Headline:  How is blockchain used in financial service industries (transparency v. anonymity.)

Body:  OK, here’s the rub, in decentralized finance.   Due to the distribution of the ledger, every individual involved can see all transactions, but, the numbered wallets are often kept some distance from a name, so transparency can exist alongside  anonymity.  For this reason, blockchain technology can be of great use within the financial sector.  It can be used to record money transfers, provide automation thru smart contracts, and allow for data storage.  The money transfers can be done much faster, and at much lower fees.  The blockchain technology can add transaction security

Why are blockchains better within the financial services sector?

Most times, when there is a large transaction using fiat currency, there are multiple parties in the middle of the buyer and seller, and each party involved is a risk for fraud.  With only the blockchain, opportunities for fraud are few indeed, due to the cryptography underlying the blockchain.  In a similar manner, the self-executing contracts on that blockchain involve zero middlemen leaving less opportunity for fraud.  Most interesting, though, is that once a person’s data is on a financial blockchain and verified, it can be transferred seamlessly to another financial blockchain.    

A blockchain is also much more efficient.  A transaction can be placed, and seconds later, the payment can be verified and assets transferred.   In point of fact, financial institutions     are on track to save $27 Billion on international transactions by 2030.      Finally, the same records kept by financial institutions can also be used for reporting to governmental entities.                                     

OK, so it’s a nice idea, in theory…

Au contrere.   Some companies are already there, mon frere.  Visa began to use a blockchain for its B2B transactions in 2017, and in 2021 began to settle transactions in cryptocurrencies.  Barclays PLC is a large international bank that uses the blockchain system to streamline the KYC requirements procedures.  Finally, American Express has also been involved partnering with a grocery delivery app called Boxed.  This partnership would allow a cardmember to earn points toward merchandise.  (I can’t help but think that the helmet on that guy would make transmission of data a snap.)  So, why isn’t everybody doing this?

There are some challenges that must be conquered: Ostensibly, Centurions would be used to this kind of challenge?

  1.   Having a blockchain is nice but inter-operability of several blockchains is  the real opportunity here.  Polkadot and Cosmos are efforts to make this better.
  2. Switching to a blockchain system is expensive in both terms of time and money.  The pool of people who know well, how to do this is quite shallow, much like a kiddie pool you might purchase online.  They are expensive, they will take a while to find, and then get familiar with your legacy systems, and then propose how they could migrate you to a blockchain system.
  3. Blockchains are new on the well… block.  Governmental entities will certainly want to regulate them, and since changing them is impossible, nobody wants to be the first mover.  This position will almost certainly be required to do an uber-expensive 2nd ‘do-over” to comply with governmental requirements.

Solutions are near.

In the U.S. SWIFT has created a KYC registry that its members can participate in, and currently, about 15%  of them do participate.  Overseas in Asia, there seem to be several similar partnerships as well, doing similar things. 

Finally, there needs to be a strategic watershed. Executives need to believe that the long-term benefits of blockchain are worth the cost. That requires taking a long-term view and working with the possibility that blockchain may lead to cannibalization of some revenue streams. The key to countering those concerns is to keep an eye on the prize: lower costs, less friction, and a safer retail banking system.

The Verdict

When cars first came on the scene, there were many who said they were too fast and unsafe.  (There is some evidence that they were not far wrong.)  Then the airplane came along.   Even faster, some people said that the level of speed was irresponsible and unsafe.  I have a difficult time believing that adoption of the blockchain is really any different.  Yes, in the beginning of cars, there were safety problems.  But as time went on, safety belts and air bags were added and these vehicles got safer.

 REFERENCES

How Blockchain Can Impact the Financial Services Industry | The Motley Fool

Blockchain in retail banking: Making the connection | McKinsey

How Blockchain Can Transform the Financial Services Industry (usnews.com)

The Impact of the Blockchain Goes Beyond Financial Services (hbr.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

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