5 blockchain-based use cases in finance

Whenever we hear the word “cryptocurrency”, bitcoin (BTC) is probably the first word that comes to mind. It has developed a cult-like following like no other in the 21st century. Within this following, you can find persons of all sorts and from all walks of life.

It’s truly amazing technology. Anyone who is deeply rooted in technology knows that bitcoin is just a primer for what is to come. Blockchain, which is the main architecture that powers bitcoin will have a much greater impact on society over time.

What is blockchain?

Blockchain is a decentralized distributed system. It could be viewed as a digital ledger or a database that stores transactional data in such a way that it cannot be forged or manipulated that easily.

Everyone has equal access to the database and can even trace transactions to spot activities that might defer from its main goal.

The idea of blockchain could be visualized as a chain of blocks. Each block contains a group of transactional data which is then verified by miners. Once each block is verified, the information is then stored on the ledger for everyone to see.

One of the main things that make it hard for others to hack the system, is that the transactions are duplicated and distributed across the entire network of computer systems on the blockchain.

Hypothetically, if a hacker tries to change a block in one part of the system. He would have to hack every other block on the chain across all the other distributed systems. Due to the fact that the daily number of blocks being created is increasing, it is becoming ever more difficult.

Blockchain and Finance

Financial Crisis

The concept of a decentralized system isn’t new. It has been floating around literature for years. What made it useful was the manner in which it has been used.

If you want to know more about blockchain and bitcoin take a look at the bitcoin paper.  It was created by an unknown or group of very smart people under the name of Satoshi Nakamoto.

It is assumed to be created within the period of the last financial crisis of 2008 when global energy prices were rising which led to an unusual rate of inflation. This then had a cascading effect on vulnerable or highly leveraged markets, such as the housing market at the time, which was akin to Las Vegas at the time.

Banks were offering out mortgages to clients who wouldn’t even make it past the first phase of evaluation at any other time. During this time, everyone involved in the housing market was highly leveraged.

They all thought that the party was going to last forever but sadly it all came crashing down.

When property prices started to fall, all hell broke loose and that was the domino that tipped it off for other financial assets. Most of the financial institutions across the planet were impacted. It even led to the downfall of famous banks such as Lehman Brothers and Washington Mutual.

The federal reserve took drastic actions to bail out the economy by saving the very banks that started this scheme who was about to go bankrupt.

Within this chaos, bitcoin was assumed to be conceptualized and came to life in 2009. It has been on a breathtaking run ever since and is probably one of the most disruptive technology in the 21st century. It was brought in to change the entire financial model and landscape.

Why Bitcoin?

Since 2008, there’s been an ever-growing suspicion of the operations and practices happening within banks. Persons just don’t trust banks anymore and even if they do, it’s not to the degree where it once was. Especially due to the centralization and governance of banks, the rules can be skewed to favor a certain audience and leave others behind.

Bitcoin is seen as an alternative that supports transparency, ease of use, and diversity. Basically, it is not a fiat currency that is backed by banks or the “system”. It is collectively backed by the owners of bitcoins or a share of it within the overall blockchain.

It works on harvesting the collective. We are not just a name attached to numbers on a spreadsheet that can easily be scratched off by an institution.

Because of this, it has garnered lots of backlash from those with power in the finance industry since its initial stages. Over time, some of those views have softened due to the ubiquitous nature of bitcoin and the fact that it’s probably here to stay.

If you can’t beat them, you join them.

Now we have banks that are implementing blockchain-based technologies into their business model. If they don’t, new startups will and probably take their customers.

Even though we are in the very early stages, certain use cases are finally popping up. Below are 5 use cases where I think blockchain-based technology is going to be impactful within the finance industry.

Peer-to-Peer Transfers

The usual model of Peer-to-Peer transfer within banks consists of mainly transferring money from one bank account to the other.

Current Challenges:

Currently, a peer-to-peer transfer can be easily skewed or manipulated. If someone has the sophistication and the know-how, they can easily shift around unsolicited money.

Another issue is that this process is prone to human error. Yearly banks pay out huge sums of money for accounting mistakes. Lastly, we don’t yet have a globalized money exchange that supports fair trade.

Blockchain Promises:

Blockchain-based technology promises to make it easier to transfer money internationally at a low cost. Oftentimes, it can be done instantly, there is no middle man evaluating the procedure and casting false judgment before making the final call.

Additionally, it is also highly secure and prevents data manipulation.

Clearance and Settlement

Clearance and settlement can often be long and drawn out within banks. Mistakes are also prone to happen.

Current Challenges:

Banks take too long to settle a payment due to all the processes it has to go through. Additionally, the overall system is not transparent. It’s hard to visualize how the process works from an outsider.

Transferring money globally is also a complex process, especially as the sum total starts to increase.

Blockchain Promises:

Blockchain promises transparency. Banks could easily settle and clear money in an automated and distributed fashion.

Customers can look at the overall mapping of where the money is going, how long did it take, and many other metadata about the transfer.

Identity Verification

Identity verification is another one of those processes that can and should be overtaken by blockchain due to the benefits involved.

Current Challenges:

Identity verification within banks can often be a long and drawn-out process with many moving parts. Even with all the barriers, it could still be seen as a waste of time and resources with the current model due to the fact that persons are still gaming the system.

Blockchain Promises:

If this process is implemented using blockchain, an individual can create their identity on the blockchain which can be used as a reference to create accounts.

The way how blockchain is designed, the information can be trusted because it cannot be easily manipulated on the blockchain.

Investments

Traditionally it takes quite a few loops to jump through to invest in a company or an asset.

Current Challenges:

Investing could take a while to set up and you cannot trade certain assets based on your profile. Typically, you also have to go through a middleman to process investments.

Although this model is being changed due to other technologies, we are still not there yet and blockchain might give us the final push to achieve that dream.

Blockchain Promises:

When we use blockchain to invest, every transaction can be viewed and traced within a system. We can have an idea of how the stock is being manipulated. Also due to the inability to use a middleman, it can reduce the cost it takes to invest.

When we incorporate KYC (Know Your Customers), it doesn’t have to take a long while to be onboarded on a platform and we can easily invest in international assets without any overhead.

Payments

Payments are probably one of the first sectors of the financial industry where blockchain-based use case was realized. Ever since bitcoin’s inception, persons have been using it to make purchases.

One of the most famous ones is the purchase of 2 pizzas for 10,000 bitcoins. At today’s rate of roughly 51,000 that’s $510,00,000. It’s a lot of money in hindsight for a pizza.

That’s just how the modern market works where NFTs are being sold for hundreds of thousands of dollars, basically jpegs on a blockchain-based system.

Current Challenges:

When making payments especially internationally, our fiat currency is at the mercy of the whip and saws of the foreign exchange market which is known to be manipulated.

Not to say that cryptocurrencies are not being manipulated too, but at the same time, it’s hard to dissect what is really happening if we should pull the rug and get to work.

Blockchain Promises:

When we use bitcoin to purchase items over a platform that accepts it, that’s the same rate anywhere you go to purchase. Even if you are in Africa or even South East Asia, that’s the same bitcoin rate you are going to use to purchase.

Due to the universal aspect of this rule, it’s making bitcoin or even cryptocurrencies being more commonplace.

On a blockchain-based system, transfers are quick and safe. You basically have no overhead with the bureaucracy involved in cross-border payments

Conclusion

Overall blockchain-based technologies in finance are going to change a lot of the old and archaic process which has been there for hundreds of years. Some of them are well overdue.

Cryptocurrencies are here to stay and blockchain-based technologies will continue to impact not just finance but wider areas of society.