24 Sep 2019
Blockchain technology, as a form of distributed ledger technology (DLT), has significant future potential in the financial sector. Business activities built on transactions over traditional corporate databases could find an alternative using blockchain technology with start-ups offering new services and applications.
The first wave of applications is expected to be rolled out over private blockchains where a central authority such as a financial institution and its partners will have rights to participate. Over time, public blockchains, with anonymous participants and without any central authority will also be established. It will surely require all-round collaboration across businesses. Governance will be the singular biggest challenge by way of system-design, incentive structures and decision-making processes. Requisite laws will have to be enacted as also appropriate regulations for this sector. There will be a clear requirement of standards.
Blockchain, though a relatively new technology, through its DLT has emerged as a secure and viable platform to harbour global financial transactions. It is capable of recording anything of value including money, equities, bonds, deeds and titles and contracts. All asset types can be moved and stored securely and privately in a peer to peer trustworthy manner. This is made possible through network consensus, cryptography, collaboration, and clever coding. Each block of the transaction is uniquely securely stored in a distributed database validated by every participant and secured using electronic cryptography. But unlike traditional databases, where information resides in unique repositories across multiple partners and must ultimately be reconciled, the distributed blockchain database creates a single, shared digital ledger.
What is significant is that two totally unknown entities entering into a business transaction can forge agreements, make transactions, and build value without relying on intermediaries such as banks, rating agencies, and government bodies! The DLT will, in an utmost trustworthy manner, be able to perform every bit of the process needed to complete the commercial transaction.
Blockchain as a disruptive technology is looking attractive to firms in the financial industry which already are seeing enormous potential opportunities to reduce friction and cost. They are investing heavily in blockchain applications to reduce transaction costs in an effort to create innovative solutions for their customers. Raising capital in the future, for example, not through the existing Initial Public Offering (IPO), but through ICO (Initial Coin Offerings), will be far more cost beneficial through peer-to-peer dealings. Eventually, intermediaries who bolster the present IPO system, are expected to decline in numbers. It is early days for Blockchain, not without challenges. There isn’t much regulatory oversight. Due diligence and disclosures are scant. Financial market players have adopted wait and watch approach. However, the technology has been unleashed and Blockchain will not only improve efficiency in raising capital but also reduce its cost and establish democratic participation in global capital markets.
Chief Financial Officers (CFOs) will benefit from data transparency, faster access to information and no need for reconciliations. The new technology will increase efficiencies and reduce loss and frauds.
Some critical and crucial issues will however need to be addressed before embracing Blockchain. Infrastructure and equipment in the command centres will have to be evaluated as also the regulatory and risk factors that need to be contended with.
It is not that Blockchain will evolve in isolation. It will need to integrate with existing Enterprise Resource Planning (ERP) models to establish new ways of recording financial transactions. It will also need to interface with other cutting-edge technologies like Artificial Intelligence and 5G networks to create a new alternative.
In India, the public sector has taken a leadership role in adopting Blockchain technology. Nearly half the State governments have initiated citizen service related blockchain projects. Care has been taken to encourage start-ups and niche technology providers in these pilot level projects. The Banking, Financial services, and Insurance (BFSI) sector has taken the lead with others from healthcare, retail and logistics also accelerating rapidly in adopting this technology. Given its technology talent and penchant for innovation, India is well-poised to play an important part in meeting the global Blockchain demand.