Blockchain in Financial Services: More than Just Cryptocurrency

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The new use cases being implemented by financial institutions worldwide

When it comes to blockchain in the financial services industry, the first thing that may come to mind is cryptocurrency and its myriad problems in the wake of multiple bankruptcies throughout 2022. However, there’s a lot more blockchain can offer for financial services, and the industry is starting to make new advancements.

At the World Economic Forum’s annual meeting in Davos, Switzerland in January 2023, blockchain and distributed ledger technology (DLT) were key discussion topics for business innovation. Services discussed include digital asset tokenization, bonds, digital identity, and counterparty risk.1 Many of the concepts shared at the meeting are already in use with major financial institutions ranging from Goldman Sachs to the Hong Kong Stock Exchange, and 34% of securities services companies say they’re live with DLT today.2

What are blockchain and DLT?

Blockchain and DLT are often used interchangeably, although technically blockchain is a type of DLT where transactions are recorded with an immutable cryptographic signature. Transactions are grouped in blocks, and each new block has a hash of the prior block, chaining them together.3 The chain contains a complete transaction history, as old transactions remain unchanged when new ones are added. To access or add data to the chain, you need two cryptographic keys: a public key (the address of the chain) and a personal key that is authenticated by the network.

For financial institutions, the type of blockchain or DLT is important. Blockchains used for cryptocurrencies are permissionless or public, meaning anyone can join and propose changes to the network. Financial institutions are choosing permissioned or private blockchain platforms with a central entity that controls access and privileges of network participants. In a private network, the owner knows exactly who is participating in the network, whereas public blockchain can be anonymous. Accurate identity is a compliance reporting requirement for many financial institutions.

Why do blockchain and DLT appeal to financial institutions?

Blockchain and DLT have been embraced by financial services for their trusted, tamper-resistant record keeping and privacy, both of which are necessary for highly-regulated financial institutions. DLT-based solutions are now included in bonds, equities, mortgages, life insurance, and annuities. A key use case is asset tokenization, or turning real assets like cash, real estate, or other tangible items into digital assets. The digital token is then controlled via a smart contract—an automated agreement between the contract creator and recipient baked into the blockchain, thus making it immutable. A major benefit of smart contracts is that they no longer need an intermediary to execute a transaction, which can speed up the transaction and lower its management costs.

Let’s use getting a mortgage on a new home as an example of how blockchain technology can speed up a complex process. The traditional procedure is highly manual, involving the person getting the mortgage, the loan processor, underwriter, assessor, escrow officer, title researcher, and possibly a broker, notary, or lawyer depending on the transaction and location. The process frequently involves a lot of back and forth between parties as the home buyer gathers and clarifies all of the requested information.

Blockchain can streamline the process and reduce the chance of errors introduced into the data by eliminating much of the back and forth. The entire process can be recorded as a single chain of data, beginning with the buyer’s initial application for loan pre-approval to the transfer of mortgage servicing from one bank to another. If the home is refinanced, history of the original mortgage is easily available, and validation steps such as document verification, title research, and notarization can become completely digital.

Blockchain adoption can simplify a number of financial processes for customers, providing a better experience with greater transparency. The immutable nature of blockchain makes it ideal for auditing and, along with its distributed architecture, increases security of records. Use cases for blockchain are expected to grow, with the market for blockchain in banking and financial services forecast to reach over $17B by 2026 and $60B by 2031.4

  1. Gartner,Blockchain Finance Grows up in Davos, January 2023
  2. International Securities Services Association,DLT in the Real World 2022, July 2022
  3. R3,Blockchain 101, accessed February 2023
  4. Research and Markets,Blockchain In Banking And Financial Services Global Market Report 2023: Increasing Demand for Real-Time Fund Transfers Bolsters Growth, January 2023