Blockchain technologies in financial sector

The financial sector seems to be the leading one in the blockchain industry, thus the advancement of the technology in the sector is rapid. It goes without saying that the financial sector has a lot of issues and complications, including such key points as security (people’s property is always at risk, being very attractive to criminals and is still very vulnerable) and the cost of services. Blockchain technology has the means to solve the majority of emerging problems, creating at the same time a friendlier environment without huge amounts of staff, bureaucracy and high costs.

Advantages of blockchain

What are the advantages of blockchain technology which are helping to solve the main issues the financial sector is facing? Let’s take a closer look.

• Decentralization and cost-efficiency. As long as the technology involves the distribution of ledger to a number of nodes, which may eliminate a third party intrusion, transaction data is not stored in one particular place and the possibility of hacking this data is reduced almost to zero. Moreover, the absence of controlling intermediaries on a blockchain makes financial applications and processes more accessible and takes the costs down significantly. Unusual though, that banks can use smart contracts, too, to reduce costs of value transfers and bookkeeping, reaching transparency and ensuring security at the same time.
• Immutability. The blocks of a blockchain, once added to it, are not subjected to modifications, which makes blockchain ledgers worthy and confident sources of information.
• Security. Blockchain transactions are peer-to-peer and decentralized, which does not suppose any intrusion of the third party. Only the key-holders are allowed to get access to the data and money, while encryption and distribution of the data defends it from the risk of someone’s taking them over illegally.
• ZKP and privacy. Blockchain networks may support this technology as a privacy solution, which enables financial data verification without disclosing its contents. Blockchain technology ensures transparency while confidential financial information is kept secret.

Use cases

Talking about use cases it is worth mentioning several key directions and fields where blockchain is frequently applied to solve emerging issues.

• Cross-border payments. Transferring assets and payments across borders is a time-consuming and costly process with lots of limitations. Blockchain allows sending and receiving money avoiding the majority of obstacles, the payments become quicker and less expensive (for instance, there is no banking charge for transactions). It is also safer, as the number of parties involved in the process is reduced to a minimum.
• Lending. With the help of blockchain lenders and borrowers do not need intermediaries to complete a transaction. They can negotiate a deal and make it directly with the help of smart contracts. In case a borrower cannot meet the terms, the smart contract can add a late payment fee to the final amount, which must be paid back to the lender. The blockchain adds trust to the system without involving any third party.
• Credit score. Financial institutions need a personal credit score, but this rating system is static and usually valid only within one country. However, blockchain technology may help with managing credit score. Lenders can get access to a person's transaction records and discover their credibility, while smart contracts will ensure the sensitive data is not compromised. Another useful thing is that blockchain can help to find out if the client is trustworthy to trade with.
• Invoice management. Blockchain technology helps companies which use electronic invoicing to upload their invoices through smart contracts. All important information (such as date and amount of payment or customer’s personal data) is saved on the blockchain. As soon as the person completes the payment, the smart contract will update the invoice status.
• Investment. One of the key directions of adopting blockchain in the financial sector. With a blockchain, the investment process becomes more secure and transparent. All necessary user’s personal, public and legal data can be stored there and investment companies can ask for access to this data. The user can refuse to share the information (and then the access will be denied) and also track the details, who uses it and what for. Thus, blockchain in the investment sector brings down the possibility of fraud or error and makes accessing the necessary data less complicated.  
• Stock exchange. Blockchain helps to make the complex system of stock exchanges more efficient and less expensive (due to getting rid of intermediaries such as regulators or brokers, for example), as their work can be done with the help of smart contracts. These smart contracts also allow shareholders to access necessary information (such as financial history, profits, dividend distribution or MoM) avoiding complications and limitations of the traditional process. Third party involvement is not needed anymore.
• IPO. High fees for bureaucracy make initial public offering procedures too expensive and distract possible interested parties. Blockchain helps make the investor-company interaction more secure and avoid extra expenses.  
• Auditing. Auditing is a very important procedure in finance but traditionally time consuming and very expensive. Blockchain records are immutable, enabling auditors checking whether the compliances are met. The use of the blockchain technology provides transparency, which the traditional approach usually lacks, and ensures honesty from service providers. It facilitates quick access to financial data, which helps to reduce the time of auditing procedures. All suspicious transactions can be tracked.
• Risk management. There are a lot of risks in the financial sector including issues with counterparties failing to meet obligations, credit information asymmetry, lack of trusted intermediaries, etc. On a blockchain, every stakeholder is represented by a node. Thus, the P2P transaction process makes intermediaries unnecessary. All transactions are recorded, decreasing the possibility of fund and credit risks significantly.