sector more flexible, transparent, and secure.
Blockchain is an effective and safe tool for solving a wide range of financial tasks. This technology has the potential to change the way we manage supply chains, transactions and asset exchanges, accounting, and auditing.
In addition, blockchain can be useful in the field of public administration and public control over public bodies. Thus, the undoubted advantage of blockchain is its universality – the technology is suitable for managing any project based on a distributed database.