Much more than just Bitcoin.
12 years have passed since Satoshi Nakamoto invented Bitcoin and its underlying blockchain technology. Since then, the blockchain has brought about massive transformation of the financial industry – and this is just the beginning. But let’s recap and consider how this transformation has come about…
Bitcoin – “Electronic Cash” as the Starting Point
On October 31st 2008, a still unknown person by the name of Satoshi Nakamoto published the Bitcoin Whitepaper. In it, he detailed his vision of a decentralized “peer-to-peer electronic cash system” that is not governed by any centralized entity like a central bank. To realize his vision, Nakamoto describes a solution using cryptography to hash encrypted transactions of blocks into a chain – the blockchain.
Smart Contracts and dApps – The Real Potential of Blockchain Technology
In 2013, 19-year old Canadian-Russian programmer Vitalik Buterin published the whitepaper about Ethereum, a “next generation smart contract and decentralized application platform”. Buterin values the idea of cryptocurrencies but argues that blockchain technology enables much more: the execution of smart contracts (self-executing programmed code in the form of if-then-loops) and with it decentralized applications, “dApps” for short.
Too Big to Be Ignored – Banks Take Note
While Bitcoin and Ethereum were largely ignored for long, cryptocurrencies quickly gained more traction in 2015. The Ethereum blockchain highlighted promising use cases of smart contracts and dApps in the financial industry. Faced with potential competition and disruption, banks and institutions slowly came out of the woodwork.
R3 Consortium – Banks Team Up To Explore The Disruptive Potential of Blockchain
In late 2015, 42 major international banks – including institutions like UBS, BNY Mellon, Commerzbank, Barclays, and the ING Group – founded the R3 Consortium. Its mission is to coordinate and promote the exploration of potential use cases of blockchain technology in the financial and banking industry.
“DeFi” – A Decentral Financial Ecosystem Arises
In 2020, a new trend captures the blockchain world by storm: “Decentralized Finance – DeFi”. Utilizing blockchain technology, practically all banking services are now available in decentralized form – lending, saving, and exchanging cryptocurrencies is possible through interaction with smart contracts alone – are banks becoming a thing of the past?
3 Use Cases of Blockchain Technology in The Financial Industry
Numerous pilot projects have been launched and tested in recent years. The three most promising use cases of blockchain technology in the financial industry are the following:
- Global Remittances: using blockchain technology between banks, it is possible to transfer fiat currency (EUR, USD, etc.) between bank accounts worldwide within seconds at a fraction of previous costs.
- Security Token Offering: digital securities can be issued via the blockchain, even voting and distribution rights can be stipulated in such tokens. Dividend payments can be automated via smart contracts. STOs are becoming a promising alternative to expensive Initial Public Offerings (IPOs).
- Exchanges: cryptocurrencies and other digital assets can be exchanged via centralized or decentralized exchanges that rely entirely on the execution of smart contracts.
Decentralization, Acceleration, Automation, Cost Reduction – The Benefits of Disruption
- Decentralization: transactions are documented and stored in an immutable, distributed ledger that all connected parties can look into at any time. Multiple (authorized) parties instead of a single central entity can check and verify the validity of transactions at any time. Transparency and trust are fostered.
- Automation: as legal requirements and verification procedures can be programmed into smart contracts, countless processes in the financial industry can be automated. Financial transactions can be audited and verified automatically in real-time, manual supervision is no longer required.
- Acceleration: the described automation means that financial transactions can be verified and processed 24/7. Global financial transactions are settled within seconds instead of multiple banking days.
Cost Reduction: through eliminating the need for financial intermediaries and manual supervision by employed staff, the costs for financial transactions are cut dramatically.
We are amid a massive financial revolution. Already, blockchain technology has shown powerful, decentralized and more efficient ways of performing traditional banking and financial services. While the extent and speed of this transformation remains to be seen, one thing is clear: the future for blockchain technology in the financial industry is bright and colorful.