A Blockchain is a public, digital ledger that anybody can verify. It is distributed globally among a network of computers. The key point is that there is no need for a central authority to add new transactions to the ledger. The distributed nature of the ledger means that it is highly secure. This is because each participating computer on the network needs to validate each transaction and agree on it. The computers use complex cryptographic algorithms to validate a given transaction.
Blockchain technology is an emerging technology that promises to change the way financial transactions are conducted. It is the driving force behind the internet-based cryptocurrency, Bitcoin.
But its applications don’t end with Bitcoin or other cryptocurrencies. Leading financial institutions are enthusiastic about what blockchain technology can do for them. Here are two key benefits of the decentralized, distributed ledger for the financial services industry:
24/7 Instant Spot Trading.
The current method for spot trading is not instantaneous. Even though the idea behind spot trading is for immediate delivery of the traded instrument, it actually takes a day or two to settle the majority of transactions. This is because of the delay associated with using third parties in each transaction, such as brokers. As a result of the involvement of these intermediaries, one cannot currently spot trade on the weekends.
The blockchain database can get around this problem, by introducing direct trading between clients that doesn’t necessitate using third parties to settle the transaction. This means that trade contracts can be settled immediately, reducing settlement costs and providing a highly liquid market at all times, including on the weekends.
Another crucial point is that instantaneous trading will almost eliminate counter-party risk. This is the risk that one party in a trade defaults while the transaction is in the process of settlement. It’s little wonder that financial institutions are excited about this benefit of blockchain technology.
Banks are also optimistic about the cost reduction benefits of blockchain technology. A key area of banking that the distributed database will save money on is international payments. In traditional banking, international payments can take up to four days to settle. The current architecture results in the need for centralized authorities to verify transactions. This verification takes time, and it is expensive for banks.
With blockchain technology, both parties can reach an agreement on the validity of a transaction, without the need for a bureaucratic authority. This agreement would be instantaneous because each bank will have its own copy of the blockchain ledger. The payment could be verified by every computer on the network in less than a few minutes, and thus recognized as a valid transaction.
Instantaneous international payments would reduce costs for banks enormously, and give them a serious boost in terms of efficiency. It’s no surprise that some major banks are already looking at ways to implement the blockchain within a few years.
There you have it: two key benefits of blockchain technology to the financial services industry. Don’t be surprised to read a lot more about the blockchain in the coming years.