The growth in the number of online payments and transactions in financial markets exaggerates the problems of security and safety of the money transfers and personal data. Which, in turn, increases the demand for encryption technologies. By demanding better and safer financial services, users are not willing to pay higher transaction costs. Distributed ledger technology (DLT) can reduce them, as well as increase the reliability of any type of transaction. In the long term, it is capable of completely transforming the financial sector and significantly reducing the role of intermediaries. The bank of the future without branches and staff will be a cloud platform based on distributed ledgers, where services will be available to customers through applications, thanks to advanced fintech developers.
A distributed ledger is a database in which encrypted copies of information about transactions are stored and validated simultaneously based on consensus on the computers of the network participants. Distributed ledger technology improves the protection of data, preventing it from possible alteration or deletion. Check this detailed explanation of how DLT works.
Now the scope of applications with distributed ledgers is expanding. On its basis, smart contracts are created – software products that allow you to carry out transactions or implement agreements automatically when the relevant conditions are met. With the growth of investments in intangible assets, the infrastructural support of transactions with distributed ledger technologies is becoming increasingly important. It also contributes to the development of DLT financial platforms. At the same time, the possibilities of using distributed ledgers in public and corporate governance are growing.
Advantages of Introduction the DLT
- Fast and secure P2P (person to person) payments and transfers
- Low transaction fees
- Improving security for transaction and data storage
- Simplification of the procedure for international transfers
- Improvement of the financial market via minimizing the number of intermediaries
- Reducing the cost of insurance using smart contracts
- Possibility of M2M (machine to machine) payments
15% of the world’s largest banks are planning new commercial products based on a distributed ledger by 2023 (65% of banks will master this technology in the next three years).
There are over 1000 blockchain cryptocurrencies already in existence.
Assets for 10% of global GDP by 2027 will be stored using distributed ledger technologies
Drivers and Barriers
- Transforming the role of financial intermediaries
- The proliferation of financial platforms, cloud technologies, and big data
- Development of encryption technologies
- Development of the market for intellectual property objects
- Blockchain susceptibility to hacker attacks due to imperfect encryption algorithms
- The need to standardize regulation of blockchain transactions
- Open information about all transactions
- Increased transaction processing speed.
Cases: DLTs in Business
The main area of use of distribution registers now remains cryptocurrencies, where information about transactions is stored in this way and the balance of users’ wallets is calculated.
However, using the same technology, the government and the private sector could significantly modernize the process of storing and transmitting the information. DLT is already in use in some countries.
For example, in Estonia, the development of a KSI based on a distribution register has been underway for several years, which will allow citizens to check the accuracy of the information in the state database. The Estonian management system is known for its “courage” in using the latest technology. But the government of “conservative” England also created a committee to research DLT technology and develop government projects based on it.
The global business community quickly recognized the benefits of using DLT, and today this technology is being used to keep companies running. For example, Everledger provides a distributed database that guarantees the authenticity of diamonds – which is very relevant in a market full of counterfeits.
The most promising for the implementation of the distribution register is the banking and insurance industries.
Blockchain provides universal transparency for various participants, which otherwise would not be possible. For example, has the supply chain been interrupted? If yes, then its participants will receive notifications in the supply chain.
Within seconds, it is possible to subsequently trace which product is damaged, as data such as place of origin, batch number, processing data, expiration dates, and delivery data are stored on the blockchain.
As a result, food retailers and other members of the network can quickly trace contaminated food to its source, immediately remove it from the market, and reduce the spread of disease.
The transparency of the supply chain is critical to meeting customer needs. In the retail sector, in particular, there are many advantageous opportunities that the supply chain could take over from blockchain technology, such as traceability and reliable information about the origin and condition of food.
With the ability to track transactions in real-time, consumers can trust the supply chain. Information about the origin and processing of products is becoming more and more important for consumers, and in the long term will become important for the buyer. The end consumer can obtain such information by reading the barcode.
It’s safe to assume that thanks to blockchain, supply chains will no longer face bad reviews or scandals in 2022.
Thanks to blockchain technology, any participant in the supply chain can access the required document in real-time and see all the changes that occur to its status on an ongoing basis. Of course, this transparency makes it possible to immediately detect ineffective links and the subsequent opportunity to correct them as soon as possible. This translates into long-term cost savings. Real-time solutions.
Blockchain technology opens up new opportunities in supply chain management, including real-time decisions that can be made by all participants in the chain.
However, blockchain has some differences from DLT.
DLT Perspectives for the Financial Industry
Now the financial sector is experiencing a wave of modernization of the entire infrastructure, leading to the automation of payments. The increase in the number of online transfers and transactions requires improved security, fast mass processing of information, and lower commissions. The introduction of distribution registry technology into the financial sector helps to realize all this.
In the near future, DLT is able to radically transform the financial industry, increase security through cryptographic data protection and neutralize the involvement of intermediaries in transactions.
Using this technology, the bank of the future can exist without branches and be only an Internet platform based on a distribution register, and all banking services will be provided through applications.
On the basis of the distribution register, smart contracts also work, allowing you to conclude secure remote transactions and implement them automatically, subject to the prescribed conditions. This is especially important given the increasing number of investments in intangible assets.
In general, the areas of use of the blockchain can be classified into four areas: certification of anything – people (documents, personal identifiers, electronic signatures), goods (quality certificates and confirmations), rights, such as diplomas and Ph.D. theses, securities, rights to real estate, certification of actions through smart contracts; reconciliation of balances or balances wherever there is such a need, such as, for example, in roaming of telephone operators, mutual settlements of companies, various types of accounting and reporting – this technology automates and saves human resource costs; voting and finding consensus; exchange of various types of assets, including both cryptocurrencies and certified goods.
- Next, can read: How to Start a Financial Services Brand?