How the Blockchain is Transforming Money and Business?

Earlier recognized as a subset of BitCoin, Blockchain has gained credibility as a separate entity in the recent years.

In the digital era, enterprises are facing challenges in managing and security of huge volumes of data; this emerging technology is a solution for enterprises to make and verify transactions across a network immediately and without the need of a central regulating authority.

Today, most of the top financial institutions along with other enterprises are leveraging the distributed ledger technology (blockchain) as a secure, transparent form of digitally tracking asset ownership; this move will help in quicker transactions, reduce costs, and lower the risks of financial breaches and frauds.

Few enterprises also plan to use this blockchain technology to track movement of assets across the entire supply chain, and electronically initiate/enforce contracts.

The digital era has presented several great opportunities to enterprises. For example, huge volumes of data are generated daily, yet we do not have the ownership of data. Either few big companies or governments have access and ownership. They either monetize this data or governments utilize it for espionage; both cases it undermines the privacy of customer’s data. Not to worry, blockchain addresses this problem.

What is blockchain?

It is a distributed ledger technology or a distributed database. This open-source technology enables users to change the code and track current activities across the network. It is a peer-to-peer technology, without any intermediaries for authentication or transaction settlement processes.

Using best-in-class cryptography, this technology records any type of structured information. IoT offers a connected network, giving a huge scope for blockchain technology to test its full potential. Banks are faced with a huge task of settling innumerable real-time financial transactions simultaneously. Blockchain proves to be useful for financial institutions.

It is an established, secure and distributed ledger of digital assets; this garners customer’s trust in sharing their private and confidential information. Its implications are noteworthy, not only for financial services but for every industry vertical.

Bitcoin, the biggest example of blockchain technology is the most popular form of permission-less system.

How Blockchain technology works?

Once you record a block of data on the blockchain ledger, it’s impossible to remove or change it. Every participant in the network has a copy of the source data of the blockchain. If a member wants to add other data, all particpants will run algorithms to evaluate, verify, the said transaction. If most of the nodes validate the transaction i.e. identifying that information matches the history, then this new transaction will be approved; thus a new block will be added to the chain.

For instance, blockchain enables settlement of securities within minutes; earlier, it took few days to settle transactions in the stock market.

Secondly, it helps enterprises manage flow of goods and relative payments; even manufactures can share production logs with regulators and OEMs for reducing product recalls.

How did it originate?

The first application of blockchain technology was the Bitcoin. Satoshi Nakamoto, in 2008, described how Bitcoin could facilitate digital payments between two entities without any third-party intermediary. Each transaction will be stored in the blockchain ledger using a digital signature. Participants ran complex algorithms for verifying these signatures and then added the transactions to the existing blockchain.

Key concepts behind Blockchain

The blockchain technology operates on two major concepts – a business network and a shared ledger.

A business network refers to a decentralized peer-to-peer system comprising of nodes of market participants (mainly banks and securities firms). Members exchange valuable data through a leger, which each member can view/owns and are updated continuously in case of content changes. Approval of transactions is validated by the protocol peers.

A shared ledger is a trustworthy source for business transactions conducted on a blockchain.

•    It records all transactions performed on the network.
•    Each participant in the network has a personal copy of the ledger
•    It is permission-based, i.e. participants can only see relevant transactions

Several enterprises have various ledgers across distributed business networks; a blockchain helps these enterprises to record complete financial transactions across the entire network.

Benefits of Blockchain

•     Trusted exchanges:The parties involved in financial transactions can easily exchange funds without any third-party risks; it reduces or eliminates counterparty risks. 
•     Empower customers:Users have complete control over financial data and transactions. 
•     Quality of data:Data present on a blockchanin is complete, accurate, timely, consistent, and always available.  
•     Integrity: Users feel secure to conduct transactions over a blockchain. There is no chance of an execution failure because a blockchain removes the need of an intermediary or a third-party financial .
•     Reliability:Decentralized networks help a blockchain avoid threats of cybersecurity since there is no central point of failure. 
•     Simplified ecosystem: All transactions are recorded on a single ledger, hence it reduces clutter and avoids problems of managing multiple ledgers.
•   Transparency: Changes to the blockchain are made public; all participants can view these changes. Therefore, it develops a transparent system of transactions that cannot be deleted or altered. 
•  Transaction costs:Blockchains eliminate overhead costs due to exchange of assets; hence, it has a great potential to lower the transaction fees.
•  Quick transactions: Earlier, interbank fund transfers took several days for clearances and final settlement. However, blockchain technology has reduced the transaction time to few minutes, which processes real-time transactions round the clock.

Challenges faced by blockchains

Blockchain is a transition to a decentralized network which requires the trust and confidence of its operators and users. Following are some of the challenges which an enterprise might face while adopting this path-breaking technology.

1. Emerging technology: As a new and growing concept, it needs to address problems of transaction speed, verification process, and data limits for wider acceptance.
2. Regulatory status: As modern currencies are developed and regulated by government agencies, blockchain technology faces challenges in adoption by the existing financial institutions in case they are not approved by government regulations.
3. Power consumption: The blockchain technology uses substantial computer power; the network’s participants work on trillion solutions every second in order to validate transactions simultaneously.
4. Privacy, security, and control: Currently, the blockchains are private or permissioned along with strong encryption. Still, enterprises adopting this technology must address concerns of cybersecurity to garner the trust of general public that their personal data will be safe and secure in the blockchain
5. Cost: The distributed ledger technology helps enterprises reduce the transaction costs however the initial investment is on a higher side.
6. Integration Issues: Blockchain solutions need important changes/complete replacement of the existing systems. Before taking this step, enterprises must have a well-defined strategy to adopt this change.

What’s in Store for you?

"There is significant enthusiasm for the potential of the technology, but there is still a limited track record of large-scale blockchain implementation in a regulated environment, and many hurdles lie ahead before we see widespread applications" as stated by Robard Williams, Senior Vice President at Moody's.

Moody’s found in its survey on July 2016 that enterprises are considering how blockchains can affect businesses; currently, there are over 120 ongoing projects that rank this technology high. These include investments, startup ventures, industry collaborations, and internal projects.

A major challenge is its compatibility with existing processes, regulatory issues, and upgradation of industry standards.

However, it is believed that the efficiency of this technology in cost, speed, reliability, security, and process audits promise to drive investments and development of blockchains in almost every industry vertical. Longevity and credit implications will be based on streamlining of business processes and reducing operational costs; these benefits will help enterprises gain a competitive edge on new entrants thus improving the process and leveraging this disruptive technology.

There is huge potential for cost savings and innovations using blockchain technology that will help asset managers gain significant competitive advantage.

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