How Blockchain Can Transform the Financial Services Industry

Blockchain technology is one of the leading innovations in the financial industry, promising to reduce fraud, ensure fast and secure trades and transactions, and ultimately help manage risk within the financial system. interconnected world.
Blockchain accomplishes this through advanced cryptography designed to resist hacking, adding trust to the transaction ecosystem.
There are many financial uses provided by blockchain, which are not limited to tracking transactions and exchanges. As our global financial system becomes increasingly connected in our age of digital transformation, investors would be well advised to learn how blockchain is changing the system and how to gain and regulate exposure to this development.
Here’s what investors need to know about blockchain’s growing role in financial services and the revenue potential and risk factors it poses, from tech-focused startups to traditional banks:
— What is blockchain?
— Benefits of Blockchain in Financial Services
— Risks that blockchain and financial institutions face
— Blockchain investments to buy
What is Blockchain?
Blockchain is a digital collection of transactions that are tracked and recorded in a decentralized network. It is a distributed ledger, which means there is no central authority of the network, or there is not a single person or entity in control with the ability to corrupt the network. The blockchain comprises individual blocks of data, each containing a record of information, which are linked together in chronological order. These links cannot be modified, this is what inspires confidence in the network.
This revolutionary technology manages information transactions by securing them as they occur. The purpose of blockchain is to reduce the cost of transactions and make them more efficient and faster.
The technology has many applications that can be integrated into different industries, providing investors with many opportunities. For starters, it’s one of the technological underpinnings of cryptocurrencies like Bitcoin.
One industry with clear applications for blockchain is financial services, where companies are in a perpetual race to reduce transaction costs and friction.
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Benefits of Blockchain in Financial Services
Blockchain has the potential to make the financial services industry more transparent, less susceptible to fraud, and cheaper for consumers.
Improved transparency. Blockchain can make the financial industry more transparent since users perform activities on a public ledger. This transparency can reveal inefficiencies such as fraud, leading to the resolution of issues that can reduce risk to financial institutions.
Added security. As consumers become increasingly active online, the digital world is fertile ground for scammers. With blockchain technology, this concern could be reduced. Payments and money transfers made on the blockchain are faster and more traceable than in traditional banking.
When information passes through different financial intermediaries, there is a risk of interception of this information, which increases the possibility of fraud. This surveillance hole can be filled by the blockchain’s cryptographic algorithms that secure the exchange of information between parties.
“In traditional finance, it can sometimes be difficult to obtain clean audit trails, which has led to serious economic losses in the past due to negligent behavior or malicious actors,” says Ben Samaroo, co-founder and CEO of WonderFi, a decentralized finance company. Platform. “This risk can be significantly reduced through a combination of blockchain technology and machine learning to monitor and manage risk with a high degree of accuracy.”
Fintechs and other businesses that use large amounts of data need blockchain to enforce data integrity.
“Since the blockchain network is distributed, there is not a single source of failure,” says Marie Tatibouet, marketing director of Gate Technology, a China-based cryptocurrency exchange.
This feature, says Tatibouet, increases the resilience of the network, protecting it from compromises.
Cost reduction. As investors move away from financial advisors to avoid higher fees, blockchain offers consumers the opportunity to benefit from lower costs associated with traditional financial services.
Fintech companies have become an important part of the financial services industry, enabling investors to open accounts with digital advisors and make independent financial decisions. As fintech plays a bigger role in global finance, its relationship with blockchain will inevitably grow stronger.
This innovation can benefit consumers as investors get more for their money and they achieve a balance between automating financial services and lower cost.
“Institutions that adopt this new technology first will be able to streamline internal processes and provide their customers with financial services at lower cost, effectively beating their competitors on cost to capture a larger share of the market,” said Samaroo.
This ultimately benefits the everyday investor looking to reduce expenses while accessing this new environment of financial services.
[READ: How to Invest in Art.]
Risks Blockchain and Financial Institutions Face
Weighing against the promise blockchain holds for financial institutions is a major risk affecting the bottom line: traditional financial institutions make money on transaction fees that could be reduced or eliminated with blockchain technology.
When it comes to transferring money, consumers must rely on banks or third parties to process transactions.
But blockchain adoption could bypass third parties such as banks, eliminating fees and other costs associated with such services. As a result, banks may face volume and transaction-based revenue issues.
Blockchain makes the proprietary infrastructure of financial institutions less important because it serves as a verification mechanism that “is not concentrated in the power of a single institution”, says Thomas Shohfi, assistant professor at the Lally School of Management at Rensselaer Polytechnic Institute in Troy, New York.
Additionally, blockchain innovation is moving so fast that regulation has yet to catch up. Thus, potential policies impacting blockchain can be seen as another barrier to integrating blockchain into financial services.
“Existing regulation presents a significant barrier to blockchain adoption, as regulators will prioritize existing incumbents over disruptors,” Tatibouet says.
Regulators are scrambling to determine the pros and cons of blockchain technology to see if it is suitable for financial institutions and what the implications are for businesses and consumers.
“This rigidity has stifled innovation so far,” says Tatibouet. “However, this view is changing as governments and other public organizations see the benefits of this technology.”
[See: 7 Bank Stocks Investing in Cryptocurrency.]
Blockchain investments to buy
For investors who want exposure to blockchain as it changes the financial services industry, there are several ways to approach this investment. One way is to buy companies whose business is operated in blockchain technology.
“Financial companies or tech companies that view blockchain as a disruptive technology and want to be experts in it can sell their services to clients,” says Shohfi.
One company that falls into this category is International Business Machines Corp. (ticker: IBM), which focuses on the development of blockchain technologies. IBM also provides enterprise services to integrate blockchain for efficiency, scalability and growth.
Another approach investors can take is to invest in cryptocurrency-focused stocks that serve as pure play for blockchain investments. MicroStrategy Inc. (MSTR) fits the bill here. The software solutions company holds over 105,000 bitcoins, a portfolio valued at over $5 billion.
Square Inc. (SQ) is another company heavily invested in Bitcoin and a strong believer in the blockchain network. The payment services company recently announced that it will launch a decentralized finance platform focused on bitcoin applications.
Investors are taking note of these stocks and their potential. MicroStrategy is up about 80% year-to-date and Square has seen a 23% increase year-to-date. That compares to the S&P 500’s return of about 20% year-to-date. Investing in these publicly traded companies allows you to invest broadly in the blockchain without being directly exposed to the volatility and speculation associated with certain cryptocurrencies.
For investors looking to further hedge their risk against bitcoin speculation and volatility, exchange-traded funds may be a better option. Amplify Transformational Data Sharing ETF (BLOK) offers investors exposure to companies that are positioned to profit from the development of blockchain technology. Since the fund’s inception in 2018, it has returned 150%, making it a profitable investment option.