How Could Blockchain Technology Change Finance?

This question has been asked by every futurist research laboratory in many of the largest banks, central banks, financial institutions, think tanks, consulting firms and government committees around the world.

R3CEV, a consortium effort funded by some of the largest banks in the world, is busy trying to answer this question. Goldman Sachs, McKinsey Consulting Research, and Consumers have all written very good reports about this question. The British government, US Senate, Canada, Australia and the European Union have all conducted investigations along this route.

Many startups also produce white books about their specific innovations or use of blockchain technology, and often include larger social questions: "How will this change things?"

Many of these studies underline four main areas of change:

Infrastructure for cross-border transactions
The digital revolution has really changed the media, as we all know. This has an effect in the financial industry too. Of course, financial institutions use computers. They used it for databases in the 1970s and 1980s, they created web pages in the 1990s and they migrated to mobile applications in the new millennium.

But the digital revolution has not revolutionized cross-border transactions. Western Union is still a big name, running many of the same businesses that they always have. The bank continues to use complex infrastructure for simple transactions, such as sending money abroad.

The following infographics, prepared by Richard Gendal Brown, show infrastructure and intermediaries in cross-border banking that have been around since the 70s.

This architecture is the result of the financial industry using a very secure personal database. Digitizing means we only sort information into a personal database much faster.

Blockchain technology enables financial institutions to make direct connections between each other, avoiding correspondent banking. R3's main products to date, Corda, are aimed at correspondent banks. Corda is a play of words that combines ‘according to’ (agreement) and ‘cable’ (the most straight line between two points in a circle).

In the case of Corda, the circle consists of banks that will use a joint ledger for transactions, contracts and important documents.

Brown used to work on IBM blockchain products, but has since moved to work on R3CEV.

Competing financial institutions can use this general database to track the implementation, clearing and settlement of transactions without the need to involve a central database or management system. In short, banks will be able to formalize and secure digital relations between them in ways that they were previously unable to do.

In the representation above, that means the correspondent banking agreement and RTGS can both be cut short.

Transactions can occur directly between two parties based on P2P without friction. Ripple, allowable blockchain, built to solve many of these problems.

Digital assets as a class
Bitcoin creates something unique: digital property.

Before bitcoin, 'digital' was not synonymous with scarcity. Any digital can be copied by clicking the button. At a glance the music industry and album sales tell this story convincingly.

But bitcoin does something new: it creates digital code that cannot be copied.

So, for the first time since bits and bytes have been found, there are ways to have something digital that cannot be copied. This values ​​the digital code. To this day, the value of bitcoin is based on blockchain capacity to prevent double spending and the creation of fake coins.

With this in mind, bitcoin developers have pioneered colored coins that can act as shares in the company. Coin 'color' represents information about what ownership rights are given private cryptographic keys.

After receiving the SEC permit, online retail giant Overstock announced it would issue public shares of the company's shares on the tØØ blockchain platform. We also see the emergence of 'initial coin offerings' (ICO) and 'appcoins' (cryptocurrency originating from applications that help fund project development).

These examples are only part of the story about blockchains in digital assets. They can be assets, but blockchain can also be used to run the market itself.

Basically, this effort treats digital assets as a carrier instrument, which is a broad and agile application.

Government and market
This capability, however, goes beyond just recording transactions. The Nasdaq, for example, is one of the first to build a platform that allows private companies to issue and trade stocks using the blockchain.

Other developers are coding financial instruments that can be pre-programmed to carry out corporate actions and business logic.

In 2016, a blockchain project called The DAO, running on ethereum blockchain, was launched with the aim of imitating the crowdfunding market. The percentage of your contribution to funds represents the percentage of votes in the way the total funds will be spent.

Reporting and compliance with regulations
Blocking can function as a record system that is fully transparent and can be accessed by regulators. This code can also be coded to certify transactions that comply with regulatory reporting.

For example, banks have severe reporting obligations to agencies such as FinCEN. Every time they authorize a transaction of more than $ 10,000, they must report the information to FinCEN, which stores it for use as an anti-money laundering database.

Clearing and Settlement
With paper-world trading, the time frame for clearing and settlement of transactions is generally referred to as 'T + 3' - that is, three days after trading (T), the transaction is completed.

With blockchain technology, the entire trading life cycle - execution, clearing and settlement - occurs at the trading stage. With digital assets, trade is a solution, and the cryptographic keys and digital ownership they control can reduce post-contract latency and the risk of the other party.

Accounting and auditing
While most databases are snapshots from sometime in time, the blockchain database is built on their own transaction history. They are databases with context, history itself, a complete record system.

The implications for auditing and accounting are very deep.
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