Will Finance Finally Come Around To Blockchain In 2019?

The finance world has a complicated relationship with blockchain, but that could change next year. Here's how finance could accept blockchain in 2019.

October 15, 2018
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The finance industry shouldn’t just be excited about blockchain, it should be fervently employing this technology each day.

After all, any industry that relies on the integrity of big data must be ecstatic about a technology that, by virtue of structure, ensures data integrity. Trust is hard to come by in finance. Blockchain eliminates the need for trust, thereby potentially eliminating the core problem with the financial system.

However, to the public eye, blockchain is inextricably linked to cryptocurrency, and ICOs are struggling due to fraud, hacks, and uncertainty.

Blockchain’s Sordid Relationship With Cryptocurrency

As one anonymous finance writer put it in an article about cryptocurrency’s disruptive potential,

“For cryptocurrency to ultimately become preferable to the dollar and the stock exchange, our entire government and economic system would have to collapse. In other words, something akin to the apocalypse would have to occur. For now, you’re better off working on building good credit than you are investing in cryptocurrency.”

That might seem like an overstatement, but it stems from the volatility we’re seeing in the crypto market. Not long ago, the New Jersey Institute of Technology speculated as to whether bitcoin could become a new global currency. At that time, projections saw bitcoin heading towards a spot as the sixth largest reserve currency in 2030, and it looked like there would be 5 million people actively using bitcoin by 2019.

Then, the value of bitcoin took a dive in 2018. Most recently, a Japanese crypto exchange platform called Zaif got hacked for $60 million. Crypto exchanges are centralized, which means they’re vulnerable to attacks. Zaif’s is one of many crypto exchange hacks that have kept professional money managers out of the market, and it doesn’t help that an icon like Warren Buffett called bitcoin an asset with no value.

That’s why we’re witnessing the birth of the security token. A security token allows you to back up the value of an asset on the blockchain. An innovation like this could pave the way for finance to finally comprehend the value of blockchain and disconnect this technology from speculative cryptocurrencies.

There’s also the fact that a blockchain ledger could provide the transparency and accountability the financial system desperately needs.

Blockchain For Accounting

Accounting underpins finance by making sure governments can hold entities accountable for transactions. Even though a crypto like bitcoin is notorious for allowing dark web dealings away from the government eye, blockchain could actually facilitate the opposite: transactions that are transparent.

Maryville University pegged blockchain as one of the technologies to be excited about back in 2017. Blockchain “is just a way of using the modern sciences of encryption to enable entities to share a common infrastructure for database retention,” says Blythe Masters, CEO of Digital Asset Holdings.

Blockchain can eliminate inefficient and time-consuming redundancy in bookkeeping, which would be a boon for accounting, because the minute two parties complete a transaction, an independent record of the transaction is automatically stamped into the ledger.

Eliminating Tax Fraud

It could also help fight tax fraud. One very large company, IBM, is excited about the prospect, pointing out that hyperledger blockchain could provide an “agreed, tamper proof and complete record of digital asset ownership.”

Furthermore, according to IBM, “Through inclusion in the blockchain business network, government regulation and taxation administrators [would] have full access to the changes in ownership and location of the digital asset. This would eliminate opportunities for tax evasion, and maximise tax revenue collection.”

Blockchain will allow governments to have a very precise, tamper-proof record of digital transactions. But will governments adopt it? One Chinese city, Shenzhen, is already working with Tencent, a gigantic internet investment company, on doing just that. Tencent’s blockchain platform will allow the city to trace all digital invoices and maintain data security. If Shenzhen and Tencent implement the new system successfully, it could provide a blueprint for other cities and governments worldwide.

Blockchain For The Stock Exchange

Although it hasn’t fully converted over, the Nasdaq exchange — the second biggest stock exchange — is all-in on blockchain technology. Part of Nasdaq’s plan involves a collaboration with Citigroup. Although the latter banned its customers from buying cryptocurrencies with its credit cards, Citi is working with Nasdaq to facilitate international securities trades on Nasdaq’s blockchain. Additionally, Nasdaq is planning on using its blockchain, which it originally built for the Nasdaq Private Market, to allow shareholders to vote on acquisitions and other matters.

When it comes to the stock market, Forbes contributor Eric Ervin uses everyone’s favorite word regarding the blockchain: revolutionize. According to Ervin, blockchain could do the following for the stock exchange:

  • Make transactions faster by eliminating intermediaries and incorporating regulatory stipulations into smart contracts
  • Streamline fundraising and asset management
  • Ensure accurate monitoring of systemic risk

What’s more, blockchain could save global capital markets anywhere from $200-250 billion per year. Nasdaq realizes how clunky and expensive the intermediaries are for mutual funds and is working on applying its blockchain for mutual fund trading and records.

Blockchain For Banking

You would hope that banks could use blockchain to improve data security, minimize fraud, and even to facilitate transactions, but that doesn’t look likely in the near future. Why? Because banks are waiting on regulations before make any major changes, and they’re tampering with blockchain’s structure in efforts to maintain the type of centralized control that is the antithesis of how blockchain works.

Current regulations require banks to have the centralized control that made them too big to fail in the Great Recession of 2008. What’s more, blockchain requires a lot of computing power. If a bank were to become a node in the blockchain, it would seek compensation for contributing computing power, which would result in high transaction fees, similar to bitcoin. This, then, would render normal everyday transactions impractical.

For banks to use true, decentralized, consensus-based blockchain, the federal government and the Federal Reserve Bank would need to step in, change the nature of our banking system, and issue strict regulations.

The Solutions Are Coming

Through blockchain app development platforms like Ethereum, there are a number of exciting blockchain projects going on that the finance industry could employ to everyone’s benefit. However, the lynchpin of America’s finance industry — the banking system — only wants to use the term “blockchain” without using the actual blockchain, in part because the blockchain is trendy, in part because banks are myopic, and in part because regulations won’t allow a full-scale transition.

Blockchain solutions such as those from major names like Nasdaq, IBM, and Tencent will continue to arise. Although American finance won’t be on the blockchain in 2019, look for other more forward-thinking countries, such as Estonia, to adapt and lead the way with blockchain finance.