Banks have been at the heart of the financial services sector for decades, acting as middlemen in the global economy. They perform this function by maintaining the world’s financial system with their internal ledgers. These ledgers aren’t available for public viewership. Thus, this prompted some sections of the population to request accountability.
Blockchain tech has been heralded as the innovation that can revolutionize currencies and the entire banking sector by replacing intermediaries with a trustless and transparent system. The world has seen the success of blockchain technology with Bitcoin, the premier cryptocurrency. The BTC price has also continued to rise since its inception, proving its viability.
Experts present the blockchain as a solution to foster quicker and inexpensive transactions. The typical blockchain network has different nodes with multiple points of failure, ensuring that the infrastructure is difficult to breach. Blockchain also allows users to create smart contracts to enforce agreements and improves the quality of financial audits.
Due to the set up method of blockchain, financial services can get better with the innovation of new features.
Key Benefits of the Blockchain For the Financial Industry
In the typical centralized architecture, breaching just a couple of nodes will cause the collapse of an institution. However, with blockchain, all the nodes connect to the network to strengthen the system. This makes it extremely difficult for cybercriminals to steal data. Furthermore, this decreases the need for keeping data with the intermediaries.
On the blockchain, most of the processes are shared. This facilitates a consistent source of truth for the nodes in the network. Simply put, the distributed ledger is the same for all the network’s participants.
Since a public blockchain network facilitates the viewership of the entire ledger, entities cooperate and work together on various matters. Hence, business dealings can be made with the smart contract functionality available on blockchains like Ethereum.
The blockchain remains the most private and anonymous form of making transactions with its addresses. These addresses are a string of mixed letters and numbers for sending and receiving tokens.
A blockchain network is able to facilitate a large number of transactions, allowing it to operate as a true financial system. In recent years, cross-chain developments have made it possible for transactions to become facilitated between different chains.
Making Financial Transactions on the Blockchain
Transferring money with the standard banking system takes an extended period. It could attract charges for both the sender and receiving party. Also, transfers could get stemmed by requests for verification. In essence, the banking system hasn’t been able to keep pace with the technological advancements made in other sectors.
The blockchain offers users a swifter mode of payment that isn’t fraught with expensive charges. In addition, cryptocurrencies are borderless and don’t require verification for transfers.
Raising Funds on the Blockchain
For entrepreneurs that rely on the conventional banking system, raising funds requires the help of angel investors or venture capital firms. The main drawback is that fundraising becomes tedious with discussions centered around valuation and equity splits.
The process of raising funds using the blockchain involves an exchange of tokens for funding, with investors banking on the belief that they’ll reap returns on investments. Anyone who wants to raise money for an idea by leveraging the blockchain can start with an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO). ICOs and IEOs cut out intermediaries like angel investors or banks.
In the financial system, facilitating an Initial Public Offering (IPO) to get on the Stock Exchange could cost you a ton of money. On the other hand, leveraging blockchain technology makes the entire process inexpensive.
Worthy of note is that even though ICOs allow entrepreneurs to raise funds, they are accompanied by issues like scam projects. That’s why most industrialists use IEOs, a more reliable form of raising money, since a digital currency exchange will require the businesspersons to be liable to the investors.
Lending Money on the Blockchain
The banks have taken control of money lending. That’s why interest rates are generally high. Banks can also block an individual’s access to credit based on their scores. This has presented the financial system with the problem of long waiting periods and high costs for borrowers.
With blockchain tech, a wider range of people can access lending facilitated by DeFi or decentralized finance. The key goal of DeFi is to migrate all the financial processes to the blockchain.
Since lending is facilitated in a peer-to-peer structure that eliminates intermediaries like banks, anyone can lend or borrow funds simply and cheaply. Once more people adopt lending on the blockchain, the banks have to make the lending process more accessible.
Global Trade on the Blockchain
Currently, international trade is problematic because of the numerous rules and regulations that importers and exporters have to follow. To track commodities, manual processes are utilized. This requires an outdated method of writing documents and ledgers.
With blockchain tech, importers and exporters can access a ledger that tracks products in transit across the globe. With the blockchain solution, traders can cut the time and cost spent on global trade by a significant margin.
Secure Agreements With Smart Contracts on the Blockchain
Contracts protect both parties involved in an agreement. However, the issue is that contracts need legal experts to put in a lot of person-hours into creating one.
Smart contracts save the day by automating agreements with deterministic code on the blockchain network. The funds in the contract can be stored with escrow and released when specific conditions have been met. In essence, this efficient mode of creating contracts can ease the number of civil cases in a court of law.
For centuries, finance has always rested in the hands of banks. This factor has allowed financial institutions to monopolize their services to suit themselves. However, the introduction of blockchain tech has heralded a new dawn in the financial services sector by presenting numerous benefits for individuals.
Blockchain tech offers advantages like enhanced digital security, better transparency, privacy, and increased reliability. The blockchain will revolutionize the financial space by improving the lending process, improving the contract creation process, raising funds, and making financial transactions.