Blockchain and Financial Services

Blockchain is one of the most exciting and often misunderstood technologies of our time. Its effectiveness is never in doubt but what it does and how it works is not always clear to everyone. For the financial services industry, blockchain is definitely a new darling. The ability to record and track transactions in a decentralised database that cannot be changed or meddled with provides a level of security and flexibility that is the stuff of dreams for banks and other financial instructions. As such, blockchain is increasingly seen as a viable technology that could disrupt the financial services industry and become a staple for banks and institutions.

In a world where there is increasing pressure on bank and financial institutions to digitise as much of their workflow as possible, as well as provide impenetrable security, blockchain provides the perfect solution to this challenge. From the registration of a loan to the transfer of assets between parties, blockchain’s popularity is increasing by the day.

Expensive promises

For many financial institutions, paper is still the bedrock of their lending practices. The documents involved in these processes – mortgage notes, vehicle loans and equipment loans – have a cash value attached to them. The obvious flaw in this system however, is that if the documents are destroyed, their value is completely lost. Also, there is the question of how these paper-based processes translate to the digital world. How can banks and financial institutions ensure that digital assets are managed properly as they exchange hands in today’s complex and compliance-driven lending ecosystem?

There is increasing pressure on banks and financial institutions to comply with the myriad of regulations and they need to be able to quickly demonstrate how processes took place. This is where blockchain’s added value comes into play. One of the most exciting and promising features of the technology, is its immutability. Once a transaction has been recorded and tracked in the blockchain ledger, it’s there for good – it can’t be tampered with, or deleted. In other words, blockchain provides a security blanket for the transfer of digital assets. This is one of the reasons why many in the industry believe that potential to further strengthen compliance and audit by demonstrating a secure chain-of-custody for the transfer of any digital asset (e.g. secured loan or lease) to anyone that has permission on the network.

Understanding the potential of blockchain within financial services

As mentioned earlier, the benefits of blockchain are rarely questioned but the debate on how banks and other financial institutions can get the best out of blockchain is an ongoing conversation. There is still a lot of work to be done and organisation need to think more broadly about how they can use the technology and get the best out of it. For many in the financial services industry, especially those working in “innovation labs” and small groups working on projects in an unconventional way, these are exciting times and the possibilities are endless.

Another benefit of blockchain is that it gives banks and financial institutions choice with respect to the technology platform they choose while digitising their workflow. With digital lending, for example, leveraging blockchain to record transactions provides a new way of providing access to all parties to a transaction in an efficient and cost-effective manner. Direct participants and “observers” such as auditors and regulators can more easily track transactions and verify their authenticity.

[easy-tweet tweet=”Blockchain does not replace the entirety of the pre-existing electronic signature, registry or e-vault capabilities ” hashtags=”Blockchain, IT”]

Blockchain will work with, not replace, existing systems

Blockchain does not replace the entirety of the pre-existing electronic signature, registry or e-vault capabilities that existed before its implementation. Instead, it can act as a complementary technology that helps simplify visibility into and the tracking of document-based transactions linked to financial assets for all parties involved and further strengthens compliance and audit. For example, e-Signature platforms can integrate with a blockchain-based ledger, to record operations such as the transfer of digital assets between two parties, and verify the authenticity of the underlying documents in the loan package. It has the has the potential to give financial institutions complete visibility into the lending process and demonstrate who has legal control over the authoritative copy of the loan documents. This process also ensures that an electronic duplicate of the original copy of the loan document can’t be made, as that would render both copies invalid. The combination of technologies can also simplify the tracking and storage of loan documents, from origination through funding.

There is so much more that can be said about blockchain and its potential benefits to the financial services industry. We haven’t even mentioned the connection with cryptocurrencies in this article and that topic alone has enough about it to fill books. But however you look at it, there are exciting times ahead for the technology, and financial institutions need to exploit the potential it offers, if they want to stay one step ahead of their competitors.

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