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Blockchain Technology - A Potential Disruptor

It serves as an alternative to the traditional currencies challenged by the market volatility and liquidity needs in precarious economic environment of mistrust

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The new buzzword that can disrupt the financial services industry is blockchain technology. In this article I intend to demystify blockchain, Bitcoin, how to get involved with it and its impact on the financial services industry and beyond.

The first blockchain was created in 2009 by Satoshi Nakamoto. It is a distributed general ledger recording, which mentions the time and the entire historical background of the transactions taken place maintaining the confidentiality of the transactions and its parties. Bitcoin is another terminology used for the application as encrypted virtual currency using the blockchain protocol to be used in to perform financial transaction.

The technology has gained the market potential after the financial crisis 2008. It serves as an alternative to the traditional currencies challenged by the market volatility and liquidity needs in precarious economic environment of mistrust. Bitcon is based on the premise for offering a peer to peer digital payment systems that enables the users to execute transactions secured through cryptography and without the involvement of any third party like clearing institution or central bank in order to issue or control the exchange.

Although Bitcon can't be physically touched but it can serve as a purpose to make transaction using recognized currencies like gold or cash through an address registered on the Bitcon. Blockchain can be accessible through an application on the telephone or tablet with bitcon. Transactions are possible using bitcon with address mentioned initiated through one's private signature. Miners completes the verification process ensuring that there is no double spending and transaction takes place with the existing account on the network. Once the block of the transactions is validated through the miners chronological order is automatically created to publically available distributed ledger which is irreversible in nature.

There are major point of distinction between blockchain and Bitcoin. Initially blockchain was meant to create Bitcoin today it's a software protocol on its own. Blockchain technology is bound to have its impact on the security model paradigm. It is actually a virtual wallet payment exchange offerings with process payments (Bitpay, Coinbase), clearing and settlement solution (Hyperledger, Serica), developing and offering crypto currency dominated products (Solidx, Tinker). There are other differentiated platforms in order to facilitate and the usage of the block chain technology solutions like Factom, counter party are the building blockchain.

Other important aspect of blockchain technology includes Ripple - creator and developer of the ripple payment system which involves decentralized and source global payment network allowing customers to bypass the international settlement channel and the value gets transferred instantly point to point.

Etherium - It is a platform and a programming language that supports the developers to build and publish the applications, to codify trade and secure. Security risk as a decentralized consensus is based on large network.

Blockchain the differentiator

The distributed ledger has myriad differentiators like Near real time, immutable , highly digitalized , and being distributed. These attributes can lead to many potential advantages - There is a reduced risk of inflation or devaluation of currency risk and act as a hedge as cross border transaction happen. There is improved auditability of the transactions and effectiveness of the monitoring with reduced duplication, no deletion or reversibility of transactions. The best part is high speed of settlement of transaction without transaction verification by central authority. The digitization enhances the operational efficiency with low accounting fraud risk and guaranteed authenticated open data.

The technology can serve to reduce costs - back office and transaction related; favours even small transactions and offer humongous opportunity for new product issuance.

On the flip side, the technology is highly unregulated having no link to the country or institution weakening the monetary policy. Trust is built through independent controls like audits.

Blockchain can be seen as a new internet where transactions in the form of contracts, agreements, exchange, transfer of cash occurring between two parties establishing a legal obligation. Based on these underlying advantages the technology has potential. The application can be extended to wide range of areas like intellectual property, legal databases, foreign exchange, leasing contracts, ridesharing. Recently blockchain technology was used in London elections where Mayoral candidate registered city budget on the blockchain with the intent to make public funding resources and asset transparent for the community. As per world economic forum report by 2025, 73% of the first time tax payment would happen via blockchain and its application has a potential to be extended to 10% of global GDP.

The technology surely has a potential to better manage the digital risks, i.e. custodial risk, settlement risk and counter party risk. There is an enhanced ability to verify the historical transactions (through Ripple Labs and Everledger). Santander has already announced the use of blockchain to reduce the bank's infrastructure costs. They announced that "distributed ledger technology could reduce banks' infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-$20 billion per annum by 2022".

To leverage and tap the potential there have been starts up who have already received a funding of excess of 1.25 billion dollar globally.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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bitcoin Blockchain Technologies

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