How Could Blockchain Technology Change Finance?

Bron: coindesk.com

This question has been asked by every futurist research lab in many of the largest banks, central banks, financial institutions, think tanks, consulting firms and government committees around the world.

R3CEV, a consortium effort financed by some of the world’s largest banks, is busy trying to answer this question. Goldman Sachs, McKinsey Consulting and Consumers' Research have all written excellent reports on this question. The UK Government, the Senates of the US, Canada, Australia and the EU have all made inquiries along these lines.

Many startups also produce white papers concerning their particular innovation or use of blockchain technology, and often include the larger social question: "How this will change things?"

Much of this research underlines four major areas of change:

Infrastructure for cross-border transactions

The digital revolution has totally transformed media, as we all know. It’s had an effect in the finance industry as well. Of course, financial institutions use computers. They used them for databases in the 1970s and 1980s, they made web pages in the 1990s and they migrated to mobile apps in the new millennium.

But the digital revolution has not yet revolutionized cross-border transactions. Western Union remains a big name, running much the same business they always have. Banks continue to use a complex infrastructure for simple transactions, like sending money abroad.

The following infographic, prepared by Richard Gendal Brown, shows the infrastructure and intermediaries in cross-border banking that have been in place since the '70s.

This architecture is the result of the finance industry using highly secured private databases. Digitization has meant we merely sort information into private databases much faster.

Blockchain technology allows for financial institutions to create direct links between each other, avoiding correspondent banking. R3's principal product to date, Corda, aims at correspondent banking. Corda is a play on words incorporating 'accord' (agreement) and 'cord' (the straightest line between two points in a circle).

In Corda’s case, the circle is made up of banks who would use a shared ledger for transactions, contracts and important documents.

Brown used to work on IBM's blockchain products, but has since moved over to work at R3CEV.

Competing financial institutions could use this common database to keep track of the execution, clearing and settlement of transactions without the need to involve any central database or management system. In short, the banks will be able to formalize and secure digital relationships between themselves in ways they could not before.

In the above representation, that means correspondent banking agreements and the RTGS could both be shortcutted.

Transactions can occur directly between two parties on a frictionless P2P basis. Ripple, a permissioned blockchain, is built to solve many of these problems.  

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