The Ethereum Blockchain allows more inclusive, open, and secure business networks, shared operating models, more efficient processes, fewer costs, and offers new products and services for the banking and finance sector.
It also allows digital securities issuance for a limited period for lower costs and with high-level customization.
Digital financial instruments can be changed as per investor demands, expanding the market for other investors, reducing cost for the issuers, and reducing any counterparty risk involved.
In the past five years, blockchain technology has changed for enterprise-grade use focusing on the following benefits.
Security
The distributed consensus-based architecture used removes all the single points of failure and also the need to have any intermediaries.
Ethereum also helps in implementing secure application code that will stop fraud from malicious third parties.
Transparency
The blockchain uses mutualized standards, protocols, and processes, thus working as a single source point for all network participants.
Trust
The transparent and immutable ledger accompanying blockchain makes it simple for multiple parties to collaborate, manage their data, and arrive at agreements.
Programmability
Ethereum even supports in creation and application of smart contracts. It makes them tamper-proof, thus creating an increase in trust and efficiency.
Privacy
With Blockchain comes market-leading tools that help data privacy at every layer of the software stack. This improves trust, transparency, and efficiency and increases privacy.
High-Performance
The private and hybrid networks have been equipped to handle lakhs of transactions per second and even the surges in network activity.
Scalability
It also supports the interoperability between public and private chains and offers enterprise solutions with global reach, high integrity, and resilience.
As per a recent report, blockchain developments will now help the banks to garner a saving of $27 billion by the end of 2030.
This will reduce all costs by more than 11%. Ethereum has also shown disruptive economics, causing people to get ten times cost benefits against incumbent technologies.
How does Digitization of Financial Instruments Impact Finance?
The digitization of financial instruments, including digital assets, programmable money, and smart contracts, adds to the benefits of blockchain. It provides high levels of connectivity between products, services, holdings, and investments.
Digital financial instruments provide the following advantages:
Authenticity and scarcity
Digitization ensures data integrity and provides asset provenance and complete transaction history.
Programmable capabilities
A code that addresses headers like compliance, governance, data privacy, system incentives, and features that manage stakeholder participation can be built into assets.
Streamlined processes
An increase in automation increases operational efficiency as well. It allows real-time settlement, audit, and reporting and reduces the processing times and chances of errors and delays.
Economic benefits
Automated and highly efficient processes help reduce infrastructure, operation, and transaction costs.
Market reactivity
Digital securities allow better customization than normal securities, and you can issue them for short time frames.
New products and markets
Secure and rapid asset transfers tokenized micro-economies, fractionalized ownership of real-world assets, and other benefits.
What are the common Blockchain Use Cases in Financial Services?
Capital Markets
- Issuance
- Sales and trading
- Clearing and settlement
- Post-trade services and infrastructure
- Asset servicing
- Custody
Asset Management
- Fund launch
- Cap table management
- Transfer agency in asset management
- Fund administration
Payments and remittances
- Domestic retail payments
- Domestic wholesale and securities settlement
- Cross border payments
- Tokenized fiat, stablecoins, and cryptocurrency
Banking and Lending
- Credit prediction and credit scoring
- Loan syndication, underwriting, and disbursement
- Asset collateralization
Trade Finance
- Letters of credit and bill of lading
- Financing structures
Insurance
- Claims processing and disbursement
- Parametrized contracts
- Reinsurance markets
How does blockchain impact capital markets?
Capital markets usually refer to the pairing of issuers having demand for capital to investors having risk and return profiles.
Raising capital can be challenging for entrepreneurs, startups, and large organizations. More so, in emerging markets, they have to deal with a lack of monitoring, strict regulations, and market infrastructure for settlement, trading, clearing and issuing. Some benefits that blockchain provides for capital markets:
- Removal of a single point of failure through decentralized utilities.
- Simplifying capital market activities, reducing costs, streamlining the processes, and reducing settlement times.
- The digitization of processes and workflows, reducing risks of frauds, human errors, and overall counterparty risks.
- The digitization or tokenization of assets and financial instruments making them easy to manage and program.
- In this token form, they can get wider market access through higher connectivity and chances of fractionalized ownership.
How does blockchain impact asset management?
Venture capital firms, real estate funds, private equity firms face high demands to improve their liability risk management, adapt to more dynamic decision-making structures, and handle the complexity of changing regulations.
Blockchain allows:
- Automated fund launch
- Seamless stakeholder engagement along with getting digitized assets and services
- The digitization of portfolio and holdings to gain larger market access, liquidity, and fractionalization
- Built-in privacy settings for transaction confidentiality
- Voting and other shareholder rights are programmed into digital assets, thus providing a smooth user experience and reducing human error
- Creation and application of incentive mechanisms to get increased participation
- Improvement in governance and transparency for investors and stakeholders
- An Efficient cap table management
- Automated fund administration
- Automated transfer agency in asset management
How does Blockchain Impact Global Payments and Remittances?
Global payments are executed by many intermediaries these days. It takes between 2 to 7 days and an average of 6.94% expense to send around $200 between two countries. Blockchain streamlines payments and remittance and allows the following:
- Fast and safe domestic retail payments
- Rapid and secure settlement of domestic wholesale and securities.
- Rapid and secure cross border payments
The real-time gross settlement between central banks, commercial banks, and independent banks
Digitized KYC/AML data and transaction history, thus reducing chances of fraud and allowing real-time authentication.
Automated regulatory oversight and auditing
There are multiple forms of payment allowed on blockchain: Tokenized fiat, stablecoin, and cryptocurrency are some of them.
How does Blockchain Impact Banking and Lending?
Core banking comprises transactions, payments, loans, and mortgages. Many of the services are dependent on legacy processes of execution.
Blockchain streamlines banking and lending services, reducing the counterparty risk. It also allows
reliable documentation and KYC/AML data, thus reducing the operational risks and allowing real-time verification of financial documents
Streamlined credit prediction and credit scoring markets, instantly informed by the compiling of user activity and sanctioned data across any network.
There is automated syndicate formation, disbursement of funds, underwriting reducing any cost, delay, and friction.
Facilitated collateralization of assets as digitization allows real-time asset management, tracking, and the enforcement of regulatory controls.
How does Blockchain Impact Trade Finance?
Trade finance, in simple terms, refers to the infrastructure, processes, and funding that support the international trade supply chains.
The industry still depends on paper-based systems that can be easily stolen. Individual transactions take a time of 90-120 days in case of letters of credit, verification of documents, and establishment of trust among the stakeholders.
Blockchain can digitize the entire trade finance lifecycle with security and efficiency.
Blockchain also allows:
- Digitized and verified documentation (i.e., letters of credit and bill of lading) and their KYC/AML data, along with verification of all financial documents.
- Asset digitization is used to provide faster settlement times.
- Creation of highly efficient financing structures through a secure, shared network and digitized processes.
- Creating a constant financing vehicle for the entire trade lifecycle, thus removing the practice of negotiating independent finance vehicles for every stage of trade.
How does Blockchain Impact Insurance?
Casualty and property insurance claims are easily subject to fraud and claim assessments. Blockchain can easily streamline data verification, claims processing, and disbursement, thus reducing its processing time.
Blockchain allows us to:
- Authenticated documentation and KYC/AML data, thus reducing the risks of any fraud and hastening the claim assessment procedures.
- Automated claims processing using smart contracts
- Automated parameterized contracts that will be payout on the occurrence of risk
- Automated disbursement of all insurance payments
- Tokenized reinsurance markets simplify policy reinsurance in the open marketplace, removing traditional broker relationships from the middle.
How does Blockchain Facilitate Compliance?
In the commerce and finance space, following all regulations is extremely necessary. It is crucial to ensure that all financial institutions follow all the rules, laws, and regulations that apply to their activities.
Even firms find it tough to match with the pace and complexity of regulatory changes enforced.
Blockchain offers these benefits:
- Unique governance and compliance attribute that is programmed as per the digital assets.
- Streamlined processes can automate things like data verification and reporting, improve regulatory mistakes, reduce friction in operations and eliminate any errors arising from manual auditing.
- Creation and enforcement of incentive structures so that the governance procedures are improved.
