Blockchain in Financial Services
Blockchain technology is expected to revolutionalize how our industries and enterprises operate. Experts estimate that it will business process flows and enable organizations to build products and services that are more secure, transparent, fraud-resistant, and cost-efficient. Banking and financial enterprises and start-ups have been the first to experiment with and adopt this disruptive technology. Reports and surveys suggest that, within the next decade, these organizations will go through rapid stages of innovation to establish blockchain as the Backbone for their day-to-day operations and the services they offer to their customers. In this book, we'll be looking at some prominent applications of this technology for the banking and finance industry through projects. Each project is implemented using a popular distributed ledger platform...
Present-day banking and finance systems
The global banking and financial system plays a huge role in the life of the modern human being. It moves more than a trillion dollars around the world in a day, and more than a billion people are directly or indirectly served by it every day. It is the backbone of global trade finance and it enables enterprises, from start-ups to conglomerates, to run their businesses smoothly in any part of the world. The technology that makes this ecosystem tick has evolved in leaps and bounds in the last two decades, especially with the advent of the internet.
However, owing to compliance restrictions, reliance on legacy systems, and a conservative outlook on technology, most banking IT systems today are yet to adapt to advancements in technology and are unable to keep up with the nefarious means employed by malicious individuals. As a results close...
Understanding blockchain technology
Blockchain technology was invented to be the backbone for Bitcoin, the popular cryptocurrency. It is a distributed ledger spread across a permissioned or permissionless network. The participants of this network are referred to as nodes. Each node contains a copy of the ledger. To update the ledger, the participants in the network will propose a transaction or a set of transactions that should be added next to the ledger. Once the participants in the network come to an agreement on the next set of transactions, they will add the transactions to their local copy of the ledger. This way, the sanctity and uniformity of the ledger across the nodes are maintained.
Data is added in "blocks" of transactions. Each block contains the hash value of the header of the previous block. (A hash function generates a unique output of fixed length for...
Blockchains for financial services
There are many advantages offered by blockchain technology that make it suitable for application in financial services. The technology can help us overcome numerous shortcomings and inefficiencies of present day Banking and Financial systems. The following are some of these areas:
- Reconciliation: Reconciliation is an expensive and time-consuming affair across almost all financial products and services. The delayed visibility of transactions or information across organizations leads to delayed settlement for the end customer. Cross-border and domestic payments, trade settlement, trade finance, and letter-of-credit settlement are examples of some workflows that are more time-consuming and expensive due to the effort spent on reconciling data between organizations. Blockchains can help eliminate or reduce reconciliation costs and time. Transactions...
How to approach implementing a blockchain solution
The following is a list of discussion points and activities that IT practitioners should consider and carry out before implementing blockchain technology within their organization:
- Identify business requirements that require provenance, audit ability, or distributed workflows.
- Recognize whether potential use cases can be executed with centralized databases or digital signatures without relying on a blockchain. (One example of a use case that requires blockchain could be an inter-organizational use case where no central organization or regulator exists to take ownership of the database.)
- Envisage the end benefits of implementing blockchain technology.
- Identify legacy workflows and modules that will need to be replaced or augmented.
- Analyze whether the end benefits from replacing the legacy workflow outweigh the costs.
There are different implementation strategies that organizations can look at to implement a blockchain network. These are as follows:
- All stakeholders own and maintain a node on the blockchain network. This node can be on-premises or on a cloud platform.
- A cloud-hosted blockchain network is operated by a trusted service provider. Organizations can view data and information and submit transactions based on access control. This is known as Blockchain as a Service (BaaS).
- Accessing a public permissionless blockchain to record data so that it cannot be tampered with. A good example is storing the hash signature of a document to the public Bitcoin or Ethereum network. The transaction ID and the document is then shared with other stakeholders who need to validate the authenticity of the document in the future.
Organizations can choose to put either complete...
Popular distributed ledger platforms for financial applications
The blockchain industry today is inundated with distributed ledger frameworks and platforms that can be used to implement solutions. For this book, I've selected three popular platforms that are being used by developers and architects to implement financial solutions. These platforms are as follows:
- Hyperledger Fabric
These platforms have been used extensively for implementing blockchain projects globally. As with any framework, there are trade-offs when you settle on one for designing your solution. Let's look at these platforms.
Ethereum is probably the second most popular blockchain platform in the world. It was conceptualized...
I hope this chapter gave you insight into how blockchains will impact the financial services sector, how enterprises are adopting this technology, and what to consider when trying to implement a blockchain solution. It should also have helped you understand how to implement blockchain projects within an enterprise.
We started the chapter by looking at the present-day banking and finance industry and by understanding blockchain technology. Next, we went through the areas where we believe blockchain can make a difference in this industry. We also looked at how organizations need to approach implementing blockchain technology and what the different implementation models they can consider are. Lastly, we looked at some of the popular blockchain platforms of the day. We'll be using these to implement the projects that will follow in the coming chapters.
In the following...