Blockchain technology pros and cons in financial services

 

Blockchain technology

What's blockchain?

A blockchain is a distributed record that keeps a continuous increase of organised records called blocks. These blocks are connected using cryptography. Every block covers the previous block's cryptographic hash, transaction date, and timestamp. A blockchain is a decentralised, public digital ledger. It is used in transaction recordings among various computer systems. In this way, a record cannot be changed retrospectively without modification of the remaining blocks and the agreement of the network.

Features of blockage technology

The main features of blockchain technology are as follows:

Features of blockage technology

Shared ledger

It's a distributed system for sharing records among business networks. In this ledger, Transactions will be recorded only once. It will eliminate the effort of duplication in the conventional systems.

Decentralization

In this component, control and decision-making ability are transferred from centralised entities to a network. To gain participants' trust, decentralised blockchain networks utilise transparency and openness.

Permission

It ensures transactions are safe, authenticated and verified. It also helps to deter participants from gaining control. Furthermore, exerting authority over one another can degrade network functionality.

Immutability

Something that cannot be altered or changed is called immutability. Once someone records transactions on the shared ledger, no member can interfere with it.

Smart contract

These are a set of instructions that govern business transactions. In the event of an error in any transaction, a new transaction is created to correct the mistake. But both transactions will be visible over the blockchain network.

Consensus

To record the transactions, blockchain systems set rules for member consent. New transactions will be recorded on the blockchain network if most of the members approve them.

Blockchain in finance

Blockchain offers numerous benefits in the finance sector by generating new opportunities and mitigating risk.

Decreasing compliance costs

Businesses use the know your customer policy to gain and retain customers on board. But nowadays these processes have become outdated and require more cost. Blockchain technology may require only one verification per client, resulting in significant efficiency gains. Furthermore, it will reduce the cost and improve customer experience and transparency.

Cost-efficient transactions

Blockchain technology will help to save significant time and cost. Transactions will require less oversight. Participants can exchange valuable stuff directly. It eliminates repetition of effort as members have access to a shared ledger.

Automatic agreement fulfilment

These agreements are sets of instructions embedded into tokens. These issues are stored on the blockchain for automatic execution under specific conditions and instructions. It enables self-execution of contracts.

Increase network transparency

The required levels of security and transparency needed for modern digital systems are provided by blockchain. There remains a concern that someone could manipulate the underlying software to obtain counterfeit money. Blockchain technology utilises three principal systems of cryptography, decentralisation, and consensus to make the system extremely powerful, making it nearly impossible to tamper with.

Better traceability

An asset can be instantly traced with the transparent audit trail of blockchain. It enables the direct sharing of provenance data for industries that practice sustainability and ethics. Furthermore, it can show supply chain deficiencies, such as delays, driving greater accountability.

Increased efficiency

The distributed common ledger between different network members reduces the need for time-consuming record reconciliations, thereby eliminating the need for them. Smart contracts saved on blockchain can speed up and automate the process operations.

Limitations of the blockchain technology network

Blockchain has significant roles in the financial field. But it also presents some.

Drawbacks of the blockchain technology

Adaptability

The primary challenge of blockchain technology is its limited scalability. The increase in the number of transactions can lead to network congestion and slow down processing time. Blockchain technology is an important point for projects that require high throughput and low delays.

Interoperability

The lack of adjustment and synergy among various blockchain networks can hinder seamless communication and data exchange between different systems in the financial industry.

Regulatory and legal framework

The blockchain technology is growing rapidly. It creates uncertainty in the legal frameworks and regulations department. Hence, financial frameworks struggle to keep pace with the complex regulatory environment.

Privacy concerns

Public blockchains are apparent by structure, which gives rise to privacy threats. This concern was particularly pronounced when sensitive data was involved. Private and permissioned blockchains can address this issue to some extent. However, they have limited decentralisation, unlike public blockchains.

Energy consumption

The proof-of-work consensus process increases environmental concerns. Some blockchain networks, such as Bitcoin, use this process.

Integration with legacy systems

  Integrating blockchain systems into existing legacy systems can be problematic as it requires significant infrastructure changes, workstreams and processes.

Adoption and resistance to change

The financial services industry can show resistance to the adoption of blockchain networks. The finance department can do this. Blockchain setup requires significant investment resources, personnel and technology.

Talent and expertise

There is a talent and expertise deficiency in blockchain technology. This shortage poses challenges for financial departments in building, maintaining, and implementing suitable blockchain solutions.

Future of blockchain technology in finance

Blockchain has revolutionised traditional systems by transforming them into transparent, decentralised, and secure alternatives. It reduces redundancies, transaction and compliance costs. Additionally, it enables fast and reliable operations using components such as a shared ledger and smart contracts. By resolving trust, inefficiency, and data integrity, blockchain networks empower the finance department to adapt and innovate in the modern digital world. However, concerns remain, such as scalability, regulatory doubts, and hindrance to change. In the long run, the pros are compelling. With the revolution in industry, more agile operations, blockchain stands as the foundation of the technology, giving a future for finance.

Final thought

In conclusion, blockchain networks have a significant impact on the financial industry. Blockchain technology will transform financial services for the good reason. Due to its secure and decentralised nature, the financial sector can decrease asset management costs, trading and regulatory compliance expenses. Furthermore, with the help of advanced data analysis built on blockchain technology, companies can gain market trend insights and identify risks before they occur.