Blockchain in financial services

Blockchain, disruption, and the financial services landscape

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The buzz and energy surrounding blockchain technology is apparent no matter what type of media is analyzed, what industry is examined, or whether the organization is a startup or established incumbent. It can be difficult to distinguish what it means for you and your business, and, specifically, what this platform means for finance moving forward. Blockchain is a platform and should be leveraged to develop services as implementation continues, especially for finance and accounting professionals.

In short, blockchain can and will create an environment where finance and accounting must evolve, with several critical components driving this evolution:

  1. Unalterable data. Without diving too much into the technical weeds, data that is uploaded and a component of the blockchain, and secured using the network protocols, cannot be changed or altered without leaving a clear trail. With the news around data breaches and security, this functionality is something to keep an eye on moving forward. Making this even more evident, every block of the blockchain is assigned a date and time stamp and blocks cannot be altered after being added to the blockchain.
  2. Consensus verification: For any information to be uploaded, approved and added to the blockchain network itself, there needs to be a consensus amongst existing members to approve this information. Put simply — and depending on the specifics of the network setup — information is, prior to be added to the blockchain and encryption, verified by existing members of the network either via proof of ownership protocols or completion of algorithmic puzzles.
  3. Real time availability: Having information available in real time, after being approved by existing members of the network and encrypted, is arguably one of the most business ready applications of blockchain. This combination or encryption, consensus validation and confirmation, and delivery of data in real time represent a leap forward in data analysis and management.

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Specifically from the perspective of the financial services profession, the opportunities, changes, and implications possible with blockchain are extensive. Drilling down, there appear to be several areas where increased adoption of blockchain technology will facilitate the development of a more strategic finance industry and function.

  1. Continuous attestation: Traditional auditing, which focuses on historical data, uses a random and statistical sampling methodology that only provides a partial perspective for auditors and eventual end users of the audit report. With the encryption, consensus validation and timestamp security embedded on the blockchain, auditors and management have the ability to examine virtually 100 percent of transactions. Even more revolutionary for the profession, with transactional data verified on a continuous basis, auditors and attestation professionals can assist in data security policies, generate actionable insights and link data to the strategic decision-making process.
  2. Real-time settlement of exchanges: Mobile and online trading, even those facilitated via mobile applications, may appear to be settled instantaneously on both sides of the transaction, but the reality is far different. Even at sophisticated institutions specializing in trading and exchanging financial instruments, days or even weeks — as in the case of international transactions — can pass before the transactions settle. Leveraging the blockchain platform with data both verified and instantly available to all participants, the efficiencies and cost savings can be substantial, but also threaten the traditional role of intermediaries. While this eliminates some current duties it also opens the door to higher level advisory functions as opposed to simply verifying counter-party identities.
  3. Smart contracts: Arguably some of the most inconvenient and costly friction and delays in the current business landscape are connected to contract execution and resolution. Integrating contractual terms, linking terms to counterparties on the blockchain and obtaining agreement via public and private key agreement, streamlines contract execution and reduces the need for intermediary mediation. Lenders can leverage this development to automate loan covenants, payment terms and any other applicable terms in loan agreements and contacts.

Blockchain has been receiving a large amount of coverage, can seem intimidating and will inevitably generate disruption for financial services. Drilling down and taking stock of both how blockchain operates and the implications it has for business operations, is exciting, eye-opening and applicable for every organization. Change is inevitable, but so are the opportunities and future business functions for blockchain.

Share in the conversation, and let me know how you think blockchain is changing the face of the financial services landscape.

From time to time, we invite industry thought leaders and academic experts to share their opinions and insights on current trends in blockchain to the Blockchain Unleashed blog. The opinions in these blog posts are their own, and do not necessarily reflect the views of IBM.

Bring transparency, simplicity and efficiency to every financial transaction

Assistant Professor, Lehman College, City University of New York

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