We’ve been reading about the promise of blockchain technology for few years now.
Many skeptics are beginning to wonder if the “year of blockchain” will ever really arrive. Blockchain isn’t a cure-all, but there are clearly many problems for which this technology is the ideal solution. We continue to see banks, brokerages, insurers, regulators, and others actively testing ways to harness the benefits of blockchain. The journey has only just begun.
Whether it is a blockchain or not, or simply a different version of a type of blockchain with different features is not important, as it is mere semantics. More important is that the financial industry is working hard to be ready for the future.
Benefits of Distributed Ledger Technologies
1. Instant Settlements
Transactions can be done in minutes or seconds, while currently, settlements can take up a week. With Blockchain, settlements become user-optimised, which will save a significant amount of time and money, for both parties involved.
2. Improve Capital Optimisation
One of the main features of Blockchain is that it removes the need for a trusted intermediary and makes peer-to-peer transactions possible. When Blockchain is applied in the financial services industry, it could render useless the fee-charging intermediaries such as custodian banks (those that transfer money between different banks) or clearers (those vouching for counterparties credit positions).
3. Reduced Counterparty Risks
When transactions are settled near instantly, it will remove a significant part of the risk that the counter party cannot meet its obligations, which could be a substantial expense for banks.
4. Improved Contractual Performance due to Smart Contracts
When banks and financial institutions are using smart contracts, it will improve contractual term performance as smart contracts execute automatically once certain pre-set conditions have been met.
5. Increased Transparency
Increased transparency among financial institutions and as such improved regulatory reporting and monitoring by central banks, if the regulators also have access to the blockchain.
6. Increased Financial Solutions in terms of Crisis
Increased options for financial solutions in times of crisis due to crypto or digital currencies or tokens.
7. Reduced Error Handling and Reconciliation
A key feature of Blockchain is that any data recorded is immutable. Any data that is recorded on a blockchain can be tracked in real-time, leaving a very detailed audit trail. As such, it eliminates error handling and reconciliation.
It is vital for the financial industry to innovate and to investigate new technologies to improve their products and services. If the incumbents don’t change their offering and innovate, newcomers will disrupt their business as we have already seen with a variety of Blockchain FinTech startups that are building new ways to handle our financials.
ABOUT THE AUTHOR:
Imtiaz Ahmad is a qualified finance professional from ICAEW & ACCA with 15+ years of experience; worked for a diversified range of industries in Pakistan and Middle East. He is a seasoned Coach, Mentor, Counselor and Trainer in Accountancy and Finance profession too. He has 500+ students who got qualified ACCA, CA and CMA to his credit, in different countries around the globe.