What is Blockchain Technology? A Comprehensive Guide For Beginners

When Satoshi Nakamoto first created the cryptocurrency Bitcoin in 2008, it was viewed with immense distrust, still is to a considerable extent, with Central Banks and Regulatory Agencies remaining sceptical and refusing to adopt it. However, the underlying technology, blockchain has become one of the most talked about topics Worldwide. Nearly every major player in every industry is exploring the use of blockchain technology. It is finding use cases in several areas including financial services, retail, trading, legal, healthcare, and pretty much any business that involves record keeping and is also expected to unleash a new wave of financial products and services generating new avenues for greater revenue for banks.

Blockchain, also known as “distributed ledger technology” was originally created as a tracking database for Bitcoin transactions. It was designed to process transactions without the need for a central bank or intermediary, using complex algorithms and consensus among its peer-to-peer network to verify transactions. In the past couple of years, banks and financial institutions have been betting on blockchain to provide a reliable alternative to systems that depend on intermediaries and third-party validation of transactions. Their goal is to leverage blockchain distributed ledger approach to create a system that decentralizes trust to significantly reduce all types of transaction fees along with shorter processing timelines. The disruptive potential of this technology is widely claimed to equal that of the early commercial Internet. A crucial difference, however, is that while the Internet enables the exchange of data, this technology could enable the exchange of value; that is, it could enable users to carry out trade and commerce across the globe without the need for payment processors, custodians and settlement and reconciliation entities.

According to Forbes, blockchain technology is being viewed as a platform which could bring about stupendous changes in financial transactions, due to:

  1. As a public ledger system, blockchain records and validate each transaction made, which makes it secure and reliable.
  2. All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
  3. Blockchain technology discards the need for any third-party or central authority for peer-to-peer transactions.
  4. Decentralization of the technology.

Governments, world’s largest financial institutions, global banks and other financial organizations are investing in proof-of-concept projects internally, using trial and error deployments within limited parameters to create efficiencies. The full potential of blockchain can only unravel when institutions partner together to set industry standards and protocols that enable interoperability. The underlying principles of blockchain i.e. decentralization, consensus based system and use of unique digital signature will reinforce the financial system which was recently found to be increasingly vulnerable to online frauds. Startups, established financial institutions and fin-tech companies have found the below applications of blockchain technology and are investing in the development of application and products based on the same:

  1. Payments: Blockchain can transform the world of digital payments to near real-time transactions with real time settlements, without intermediaries. Development of new payments products, based on blockchain technology such as self-executing smart contracts are the next step.
  2. KYC/AML and Records Management: A decentralized, network-defined registry makes KYC processes streamlined and helps in AML checks and controls during client onboarding.
  3. Capital Markets: A distributed and consolidated data repository built on blockchain technology gives users a unified and real-time view of all trade-related information, thus reducing the scope for error or disagreement and accelerating the settlement process.
  4. Trade Finance: The complex network of players with manual processes and paper work is transformed into efficient and innovative trade finance services
  5. Syndicated Lending: Blockchain in syndicated lending envisages to reduce the settlement process on the sell-side and buy-side, thus saving time and cost worth millions.
  6. Regulatory reporting: Easy access to transaction reporting data for regulators will reduce cost of regulatory reporting of market participants.
Image Source: Mermelab

The use of blockchain, when applied to legacy processes of the banking and financial services firms, has potentially transformative effects in the space. However, it is essential to bolster the technology infrastructure even before banks start testing the waters. Blockchain has exceptionally high impact and it leads to:

  • Lower operational costs
  • Seamless global trade
  • Reduced risk in clearing
  • Increased trust
  • Distributed Identity

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