Blockchain banking: How finance is embracing technology meant to disrupt its status quo
It’s not serendipitous that blockchain technology was first introduced as a way to breathe some fresh air into the financial sector. Originally created at the height of the 2008 global financial crisis as the operational backbone of Bitcoin, blockchain’s Distributed Ledger Technology (DLT) is a safe and secure method to transfer and catalog data.
In short, blockchain is a public ledger capable of recording the origin, movement and transfer of anything of value. Instead of relying on a central authority (i.e. banks), blockchain requires unanimous approval from the individual nodes in the blockchain to process a payment or transfer a good. The ledger technology is most attractive to the financial sector because it solves many problems plaguing the industry today, namely security and efficiency.
Blockchain subverts institutions (an original intention of Bitcoin) in a way that makes today’s current financial industry appear archaic, so it's no surprise the powers that be in the world of finance are looking for their seat at the table. DLT technology's promise of eliminating unnecessary middlemen, paperwork and security headaches can save some of the largest banks, like Santander, around $20 billion annually.
The word “disruptive” is used all too frequently nowadays, especially in the technology space, but blockchain truly has the ability to shake the multi-trillion dollar financial industry to its core. Here are just a few examples of blockchain in the finance sector doing just that.
Establishing Trust Through Smart Contracts
Arguably the most impactful application of blockchain in finance is its ability to efficiently establish trust through smart contracts.
Essentially, smart contracts are similar to physical contracts, except the stipulations of the contract are fulfilled in real time via the blockchain. Smart contracts are beneficial, especially to the finance sector, for numerous reasons. These contracts are fulfilled instantly after all stipulations are met, do not require any middlemen and add heightened levels of security.
Jeff Garzik, co-founder of blockchain company Bloq, says smart contracts are beneficial to parties looking for very specific outcomes, such as when a contract is fulfilled by both parties following all the predetermined rules and dissolves under violations. A good example of this is investing.
When an individual invests in a company, the rules and stipulations are clearly established between the two parties. The unambiguous nature of the contract is helpful because the blockchain can then enforce those rules using its network of computers to check that all contractual agreements have been met (i.e., the investor has enough money, they invested in the proper amount of shares, etc.) before the investment moves forward.
Smart contract technology is currently at the top of almost everyone’s needs because of its efficiency and privacy. Here are three companies instituting blockchain-based smart contracts in an effort to get ahead of the curve.
Location: San Francisco, California
How they're using blockchain in finance: Zeppelin builds and operates blockchain-based infrastructure for smart contract systems.
The company has implemented systems for a slew of industries, including everything from social media to the financial sector. So far, more than $4.5 billion has been transferred via Zeppelin’s smart contracts.
Location: London, England
How they're using blockchain in finance: Populous is an invoice and trade finance platform that uses blockchain-based smart contracts.
The contracts allow invoice buyers to purchase contracts from business owners in a faster and safer way than traditional agreements. Populous’ business analytics platform uses blockchain to privately view and share data among departments.
Location: Irvine, California
How they're using blockchain in finance: Uulala is using smart contracts for bill paying, micro-credit and micro-loan agreements to serve underserved populations in the Americas.
The company provides these consumers with a virtual blockchain-based wallet and rewards those who pay their bills or fulfill the stipulations of their smart contract micro-loans in virtual currency.
The ultimate goal of Uulala is to help these consumers get recognized as creditworthy by larger financial companies.
One of the most attractive applications of blockchain in fintech is its ability to process payments almost instantaneously and in a manner that protects data integrity.
Because the basis of DLT is to bypass centralized institutions, moving money from peer-to-peer is as simple as pressing a “send” button on a phone. Once initiated, the nodes in the blockchain work to unanimously accept or deny the payment in an instant. There's no need for cash to sit in limbo for days while the bank processes the transaction, nor is it burdened by exorbitant fees.
By conducting money transfers with blockchain, both customers and banks could save an unprecedented amount of time and money. Blockchain-based currencies are also universal, meaning there are no exchange rates, international transfer fees or confusing country-by-country laws that prohibit the transfer of cryptos.
Here are four examples of companies using blockchain to shake up the payments industry.
Location: San Francisco, California
How they're using blockchain in finance: Ripple is one of the best known blockchain-based payment systems. The technology lets banks, corporations and cryptocurrency exchanges transfer money directly without the need of a third party processor.
With personalized integrations, the ability to track payments and the elimination of middlemen, Ripple is facilitating the efficient transfer of money around the world.
Location: Nairobi, Kenya
How they're using blockchain in finance: BitPesa’s platform simplifies financial transactions in frontier markets.
The company focuses on the transfer of payments in Africa, offering cross-border payments, flat exchange rates and a digital treasury tool. BitPesa's blockchain technology allows for only a 1-3% charge per transaction on transfers that take only a few hours, rather than days.
Location: Purchase, New York
How they're using blockchain in finance: Credit card giant Mastercard recently won a patent for technology that processes cryptocurrency payments on traditional credit card systems.
The company realizes that blockchain-based payments are getting popular and wants customers to retain anonymity, while maintaining the speed of an already-established payment infrastructure. Mastercard also hopes the hybrid payment method will cut down on fraud and risk.
Location: Copenhagen, Denmark
How they're using blockchain in finance: MakerDao understands that making the transfer of money easier requires more stability in the cryptocurrency market.
The company is a decentralized organization on the Ethereum blockchain that seeks to minimize its own volatility against the US dollar by encouraging trading and borrowing of their Dai coin.
Advancing Trading and Investing
Blockchain technology has the capability to transform the stock market by cutting down complicated and time-consuming processes, high costs and security risks.
A traditional stock market has numerous players, including the investor, brokers, regulatory agencies and the centralized institution processing the investments. An investment can take up to three days to process because of communication between intermediaries, causing lag and uncertainty in the process. Blockchain, featuring smart contracts and a decentralized process, promises to bring speed, accuracy and efficiency to the investment process.
Since blockchain runs on smart contracts, an investment can be fulfilled immediately, rather than waiting a few days, after the blockchain deems that investment valid. The peer-to-peer investment process (in this case an individual investing directly with a company instead of through a broker) speeds up the process and eliminates unnecessary steps. Blockchain’s tightened security encryption protocols severely minimize the risk of a financial data breach.
Blockchain has also introduced another breakthrough investment idea in the form of Initial Coin Offerings (ICOs). Instead of the traditional method of raising capital in an Initial Public Offering (IPO) on the stock market, ICOs offer digital tokens that represent ownership stakes in a company.
More companies are turning to blockchain-based ICOs because they offer a faster, safer and more accurate way of collecting capital. ICOs raised $3.8 billion in 2017, but that has already been dwarfed by the $12.4 billion raised so far in 2018.
Here are four organizations evolving the investment process into a lean, mean blockchain machine.
Location: Menlo Park, California
How they're using blockchain in finance: Robinhood is one of the largest online trading platforms allowing investors to buy, sell and trade cryptocurrencies.
Originally intended as a platform for individuals to boost their personal stock portfolios via traditional stocks, Robinhood now allows investments in blockchain-based currencies like Bitcoin and Zcash.
Securities and Exchange Board of India (Sebi)
Location: Mumbai, India
How they're using blockchain in finance: The Securities and Exchange Board of India (Sebi) is currently exploring ways to implement blockchain into the Indian stock market.
The agency is mostly looking at blockchain’s beneficial abilities to secure transactions and act as a seamless, universal payment processor.
Sebi is also looking into blockchain’s future as a means of fundraising and asset management.
Location: Edinburgh, England
How they're using blockchain in finance: Aivia is a global platform for investors interested in decentralized funds.
The platform offers investors blockchain-based portfolios that diversify risk, provide real-time statistical data on the health of the portfolio, and have minimum entry barriers due to the use of smart contracts.
Aivia also gives fund managers and private companies the chance to create investible tokens, as well as a set of tools to attract crypto investments.
Location: Berlin, Germany
How they're using blockchain in finance: CoinMirror is making it easier for the average person to invest in ICOs.
As the popularity of ICOs and blockchain organizations grows, CoinMirror wants to make sure the average investor has all the due diligence information they need to make an informed investment.
The company offers “SmartFunds” that let investors pool their money with a credible investment firm. In order to limit confusion about the ICO process, CoinMirror even takes care of the filing paperwork.
Loyalty and Rewards Programs
Maintaining and growing a customer base can make or break many companies. It’s no coincidence that well-performing stocks, like Apple, Disney and Amazon, have expansive customer loyalty programs and millions of diehard fans. Businesses looking to increase revenue and retain customers have found another solution — blockchain-based loyalty rewards.
For most companies, current loyalty programs are hard to keep data on, are outdated and are at severe risk of data breaches. In a recent study, 75% of customers believe companies don't do enough to protect sensitive customer information. Additionally, 31% of all data breaches come from hacking into customer loyalty program databases. Blockchain is a potential solution for making the programs safer, larger and more precise.
The finance industry, like any business, wants a piece of the massive data and profits customer loyalty rewards programs can bring. Blockchain can optimize the process further by reducing costs, enabling a seamless, real-time program and safeguarding important data. The implementation of smart contracts allows customers to collect rewards in real-time and for businesses to manage their data better.
Centralizing a customer’s loyalty programs in one blockchain-based “wallet” encourages consumers to use their rewards more frequently. Additionally, customers will build a trust and affinity for companies using a high-level security blockchain to secure their personal information.
Here are three examples of companies helping to implement blockchain-based rewards programs.
Location: San Francisco, California
How they're using blockchain in finance: Loyyal helps businesses expand their customer loyalty programs with a Blockchain-as-a-Service (BaaS) platform.
So far, they have implemented blockchain rewards programs in the travel, employee incentives and credit card industries.
Loyyal’s customers can measure their rewards programs to truly optimize for an expansive and secure program experience. Since it’s development, Loyyal’s blockchain programs have yielded 31% annual growth in customer program enrollment.
Location: Moscow, Russia
How they're using blockchain in finance: BitRewards helps businesses offer cashback and loyalty points in cryptocurrency.
Running on the Ethereum platform, BitRewards gives businesses token software through which customers can receive rewards in the form of cryptocurrency.
By combining AI-based personalized recommendations and blockchain, BitRewards claims they can grow company revenue by 17%.
Location: Paris, France
How they're using blockchain in finance: The Sandblock Project is tokenizing all loyalty programs.
Currently in alpha, the company plans to develop extensive rewards programs for companies looking to reward their customers with cryptocurrencies and tokens.
Sandblock believes converting loyalty points, coupons and vouchers to crypto assets will create excitement among customers who will value having assets with real market value.
Upgrading Digital Identity Management
One of the most serious responsibilities of financial institutions is maintaining the integrity of a customer’s “digital identity" comprising some of our most sensitive information. We trust banks with safeguarding our passport information, biometric scans, social security number, accounts and addresses with the expectations that these institutions will keep them private.
Unfortunately, nearly 60 million digital identities were compromised in 2017, with over 40 million American’s credit card and bank information stolen from financial institutions. Blockchain has the ability to stop hackers in their tracks.
The most significant endorsement of blockchain's security prowess came at the 2018 World Economic Forum in Davos, Switzerland. The Forum concluded blockchain increases trust, accountability and efficiency in data security. Notably, the conference indicated that the financial industry can usher in a new age of digital identity security by leveraging blockchain’s decentralized mechanisms against increased risk and cyber attacks.
Here are three companies helping the financial sector maintain the integrity of millions of digital identities.
Location: Armonk, New York
How they're using blockchain in finance: IBM has become one of the world’s leading corporations investing in blockchain, especially in the area of digital identity management.
The computer giant helps install personalized blockchain-based “Trusted Identity” management solutions that use decentralized ID authentication and an updated due diligence platform.
IBM has helped over 2,000 companies install blockchain into their current infrastructures.
Location: Cambridge, Massachusetts
How they're using blockchain in finance: Cambridge Blockchain provides digital identity management software tools for financial institutions.
Instead of the traditional Know Your Customer (KYC) due diligence methods, the company installs a blockchain version relying on smart contracts and decentralized information, resulting in lower costs and more efficient data.
Cambridge Blockchain also offers an entire ecosystem to help financial institutions safeguard sensitive client information.
Location: Palo Alto, California
How they're using blockchain in finance: Civic’s secure identity platform uses a multi-factor authentication on mobile apps and the web without the need for passwords.
The blockchain technology privately saves encrypted customer biometric information, like thumbprints for example, so logins to bank accounts or websites are smooth and virtually incorruptible.
A unique feature of Civic’s product is that any customer can revoke their name from the blockchain at any time, permanently deleting the information and making it useless to would-be criminals.