The origin of blockchain dates back to 1991, when researchers Stuart Haber and W. Scott Stornetta outlined a system to document timestamps that could not be altered. However, it is most widely known as the underpinning of Bitcoin, introduced to the tech world when Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” Soon after that, Blockchain became the next possible bedrock of record-keeping worldwide and the underlying distributed ledger technology (DLT) that powers many of the most popular digital currencies.
The goal of blockchain is to digitally record information to be distributed but not tampered with. It is an open, decentralized ledger that records transactions and entries that are confirmed by peer-to-peer networks and encrypted. The data is stored into a “block,” or a fixed event that has been approved and locked into place. Each block is then added to the “chain” of events, leading to the methodology’s moniker. Each record is easily verifiable and incorruptible. The network cannot be influenced by a single party nor taken down because it exists in multiple distributed places.
Though Bitcoin is the most extensive application of blockchain, an essential thing to understand is that blockchain can be used to record any number of data points across any industry immutably. FinTech is following right behind cryptocurrencies in blockchain adoption, particularly during the compressed disruption in 2020 that is likely to continue this year. Let’s take a look at why and how other industries and applications will, and should, be next.
The digitization of financial instruments such as digital assets, smart contracts, and programmable money multiplies the benefits of blockchain by providing unprecedented levels of connectivity and programmability between products, services, assets, and holdings. A full transaction history ensures data integrity in a single shared source of truth by digitizing financial instruments. Blockchain supports programmable capabilities to be built into the assets themselves to manage tasks associated with governance, voting and information rights, compliance, and KYC/AML. The automation of processes reduces the potential for errors, delays, and operational and transactional costs, leading to a more transparent, more accountable system. Ultimately, a more streamlined process that reduces costs and aligns stakeholders will lower the cost of capital. This, in turn, will create more liquidity potential and open up possibilities for new digital instruments.
One would be hard-pressed to find a use case in financial services that wouldn’t benefit from blockchain, save for in-person payments given the single-digit TPS (transactions per second) vs the modern payment rails that operate in the tens of thousands of TPS. Trade finance, asset management, capital markets, banking and lending, insurance, etc. all would realize increased privacy, accuracy, and security from the distributed, immutable ledger technology. On cross-border settlement transactions alone, a report by Jupiter Research shows that blockchain deployments will enable banks to save up to $27 billion by the end of 2030, reducing costs by more than 11%. Financial institutions acknowledge that Blockchain technology will save billions of dollars for banks and major financial institutions over the next decade.
Payments is a category on which blockchain efforts are concentrated. This is an obvious conclusion, being that on the blockchain, AP/AR is easily tracked and verified, duplications are virtually impossible, and smart contracts can automate the process based on agreed-upon terms. However, cryptocurrencies have proven too volatile and slow to be an adequate payment solution in most cases. Few merchants can feasibly accept a payment method that takes hours to process when the value may swing drastically.
Paystand, a B2B payments solution, learned early on while enabling Bitcoin transactions, that its traditional banking partners were worried about the direct value transfer between parties using blockchain technology. On that path, it was also unable to provide the privacy and transparency needed for B2B payments, which sometimes involves a third-party verification such as an insurance provider or title company. The company discovered that Fiat (a government-issued currency not backed by a commodity., e.g., the dollar) or credit is the most feasible form of payment for traditional business payments.
Beyond Bitcoin and finance
There are plenty of other examples of blockchains that function for something other than cryptocurrencies (primarily Bitcoin, Ethereum, and Ripple). Moreover, companies are building their own blockchains for industrial and business purposes other than pure finance–from the more obvious uses of supply chain management and real estate to the less obvious uses of voter certification and healthcare (including Covid 19 vaccination records). Let’s take a look at some more of these potential applications.
The disruptions caused by Covid-19 struck organizations at all levels, accelerating the need for digitization down the supply chain. Supply chain data is not always visible, available, or trusted. By moving from spreadsheets and emails to permissioned blockchain solutions, organizations can maintain strong data quality and integrity during this transformation. While some supply chain managers are using blockchain, many are still in the proof of concept phase or at some nascent stage of adoption. Still, the benefits are apparent, and the transition inevitable. Blockchain supports the multiparty process around data that is shared and trusted across various boundaries. This allows for location identification, delivery confirmation, condition of goods, and data accuracy–all challenges that plague many supply chain firms.