Blockchain is the first radical technological innovation of the 21st century. The possibilities are endless, but we will be focusing on how blockchain will change the financial industry. A blockchain is simply a method of structuring data, which allows a digital ledger of transactions to be created and shared amongst numerous participants through a distributed network of computers. By using methods of secure communication like public or private key cryptography, network participants are able to add data to the online ledger, in the form of a transaction, without the requirement of a central authority to authenticate or manage users and data.
Besides lending and depositing, banks are also facilitating and recording transactions and offering a broad range of other services. However, it is not all roses with regards to the banking industry. There are some disadvantages, for which blockchain can offer a solution:
– Banks can decide who can get a loan and who is not welcome in their financial system. With blockchain, this type of discrimination is no longer possible as anyone in the world can join the network;
– Transferring money from one bank to another can be time consuming and costly. By using blockchain, transactions only take up a couple of seconds and its costs decrease as the number of participants increase;
– Currently, the banks invest your money and its destination is not transparent. With blockchain, you control your own money and transparency is guaranteed by ledgers distributed among network of numerous participants;
The blockchain has plenty of advantages but we also have to take into account the disadvantages. With the banks having less control in interest rates, the application of blockchain may result in an unstable economy. Also the fact that money creation will be stopped, can be seen as a disadvantage. The inability of the money supply to vary in response to demand would likely cause greater volatility in prices and real activity. Besides, the anonymity the blockchain offers can allow for shady financial practices.
Blockchain has the ability of changing the financial industry by positioning it as newly vulnerable market:
– Newly easy to enter: blockchain allows its users to be their own financial intermediary, making the financial industry newly easy to enter by empowering the customers;
– Attractive to attack: grabbing a fraction of the profits is what makes this market attractive to attack, which is happening in this industry. For example, a London based startup named ‘Blockchain’ recently raised 41 million dollars;
– Difficult to defend: the financial industry is evidently difficult to defend, because when masses of people decide to switch to a blockchain system, banks will lose their customers, which means missing out on interest received;
We expect that the blockchain technology will be integrated into the financial value chain by many financial institutions. It will trigger an era of severe reorganization in these institutions, suggesting a disruption in the financial industry. However, as of today, blockchain is still in its early days and a complete transformation of current processes will take time.
