The Blockchain: Financial Friend or Foe?

Bitcoin. Ethereum. Ripple. Litecoin.

Tokens, cryptocurrencies, and open-source platforms are all over the news lately as pundits try and explain their volatile market values.

And while each of these technologies is impressive, the true value lies in the technology supporting them. Blockchain.

For the purpose of this piece, I’ll assume you already have a basic idea of what the blockchain is. If you don’t, IBM has written a great e-book that’ll bring you up to speed.

What ramifications will the blockchain have on the financial industry? To properly respond to that question, we’ll need to bifurcate the answer. First, we’ll discuss how it’ll affect the financial industry. Second, we’ll quickly discuss how it could impact personal users.

Institutional Users and the Financial Industry

Initially, many in the financial industry were uncertain about the emergence of blockchain and all the applications and cryptocurrencies it supports. Some considered it a financial foe and openly opposed it.

However, initial skepticism is breaking as more uses of the technology become apparent.

Here are just a few ways blockchain could help financial institutions and the industry:

1. Financial institutions rely on proper customer verification. Think about it, would you deposit your hard-earned cash into an institution that couldn’t verify who you were or where your payments were going? Due to its cryptographic protection and constant record updating, the blockchain offers tremendous potential for identify verification and protection.
2. An inability to secure financing is one of the leading reasons small and medium-sized businesses fail. Outdated credit-rating protocols and lending obstacles make it very difficult to secure the necessary working capital to keep these smaller businesses operating. Blockchain’s solution comes in the form of enhanced peer-to-peer lending, reducing transaction times and fees. Furthermore, peer-to-peer lending opens the doors to a global lending audience. International payments have always been expensive and time consuming, and blockchain offers a simpler and cheaper alternative. This could be huge for increasing entrepreneurial efforts in developing nations.
3. One of the most promising benefits of the blockchain will be smart contracts. Smart contracts are blockchain-based code containing all the information about a contract’s terms. Smart contracts can automatically execute these transactions, enforcing all terms without the need for expensive third-party intermediaries.
4. What about financial experts working in those industries? You can be sure the blockchain will revolutionize traditional CFO roles and finance functions. Blockchain will bolster IT security (which is critical in finance) and as discussed, streamline contract enforcement.

Blockchain for Personal Users

One of the most significant personal benefits of the blockchain will be the ability to regain control of personal data. Individuals store all kinds of sensitive material, from personal identification to health data, on mobile devices or in the cloud. While incredibly convenient, these forms of storage are not well protected.

An encrypted, distributed ledger will allow you to have the same convenient access you now enjoy, but with a security upgrade. “Smart” ledgers enable individuals to provide access to documentation when others need it, while maintaining the ability to withdraw access at any time and limit how the information is used (for example, information cannot be copied or forwarded).