Blockchain For Finance
Author: Andrew Ong
#IBS #instituteofblockchain #blockchaineducation #blockchain
Blockchain technology has disrupted many industries with key ideas such as distributed ledger technology and cryptography. This is especially true in finance, with the creation of bitcoin alone resulting in a mass shift in the way people transfer money and funds within and between countries. But bitcoin, which uses blockchain technology specifically for money transfers, is akin to using the internet only for emails. The internet has so much more to offer — similarly, blockchain technology has so much more to offer in the field of finance beyond money transfer. Let’s have a look at some of these disruptions.
The wave of cryptocurrencies such as bitcoin has offered users an alternative way to transfer funds between each other efficiently and securely while enjoying lower transaction fees. This is done through the use of blockchain technology, that uses cryptography, consensus mechanisms and smart code to ensure verified transactions are processed and enabled. By using technology, users who use the blockchain do not incur the cost of delays, paperwork documentation, and friction between a whole list of financial intermediaries that are evident in banks and centralized entities. Instead, they enjoy the cost savings through the use of blockchain technology whereby the process of transferring money incurs a lower transaction fee and can usually be processed much faster. Thus, blockchain technology has offered users a cheaper and faster way to transfer money between each other, and between countries — regardless of geographical limitations.
By using blockchain technology to speed up the process of cross-border payments through the removal of traditional middlemen, this would make money remittances more affordable for users who need it most. For instance, a contractor or domestic helper working in Singapore who needs to make cross-border transfers to his or her parents back in the Philippines would traditionally cost him or her 5–20% using traditional money remittance companies. However, with the use of blockchain technology, that remittance costs could be reduced to 2–3%, with that transaction occurring much faster, and being extremely transparent and visible for both parties who can trace the funds on the blockchain through their web browsers. For example, an organization called Stellar.org aims to provide low-cost financial services to users. By using and transferring their cryptocurrency, Lumens, for cross-border payments and remittances, a user can expect to pay only $0.0000025 per transaction at the Lumens current price. The use of blockchain technology can impact the lives of many users who suffer from traditionally high remittance costs and offer them an alternative.
Beyond everyday users, blockchain technology has also greatly changed the way companies access growth capital and investment funds. Companies would traditionally seek to raise funds from angel investors, venture capitalists, and eventually, end up having an initial public offering on a stock exchange. This process of fundraising is now being disrupted by blockchain technology, as it offers companies an alternative way of raising capital: Initial Coin Offerings (ICOs). These ICOs draw inspiration from crowd-funding platforms and build upon it through the ideas of decentralization and network effect, to effectively raise millions of dollars worth in capital from a large pool of investors, both retail and institutional, to fund their projects and technology. This model could be an improvement of traditional fundraising models, as users and early adopters are the ones who contribute to a crowd-sale of these tokens, and a company can build a community along with its most loyal userbase to develop a product that is viable and truly useful to its users. Through ICOs, companies who raise funds also do not need to deal with tedious paperwork and documentation similar to that of an IPO, as smart contracts help to handle the processing of funds and distribution of tokens. Hence, blockchain technology and a new way of raising funds through ICOs has re-shaped the fundraising process of companies.
Loyalty and Rewards
The blockchain offers the chance to digitize assets and tokenize them, thereby enabling a greater liquidity and even transactability of these assets. Imagine a user digitizing their gold, and using it to transact with others — a non-liquid asset is now liquid and its value increases. In another scenario, different applications are able to increasingly interact with one another, and this would reshape the landscape of loyalty and reward systems. For example, OmiseGO is working on developing a decentralized exchange that enables an asset to be tokenized and transacted with. Imagine exchanging a Grab point with a Kris Flyer mile, or with discount points at Courts. The blockchain enables assets to be securely digitized and secured, as well as allow many users to transact peer-to-peer on the blockchain. The way companies manage a user’s e-points and digital rewards will be impacted greatly by the use of blockchain technology.
Regulations and Compliance
Financial institutions need to constantly be compliant with regulations, and the fees spent on compliance are not low. Institutions have to do extensive amounts of risk management and reporting, which could be extremely manual and laborious processes. By using the blockchain ledger, which is open and immutable, to store transactions and business processes, this could reduce the need for extensive and repetitive reporting as all information would be available on the blockchain. In addition, verifying customers or KYC, which are a core process in banks, could be made easier by storing a user’s financial history on the blockchain, whereby any financial entity can access the same information without the need for reconciliation between different parties. The use of blockchain technology can help to reduce the costs and time spent on regulation and compliance between regulators and even users drastically.
And it does not stop there. Blockchain technology is also changing the way we invest by creating a separate asset and investment class which some see as “digital gold”. Smart contracts are changing the way we view contracts and agreements, by using smart code and parameters to distribute and receive funds in a more efficient and transparent way. Concepts of cryptography are being used to boost a banks’ cybersecurity level, by storing its sensitive data on a distributed database, instead of a central one. As more innovative companies and founders step up to use blockchain technology and its innovations to solve a problem in the enormous space of finance, more use cases and products will increasingly disrupt the traditional model and processes in banks and financial institutions. Only time will tell who will stay ahead of the game, and who will remain left behind in this age of disruption.