Thanks to the avant-garde technology of the blockchain, it is expected to revolutionize the entire world and not just the financial industry. The blockchain was first introduced in the financial sector, in the form of a crypto-giant application called Bitcoin and ever since its accouchement, it is changing the financial industry.
There are series of problems in the current monetary system and an anonymous idealist “Satoshi Nakamoto” took the “baton of change” right in his hands. We will go through the series of problems which the financial industry faces and decode how the blockchain overcomes the issues.
PROBLEM 1: We currently have the central ledger system. How is it a problem? Our transactions are recorded on the central database of the central bodies like bank and exchanges. These central bodies can manipulate your ledger and let’s just stay honest, you can’t do anything about it.
SOLUTION 1: The blockchain network is based on the distributed ledger where there is no central controller. Each person on the network has the ledger of entire the transaction. Everything is carried on the internet, under the watch of every node present on the network. The transactions are made successful by the people, not by the nod of central authority. The blockchain database stores the transaction forever and anyone can delve the transaction which was made years ago.
Jitendra Rajput, co-founder at “Encrybit – The Future of Cryptocurrency Exchange” says, “Blockchain is bringing back the trust which was lost due to corrupted middlemen. The systems will be more reliable once blockchain is used to its full potential.”
Since the entire power is given to the people of the network, the ledger becomes manipulation-proof.
PROBLEM 2: By manipulating the transaction details, the central ledger system can charge you an overdraft fee.
Refer this table 1 which shows the series of transactions which John had undergone in the month of January.
John thinks that his expenditure bounced on the last day and he should have been charged for the last transaction. Refer the table 2 where bank manipulates the ledger and charge the overdraft fees.
SOLUTION 2: As mentioned earlier, the blockchain network doesn’t allow any kind of manipulation. This makes John and others less vulnerable to cheating by the ledger tampering.
PROBLEM 3: Non-communicable ledger is one of the problems in financial institutes. Let’s go through an exemplary life of John who works as an electronic trader. Whatever cash he receives from his business every day, he deposits money to Bank X. Bank X updates the ledger and John’s account is credited with whatever sum of money he has deposited.
While leaving for home, he suddenly realizes that he wants some cash on hand for his kid’s tuition fees and local purchasing. He rummages around for the nearest bank and he discovers that he has only one choice to withdraw from. And that is from Bank Y. Since there is no established communication between the Bank X & Y, he has no choice but to go back to the first bank to withdraw the required amount.
More than just the problem of having to walk to the own bank, John will have to trust the central ledger of the bank. If the bank refuses the transaction, John has no other choice than to close his account due to his loss and frustration.
SOLUTION 3: There is no requirement of communication because the transaction is carried over the internet and one doesn’t have to go to the ATM of the specific bank accounts.
PROBLEM 4: The major problem with the current monetary system is unlimited minting and printing of the currencies. The central government holds right to print unlimited currencies without any gold backing. This makes the fiat currency waste and its store of value zero.
SOLUTION 4: There are some problems with cryptocurrencies as well. There is no barrier to entry and almost every single person earth can have their own cryptocurrencies. But it still limits the mindless minting of the coins. For example, Bitcoin has pegged its maximum value at 21 Million units. Even Satoshi can’t generate more values than this. This creates the scarcity of the currency and scarcity is one of the important necessitates of the medium of exchange.
PROBLEM 5: There are several countries which have poor banking sector. Years after independence, they have failed to gain the basic financial accessories like bank accounts.
SOLUTION 5: Some people are in a belief that blockchain will do to banking what internet has done to the media. The blockchain technology promises to give financial services to those who don’t have access to the bank accounts including those who in the third-world country don’t have bank accounts. Applications like Bitcoin and other cryptocurrencies empower the people to send and receive the money on the network without the need of central operator or approver.
PROBLEM 6: Today, the traditional financial institutes have gained notoriety of malpractices which leads to woes like subprime crisis. Although it is wrong to point at single entity because the mess was the collective effort of world’s central banks, credit owners, and public involved in it, central banks were the biggest culprits.
SOLUTION 6: It is expected of the blockchain that it can prevent the next financial crises. Now, that’s something worth a ponder. The distributed ledger gives the power to monitor individual’s ledger and empowers regulators with visibility of trading ledgers- something which central system lags and caused crises. The blockchain also helps in evaluating the derivatives and smart securities in real time. This prevents the traders and investors from putting their money in the bad entity.
PROBLEM 7: Something which has kept large banks excited is keeping track of trades in bonds or stocks, and making sure that payments are carried properly. At present, it is a complex process as it involves banks, traders, exchanges, middleman, clearinghouses, and others. It takes two to three days to verify if people have sold their bonds or share and then the movement of funds is allowed.
SOLUTION 7: If blockchain is used to log ownership data, all this work could be done in minutes. Systems like this in banks can save around $20 bn. Now, that’s a huge number considering how they have been sanctioning the loans without proper collateral.
PROBLEM 8: Accounting has been one of the serious issues in any industry. At this point in time, everyone from accountants to financial executives scratches their heads in maintaining the accurate and accessible data. In order to have the consistent records, they cross-verify and perform multiple-checks. This process of reconciliation and consolidation waste a lot of time and industry needs a desperate change now.
SOLUTION 8: Blockchain will be the single source of data which can be referred by all the parties involved in a trade. What would introducing blockchain as a common database platform would do? It would end costly audits by automated cross-checking and double-verification. Basically, the blockchain can be used where values are transacted.
PROBLEM 9: The most basic setback of having cash is double spending. Let’s understand what double spending is through a simple example.
John decides to eat at McDonald and order a burger worth $10. He pays in cash and that cash goes to the McDonald vault. There is no chance of spending the same $10 somewhere else to purchase something else. UNLESS YOU SNATCH THE MONEY AND RUN. If you manage to snatch it, you can spend that money somewhere else, which is basically double spending.
SOLUTION 9: Blockchain applications like Bitcoin manages double spending problem by updating the universal ledger by confirming mechanism carried out by the validators. Bitcoin’s blockchain contains all the transactions in chronological order appended with timestamp right from the beginning of its operation. Hence, there is no way a person could spend his money twice.
The Final Call
There is a massive outpour regarding the blockchain among technocrats. Although the blockchain is in its commencement phase, there are series of development and modification going through. It is speculated that blockchain will soon get into the third generation where things would get stable and it will become a regular part of our lives, just like the internet has been.
This is a guest post/opinion piece and should not be construed as financial advice.