@liskLisk

We empower developers with a software development kit for blockchain applications written in JavaScript.

Financial services are defined by the International Monetary Fund (IMF) as processes by which consumers or businesses acquire financial goods. It involves a wide range of economic activities provided by the finance industry, such as banking, investing, and insurance.

The financial services sector is classed as one of the most important within the global economy and is for the most part the primary driver of national economies. It has a direct influence on the prosperity of a country’s population.

Despite its positive impact, history has shown that the financial services sector has also played a negative role in causing global recessions and poverty when incorrectly managed, and hence can produce disastrous results. Blockchain technology can have a significant impact on the financial services sector in many different ways and can provide overall benefits for governments, companies, and individuals alike.

In this article, we will discuss the benefits that blockchain technology may bring into the financial services sector from both a company and a regulatory perspective.

Challenges in Financial Services

The financial crisis that occurred back in 2008 was primarily caused by deregulation in the financial industry. Hence, due to the lack of regulation and supervision, it resulted in the worst economic crisis since the 1930s, causing a disastrous impact on the global economy.

More recently, the case of Wirecard, a German payment provider that fraudulently lost €1.9 billion and filed for bankruptcy in 2020 [1], highlighted once again how important it is that companies; in particular financial companies, abide by the rules and regulations in place. This recent case also illustrates how difficult it can be for the financial services industry to conduct verifiable auditing and adhere to the regulatory requirements.

However, in today’s globalized world it has also become more and more difficult for globally operating financial firms to comply with the different and ever-changing regulations in the markets they operate in.

As the world becomes more interconnected, the number of international payments has also increased consistently over the past years [2]. Cross-border payments involve a large number of intermediaries that process every transaction to provide trust between the different parties. Consequently, transferring money between different countries is not only expensive but also somewhat cumbersome. Cross border payments can take up to five days, with domestic payments also not being settled instantly.

Similarly, the issuance and trade of financial securities, such as shares and bonds are also sluggish. The issuance of securities usually involves many stakeholders and hence, is complex and time-consuming. Buying and selling securities requires settlements to be performed and can take several business days before clearance can be realized.

This slow process prohibits financial institutions and their clients from moving quickly and adapting to changes. This is expensive and creates risks for both parties wishing to execute a transaction. 

Client onboarding plays an important role in the relationship of financial institutions, such as banks and their clients, and generally refers to welcoming processes to their services. This is usually a lengthy process as it involves the verification of identity, suitability, and risk of engaging in a business partnership with the client.

This process is also defined as ‘Know Your Customer’ (KYC). It can take anywhere between two to twelve weeks until a client is fully onboarded [3], and results in incurring additional costs to both parties. Despite the drawbacks of the KYC process, no other alternative has prevailed until now.

The challenges to the financial services sector do not end here. Certainly, other problems such as fraud, human error, disintegrated systems, and bad access in some rural areas also need to be considered. However, this article will focus on the previously mentioned challenges and will investigate how blockchain can assist in overcoming these obstacles.

Benefits for Enterprises

Blockchain technology can have a significant impact on solving these challenges, as it has the ability to benefit regulators, financial institutions, and individuals in many ways. The key characteristics of blockchain technology, decentralization and immutability, play a primary role in this context.

Decentralization means that data stored on the blockchain is visible to everyone, and immutability refers to the fact that this data cannot be tampered with or changed by an individual. In addition, blockchain transactions have now become programmable and automated. These very important features lay the foundation for efficiency, transparency, and security in ways that have never before been attainable in the financial service sector.

Blockchain facilitates better compliance

Blockchain technology can improve private regulatory compliance and assist regulators by making financial services more transparent. Financial institutions can receive an all-encompassing overview and a single source of truth of their assets and transactions, which results in making the entire auditing process easier and cheaper.

Regulators can have direct access to compliance-related data stored on a blockchain and can spot irregularities early on to avoid unpleasant surprises, such as occurred with the Wirecard fiasco. Storing compliance-related information on a blockchain also reduces the cost and efforts of regulatory reporting and results in higher quality and accuracy. 

Blockchain enables faster and less expensive payments 

Blockchain technology can facilitate direct and secure payments, both domestically and internationally with few or even no intermediaries. In addition, blockchain can streamline the process and reduce the cost significantly as a result.

Another key benefit is that it lowers the transaction time from hours to seconds [4]. According to a study by Jupiter Research, blockchain deployments will enable banks to save up to $27 billion on cross-border settlement transactions by the end of 2030, therefore reducing costs by more than 11% [5].

Blockchain allows a smoother client onboarding

Blockchain technology can allow users to store and manage their personal data on a blockchain. This is often referred to as Digital Identity Verification. During an onboarding process, the client could easily provide the financial institution with the verified personal information, and in turn speed up the onboarding process significantly. 

Blockchain makes the issuance and trade of financial securities cheaper and faster 

Blockchain technology can have a large impact on the capital market which enables the issuance and trade of financial securities, such as shares and bonds, and is used by companies to raise funds.

Using blockchain technology, it is possible to issue and trade digital securities instantly, coupled with being cheaper and with fewer or no intermediaries.

Finally, blockchain technology enables more customization of digital securities.

Blockchain makes trade finance more transparent and efficient

As global trade is growing, trade finance which represents the financial instruments and products that allow trading to take place, is becoming more and more vital in today’s world.

Blockchain technology has the possibility to make trade more secure, efficient, and transparent by replicating the whole process on a blockchain. This in turn culminates in faster processes being expediently automated, and further ensures human errors can be eliminated, resulting in the creation of trust through open transparency.

Blockchain enables new ways of funding 

Blockchain technology enables new ways of sourcing capital, such as tokenization, initial coin offerings (ICOs), and initial exchange offerings (IEO). Tokenization refers to the securitization of digital assets, and is a process in which blockchain tokens are issued to represent real-world assets, such as real estate. A key benefit here is that smaller investors can have access to these assets as they can be divided into more diminutive granular pieces. 

An ICO is a practice of fundraising for blockchain projects, wherein tokens or cryptocurrencies are offered to investors before they are listed on the wider marketplace, such as exchanges, to raise capital for a business idea.

Most recently, IEOs became a more popular alternative to raise funds in contrast to the independently organised ICOs. Briefly, an IEO is a coin offering that is administered by a cryptocurrency exchange, which in turn offers the investor a more secure and safer regulated environment.

Blockchain Technology Applied

The first use-cases involving blockchain technology appeared within the currency and payment realm. The most prominent case was Bitcoin in 2009. Since then, many financial services companies have started to invest in blockchain technology. According to IBM, 91% of banks were investing in blockchain solutions by 2018 [6]. The five largest banks of Spain belong to this group. 

Iberpay – Blockchain for smart payments [7]

The five largest Spanish banks – Banco Sabadell, Banco Santander, Bankia, BBVA, and CaixaBank collaborated with Iberpay on the development of a proof of concept blockchain application. This application facilitates automatic digital payments via smart contracts only if predefined conditions have been met. For instance, a smart contract can be used for the confirmation of shipped goods and can initiate an automatic payment over the blockchain.

As part of the proof of concept, a private blockchain network called ‘red-I’ was created to facilitate the transactions between the banks. It consisted of a total of seven operating nodes. Over the course of the project, over 20,000 payments were facilitated on the blockchain network with an average confirmation time of 2.5 seconds. [8]

The pilot project successfully finished in 2020 and according to bank representatives, “has confirmed the viability of employing blockchain technology to the payments sector” [9]. In the future, a second project will be initiated, which aims to establish a connection between the ‘red-I’ and various other non-banking networks [10].

Benefits of the initiative

• Faster and automatic execution of transactions.
• More traceability and integrity for payments.
• Confirmed applicability for blockchain technology in the payment sector.

Financial Services Proof of Concept Built with Lisk

Blockchain technology can offer numerous benefits in the financial services industry. You can already build payment blockchain applications with the Lisk SDK. The Recurring Payments proof of concept developed by Jurre Machielsen is a decentralized system that creates deterministic contracts between parties and enables automatic payments. The Lisk Builders program can assist enterprises and developers in developing blockchain applications for financial services.

References

1. Wirecard
2. Cross-boarder payments
3. Client onboarding
4. Transaction time
5. Blockchain Deployments
6. Financial services
7. Digital Payments pilot
8. PoC interbank payments
9. Blockchain technology on payments sector
10. Connection between ‘red-I’ and other non-banking networks

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://hackernoon.com/applying-blockchain-technology-to-financial-services-of1q37cp?source=rss