Blockchain technology lays the foundation for a digital infrastructure that is an aggregation of resources from computer science, cryptography and economics in order to ensure secure decentralized transactions as well as data management. The development of blockchain technology has evolved over the years, thanks to expansion of internet, emergence of digital assets like Bitcoin and setting up of smart contracts and decentralized autonomous bodies.
The application of blockchain technology in financial services is rooted in a basic necessity for financial service providers which is to enhance the overall authenticity and security of financial transactions while lowering the risks involved. Blockchain is based on the concept of distributed ledger that maintains a log of every transaction and maintains the timeline as well as veracity of that information on a network that cannot be tampered with.
The global financial system serves billions of people on a daily basis. Meeting such a gigantic obligation comes with certain hurdles and hiccups. Some of the issues include costs of coping with numerous stakeholders, delays, documentation involved, and data breaches that financial entities succumb to every year. Blockchain technology comes to rescue by eliminating the need for any intermediary in securing a financial transaction.
Key Applications of Blockchain Technology in Financial Services
Fraud Detection:
The use of blockchain technology in financial services can significantly reduce the chances of frauds as it involves peer to peer (P2P) approval of transactions that cannot be diluted. Blockchain technology uses cryptography to process and store transaction blocks. This feature can be advantageous for banking and financial institutions as cryptography substantially reduces the risks involved in financial transactions.
Affordability of Transactions:
Blockchain technology can make financial transactions more affordable. Smart contracts in blockchains eliminate the needs of intermediaries to process the transactions thereby reducing the costs involved. This even creates room for instant settlement of payments as layers involved in financial systems are significantly reduced.
Calculation of Credit Scores:
Blockchain technology can help financial institutions to calculate credit scores using non-traditional criteria. Blockchain technology stores legal, personal and public information of users in a highly protected environment. This can allow financial enterprises to monitor user data via immutable smart contracts.
What are the limitations?
It may be a daunting task for financial service providers to successfully switch to blockchain technology given the scarcity of qualified blockchain developers, time and costs involved. Data once stored in blockchain cannot be altered thereby creating a roadblock for companies that need to modify data.
Conclusion
Blockchain technology has an immense application in financial services sector. The use of cryptography and distributed ledger system in blockchain can help financial institutions ensure safe, faster and affordable transactions. However, there are limitations in implementation of this technology due to a dearth of experts in this field and the costs as well as time involved in its implementation.
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