Blockchain in Finance 2021
Blockchain has introduced radical innovation trends that have had a huge impact on virtually every industry, including finance, supply chain management, and healthcare. Let’s take a look at the trends expected for blockchain applications in finance in Russia in 2021.
Blockchain Benefits for the Financial sector
About two or three years ago, blockchain startups became known to the public. Now, almost every modern enterprise is looking for opportunities with the help of blockchain technology. Blockchain is essentially a decentralized registry technology that works like a distributed registry. In 2009, he was able to attract public attention by finding his impersonation in Bitcoin.
Thus, the general ideas suggested the use of blockchain only in finance. Interestingly, the features of the blockchain also indicate its ability to seriously influence the financial industry. As blockchain applications expand across various industries, it is important to look at the role of blockchain in the financial sector in the near future.
As a rule, any new technology is difficult to understand. Most importantly, it is quite rare to find a technology with a name that describes exactly what it does. In this case, the blockchain is a perfect example, since it means exactly what its name suggests. Blockchain technology allows you to create and store blocks of information in the chain.
Each new block created for a transaction is included in the chain to create a “digital ledger”. Blockchain registries have provided significant advantages over conventional digital registries, thereby expanding the use of blockchain in finance. So, what exactly distinguishes the blockchain from other digital registers?
The following important advantages of blockchain demonstrate the reasons for considering the application of blockchain in the financial sector.
Blockchain technology allows you to distribute the digital registry between different nodes. As a result, there is no need for a separate third party to process and store transaction data. Thus, the use of blockchain in the financial function can prevent the possibility of hacking of transaction data due to the lack of a central repository for storing transaction data with a single security system. In addition, the blockchain technology also deprives intermediaries of the ability to control financial transactions. As a result, blockchain applications in finance can provide better availability and profitability.
The most important detail about blockchain that provides a convincing answer to the question “Is blockchain the future of finance?” is immutability. Once you have written the blocks and added them to the block chain, they are not subject to any changes. Immutability provides a wide range of huge benefits when implemented in normal business operations. In fact, blockchain registries can serve as reliable sources of information.
Among the many factors that increase the demand for blockchain adoption in banking, security through blockchain technology definitely stands out. The blockchain uses encryption to secure its transaction book. As a result, only individuals with a specific key code could access the data. In addition, blockchain transactions are decentralized and peer-to-peer, which provides a high level of security.
Examples of the use of blockchain in banking and financial services
Now that you know about the distinctive features of blockchain that make it suitable for the financial sector, it is important to know how it can transform the financial industry. It is extremely important to understand the answers to the question “How blockchain is used in finance” in terms of the problems in the financial industry that are solved with the help of blockchain. The financial industry has been facing various challenges for a considerable period of time.
While technological advances have solved traditional problems, some new technologies have led to serious problems. The existing financial market is packed with various fintech solutions. Therefore, financial service providers constantly do not understand what solution could effectively meet their requirements. Here are a few ways in which the use of blockchain in finance can solve serious problems in the financial sector.
Security and transparency issues
Financial services around the world continue to adopt a traditional, centralized, and multi-level approach to their operations. Financial data is mostly stored in centralized databases and must pass through multiple intermediaries. At the same time, centralized systems do not provide transparency. In addition, data security depends solely on the security of the database and intermediaries.
On the other hand, databases with the highest level of protection are vulnerable to hacking and data leakage. Lack of transparency often leads to complex security threats, as no one is aware of any inconsistencies until a data leak or other system malfunction is detected. While everyone disagrees with the idea of transparent financial reporting, a certain level of transparency is beneficial for financial service providers and customers.
The use of blockchain in the financial and banking sectors helps to ensure transparency and security at the same time. The most important feature of the blockchain for ensuring security and transparency is immutability. Without the possibility of changing the data, the blockchain can guarantee the security, correctness and authenticity of the data. The use of blockchain in the financial sector also benefits from the benefits of privacy.
The financial sector has to invest heavily in various operations, primarily due to centralization. Financial service providers must invest heavily in accounting, database maintenance, centralized database procurement, value transfer systems, database security, labor costs, and intermediary fees. In addition, all these investments are repetitive, and financial service providers must regularly invest in them. As a result, all the additional costs can make the financial services system quite expensive.
The price advantage of blockchain provides the perfect answer to the question “Is blockchain the future of finance?” as it can significantly reduce costs for financial service providers. According to a recent study, distributed ledger technology can help reduce the costs of financial service providers by almost $15–20 billion a year by 2022. Blockchain technology can increase transparency and reduce costs by focusing on security. The use of blockchain in the banking sector can help in the implementation of smart contracts, thereby reducing the cost of accounting, intermediaries and value transfers.
Audit is an integral aspect of the financial sector. Financial audit is a long and expensive process, which also causes problems due to opacity. Without any transparency, intermediaries may disclose certain pieces of information during the audit process. As a result, the financial sector has to deal with problems of unethical behavior, non-compliance with regulatory requirements, long audit periods, and bad faith.
The use of blockchain in the financial sector can simplify the audit process. Immutable blockchain records allow auditors to check them for proper compliance with the requirements with full transparency of the events of the financial organization. Blockchain can help maintain transparency, thereby ensuring the integrity and ethical behavior of financial service providers. Any suspicious transaction is easier to track using the blockchain. In addition, the blockchain provides quick access to all financial information, thereby reducing the time required for audit processes.
The financial sector has to face significant risks when making loans, such as establishing trust in intermediaries. Other risks include the counterparty’s inability to meet its obligations and credit risk associated with information asymmetry. In addition, the attention of commercial banks to monitoring and tracking the use of loans ultimately depends on intermediaries. Financial service providers do not have proven measures and strategies to deal with such risks.
The use of blockchain in banking and financial services can allow for peer-to-peer transactions. In this way, financial service providers can eliminate their concerns about the role of intermediaries in peer-to-peer transactions. Blockchain technology allows you to use smart contracts to calculate transactions faster, and the immutability of data using the blockchain increases reliability.
Most importantly, recording all transactions on the network can help reduce the risks associated with fund management and credit risk. As a result, the implementation of blockchain in the financial function can allow financial service providers to effectively manage risks.
Key Trends expected for blockchain in Finance in 2021
A clear understanding of the benefits of blockchain technology for the financial sector and how it can be used to solve the problems faced in the existing financial landscape definitely shows the prospects of blockchain in finance in 2021.
According to experts, the use of blockchain in the financial sector in 2021 will witness an improvement in venture capital investments. Many financial services are developed using blockchain technology. Investment in blockchain applications in finance is increasing significantly, especially in Europe. Many startups are slowly demonstrating effective progress in the financial services ecosystem with the help of blockchain.
Blockchain plays a crucial role in tokenization, which is the process of issuing tokens on the blockchain with the display of real assets. Tokenization is currently one of the notable blockchain implementations for the financial sector with higher activity and significant venture capital investments.
The use of blockchain in banking sector is also finding new grounds with the introduction of digital currencies of the Central Bank. CBDC is essentially a new type of central bank money based on blockchain. In addition, financial service providers are looking for opportunities to use blockchain for efficient fund management. The use of blockchain in fund management can help financial service providers cope with the pressure of cost management.
The next major trend that you can see in blockchain applications for finance in 2021 is related to investment. According to Crunchbase, global blockchain companies have attracted about $23.2 billion in investment since 2016. In addition, US companies were able to attract investments worth $ 3.3 billion over the same period.
However, the relatively better deals between 2019 and 2020 due to the global pandemic are questionable. Many industry enthusiasts are trying to think about whether blockchain is the future of finance after the global pandemic. However, other industry experts, such as Brooke Pollack, managing partner at Hutt Capital, have different views on the introduction of blockchain in finance in 2021. Hutt Capital is a venture capital fund for blockchain initiatives.
Pollack said that transaction activity in the fourth quarter showed growth, which is a favorable year for companies using blockchain. According to Pollack, the strong performance of blockchain companies has led to increased investment for the implementation of blockchain in the financial sector.
In addition, blockchain startups are also introducing new tools and products to the decentralized finance or DeFi ecosystem. DeFi is basically financial software developed on a blockchain with a modular architecture. One of the most striking examples of DeFi applications is related to BitPay. BitPay offers Bitcoin payment solutions for organizations and businesses.
It is quite obvious that blockchain technology is a mandatory solution to many problems that exist in the financial industry. As businesses and startups continue to find new perspectives on how blockchain is used in finance, new concepts such as DeFi and CBDC may emerge in 2021.
In addition, financial service providers will continue to seek blockchain technology for transparency, security, risk management, and faster transactions. However, the implementation of blockchain in finance still faces various challenges. Organizations ‘ ability to anticipate new trends related to blockchain applications in finance and the evolving blockchain functionality can mean better results.