There’s more to blockchain in the financial industry than simply cryptocurrency. Learn other ways blockchain is changing the game in the finance and investment sector.
Blockchain has seen explosive growth in recent years. Market forecasts predict it to grow at 62.73% CAGR through 2026, reaching $52.5 billion. In the financial services industry alone, blockchain is expected to reach a whopping $26.5 trillion by 2022. Why is this?
The financial services industry processes billions of transactions worth trillions of dollars every day. For every single transaction, security, transparency, and cost-efficiency are of utmost priority. Still, according to a PWC report, almost 45% of financial intermediaries suffer from economic crimes every year. Due to the intrinsic strength of blockchain to tackle and survive such attacks, a gradual but significant shift has been made from traditional financial services to blockchain technology.
The inherent benefits of blockchain make it a natural fit for the financial services market.
Blockchain provides security as it is designed to tamper-proof against fraud and malicious third-party attacks. Blockchain is a single shared source of truth for participants, which makes it more transparent. Along with its immutable nature, blockchain invokes trust among different parties for agreements and collaborations. In addition to these benefits, blockchain can sustain hundreds of transactions per second and periodic surges of inactivity.
The most well-known use of blockchain is in cryptocurrencies. Other than cryptocurrency, some use cases in the investment world include:
1. Hedge Fund
A team of expert investors manages these funds. It is an investment partnership comprising a group of investors and a fund manager with limited partners.
The partners are not ordinary investors but are traders. The main motive of hedge funds is to maximize investor’s returns and minimize the risks.
Due to cryptocurrencies, hedge fundraising has doubled over the last couple of years. A blockchain-based hedge fund is based on crypto and provides an open and transparent platform for many more crypto investors to participate and maximize their returns.
Currently, there are two kinds of crypto hedge funds. The first group manages portfolios that exclusively contain cryptocurrencies. The second has added a mix of other assets with cryptocurrencies.
These expert investors also keep diversifying the investment portfolio to maximize return. Crypto portfolio rebalancing tools come in handy in those decisions.
2. Fund Raising
Fundraising involves raising funds from venture capitalists, which is often a tiresome and complicated process. It consists of several steps, which can be overwhelming and time-consuming.
Blockchain has accelerated this process. It presents several alternatives such as Initial Coin Offerings (ICO), Initial Exchange Offerings (IEO), Equity Token Offerings (ETO), and Security Token Offerings (STO).
ICO is a popular fundraising method. Primarily start-ups who wish to offer products and services related to cryptocurrency and blockchain space use this method. ICOs are like shares of a company in which to participate; the investors need to purchase a digital currency first.
A word of caution though: as ICOs are entirely unregulated, one has to be very diligent in their research and investment.
STOs are more prevalent in financial services as they are legally protected and must pass due diligence. Switzerland and Malta are pioneers of STOs.
Payment in banking is another area where the penetration of blockchain is fastest. Banks are increasingly leveraging the benefits of blockchain such as:
- Faster processing time
- Higher security
- Safe transfers
- Real-time operation
- Round the clock availability
These benefits facilitate faster payments at lower cost, lower processing fees, and the ability to cut down on the need for verification from third parties.
Australia’s Westpac and Estonia’s LHV banks are among some examples that have successfully integrated blockchain into their processes.
4. P2P Transfers
P2P (Peer-to-Peer) transfer involves a transaction between two parties where money is sent from sender to receiver’s bank account using a net or mobile banking.
Traditionally P2P transfers are prone to major concerns such as lack of international money exchanges, difficulty to initiate refunds, human errors, fraud, and security issues.
With the adoption of Blockchain for P2P transfers, digital wallets are increasingly replacing cash, credit cards, vouchers, cheques, and gift cards.
This has ensured instant transactions globally, elimination of fees, inexpensive money exchanges, and a high-security level.
Nuri, formerly known as Bitwala is a popular example of a P2P App that uses Blockchain technology to facilitate seamless money transfers.
5. Clearance and Settlement
Bank transfer under traditional financial infrastructure takes a couple of days to settle. All the more so, in global transfers. It has to undergo various complex processes and bypass intermediaries such as custodial services before reaching its destination.
The banks also have to reconcile their balances across the global financial systems mandatorily. This involves asset managers, traders, a wide range of funds, and much more.
With Blockchain technology, all the transactions can be kept public and transparent by the bank. Banks can settle transactions simply and directly on a public blockchain platform without relying on a network of custodial services and regulatory bodies like SWIFT.
6. Asset Management
Financial institutions offer services to high net-worth individuals, government entities, corporations, and financial intermediaries to manage their investments on their behalf. The aim is to appreciate the client portfolio over time while mitigating risks.
Blockchain is revolutionizing the future of asset management. It has the potential to reduce costs, streamline assets, improve transparency and facilitate a range of innovative investments.
The several areas where blockchain can revolutionize the future of asset management are:
- Client Onboarding – Preparing a client to utilize platform and products after confirming identities of parties involved using identity management and data security applications.
- Smart Contracts – After the client’s account is set up and they start placing orders, blockchain can trigger a smart contract that contains the terms and conditions of transactions and automates the approval process
- Operational Efficiency – Blockchain, with its data transmission speed, can be instrumental in reducing trade execution time from milliseconds to microseconds, handle the increased volume and complexity of orders and requests.
- Regulatory Compliance – Blockchain, with its secure, meticulous, and transparent nature, can be beneficial in asset management such as investor communications, management reporting, and regulatory compliance.
7. Compliance Obligations
Financial institutions spend over $270 billion each year and dedicate 10-15% of staff to regulatory compliance obligations. And when the regulatory changes happen at a fast pace, it becomes difficult for the financial institutions to cope.
Blockchain benefits such organizations by providing automated data verification, reducing operational frictions, and eliminating errors because of manual editing.
Code Compliance is one such product that uses blockchain to reduce back-office costs of compliance management.
8. Non-fungible tokens (NFTs)
NFTs have been a very popular blockchain application. It is a unit of data on blockchain that certifies a digital asset to be unique and not interchangeable. NFTs can be used to represent an investment in intangible assets such as music, digital art, collectibles, memes, GIFs, fashion, etc.
Picture is one such platform under this domain that helps non-technical users to create, track, exchange, and manage digital NFTs on the blockchain. The company has also built and managed a site that makes buying and selling such digital art feasible.
To summarize, blockchain can disrupt the financial services industry by bringing about a major technological and digital transformation in their traditional financial processes.
These use cases are just the tip of the iceberg of its immense future scope and possibilities.