How are blockchains and cryptocurrencies impacting the financial market?

How are blockchains and cryptocurrencies impacting the financial market?

Cryptocurrency and blockchain have gained utmost popularity in today’s world. It appears that the reason behind the increasing demand for cryptos is nothing but the decentralization ideas they convey. However, just as much as it promises potential gain, the high volatility makes these digital assets more open to dramatic loss risks as compared to other traditional investments. 

We have seen how in 2017, the price of Bitcoin rose from $1000 and went higher than $19000 before dropping down to almost $3000. Again around the end of 2020, Bitcoin rose and reached a new height of $60000 before hitting bottom on $30000 in early 2021. Believing this would have given a good overview of updates regarding cryptocurrency, let us move on to the scenario with blockchain as a whole.

As per a study of a leading website in the industry, around 40% of Americans did not visit a bank or a credit union in the past six months. No wonder why this is happening! We know that banks are not vital for financial management anymore, which does not mean that the banks are disappearing. However, taking advantage of the scenario, open banking contributes in both terms – the value of outcome that could be developed and its impact on businesses and consumers.  

Is it really a time to say “Bye-bye banks, hello blockchain!”?

Along with banks, many other companies save, lend, and invest in faster, easier, and cheaper ways than financial giants. All of these have been possible because of the entry of blockchain in the scenario. Undoubtedly, there are still a few challenges to overcome before blockchain ACTUALLY takes over financial services and banking. The potential cost-saving and labor in the case of blockchain are so appealing that most financial institutions are choosing to invest millions in adding employees who can do thorough research on its implementation. 

The effect on the finance market

The financial market globally moves by trillion of dollars in a single day, and it helps serve billions of people across the world. However, this system has many problems that add costs through delays and fees and create friction through onerous and redundant paperwork, opening opportunities for crime and fraud. 

Considering financial intermediaries, 43% of the money transfer services, stock exchanges, and payment networks experience economic crime each year. For the entire economy, it is 37%; the number for professional services is 20% whereas, for the technology sector, it is 27%. Undoubtedly we see here that the regulatory costs proceed to go up and remain a significant concern for bankers. With this, as the cost adds, the one to bear the burden is no other than the consumer. 

Blockchain in Finance (FinTech, as you know it!)

Originally, blockchain was developed to act as a technology behind cryptos such as Ethereum and Bitcoin. A huge distributed ledger across the globe, running of lakhs of devices, blockchain can record anything of value. Bonds, equities, money, titles, contracts, deeds, and all digital assets can be stored and moved peer to peer, privately, and securely. This is because trust is not established by the government, banks, and other powerful intermediaries but by cryptography, network consensus, clever code, and collaboration. 

For the first time in the history of humanity, two or more two parties, be it individuals or businesses who may or may not know each other, can make transactions, forge agreements, and build value. That too, without depending upon the intermediaries like rating agencies, banks, and government bodies to establish trust, verify identities or perform critical logic in business such as clearing, contracting, record-keeping, settling, and other tasks that are based on all forms of commerce.

Given the peril and promise of such riotous technology, in the financial industry, various firms from professional service and audit to insurers and banks are investing in solutions based on blockchains. What could be the possible reason for this deluge of interest and money? Most of the firms look for opportunities to reduce cost and friction. In the end, most financial intermediaries depend upon the costly, complex, and dizzying array of intermediaries to execute their own operations. 

It is known that a European Bank named Santander put their prospective savings at $20B a year. A consultancy, Capgemini, estimates that it is possible for consumers to save about $16 billion in insurance and banking fees each year if there is an implementation of blockchain-based applications. 

Advantage of Distributed Ledger Technology in Finance Market

In the finance market, distributed ledger technology (DLT) has the ability to boost the efficiency of import & export by streamlining the open access to documents related to greater capital efficiency, faster settlements, and trade. Also, for activities of post-trade, the application of smart contacts can result in having eliminating the need for intermediaries, reducing counterparties, paving the way for quick settlements, etc.

Blockchain or DLT has made small payments pretty affordable, without any need for external labor. This helps to shrink the processing time and makes broker intervention optional. The potential of blockchain technology or DLT has been brought into the eyes of predominant as well as new institutions. On their part, the insurance sector relies on third parties to offer assets, risk, and loss data in the process of underwriting. 

Data claim and collecting submissions require efforts in a manual way, which leads to the increased potential for fraud and manual rework. With the intervention of DLT, processes can ve properly streamlined using smart contracts that frees the loss adjustor to go by every claim. 

Bottom Line

Blockchain technology has the potential to reduce the heavy duplication of information that creates confusion, conflicts, and delay in various aspects of financial markets. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar. As blockchain technology and decentralization offers a significant number of validators and miners and also significant value, caution must be taken to verify the transactions for validating them. 

In today’s date, blockchain and cryptocurrency are immature. However, there are a few areas wherein they are implemented effectively. The answer to what the future of financial markets will look like with blockchain and cryptocurrency is to work on building working systems and check what kind of difficulties arise. It will be critical to look ahead, integrate with regulation, law, and governance. But for sure, cryptos and blockchain will represent a new form of trust in the financial market.