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How Blockchain Technology will change the financial sector

blockchain-technology

Blockchain technology has been the guideline of many debates and evaluations about the future of the financial sector. It is clear that it is a concept with the potential to change the logic of the market and create new business opportunities.

Blockchain can be defined as a digital system of nodes that act in parallel and allow self-certification and exchange of information. Technically it is a process of adding cryptographically signed data blocks to form perpetual and immutable records.

blockchain-technology

That is to say, it is a chain system of blocks, used mainly in cryptocurrencies such as the famous Bitcoin or Ethereum, which allows online transactions without the need of an intermediary thanks to “smart contracts” guaranteeing an agreement between two parts. This system based on parallel and simultaneous processing of information is extremely safe.

The data of the transactions after registered cannot be falsified or deleted, and are stored in a history that contains all operations since its creation: a kind of digital account book that records transactions and information in a verifiable and permanent way.

The concept of blockchain arose to support the Bitcoin protocol, but is no longer limited to the monetary sector. The blockchain goes beyond the application to currencies, because it allows registering any type of financial transaction, which can be bonds, shares, transfer of property and any type of right or obligation.

Since the Blockchain technology was created primarily to support virtual currency transactions such as Bitcoin, its use was initially for the financial sector. However, over the years, the new technology has been developed and is now incorporated in most industries.

A 2018 study by Tactrica indicated that the 5 main sectors of the industry for the adoption of blockchain would be: finance, manufacturing, governments, health care and insurance. In 2019, those predictions are happening.

blockchain-transformation

It is expected that the top 10 business use cases for business blockchain will be:

  1. Trade finance
  2. International currency transfer
  3. Syndicated loans
  4. Post trade: compensation and settlement
  5. Automated compliance
  6. M2M IoT asset management
  7. Payments
  8. Crowdfunding + VC
  9. Supply chain management
  10. Patient registration management

For researchers Sander Duivestein and Patrick Savalle, bitcoin and blockchain technology are the third technological democratization of our era.

“The first came thanks to the internet, and enabled the democratization of information. The second democratization began with 3D printing, it is the democratization of manufacturing in which factories became obsolete. They are no longer needed to build a product Now we are about to meet the third democratizing force, the democratization of money and finance, there will be no more monopolies controlling our money or our business. “

That impacts the financial sector, generating new business opportunities. The big challenge of the companies is to adapt to this new scenario, with agility, but with a lot of security that is the key point of the sector.

Some relevant numbers of what the blockchain achieved and will achieve in the upcoming years:

blockchain-benefits

  • The financial sector has spent a total of USD 552M on blockchain in 2018 and the distribution and services sectors invested almost USD 379M.
  • 90% of North American banks and European banks are investing in blockchain to make their services more secure and transparent. According to Accenture, banks could save around USD 8-12 billion annually with this technology.

According to some Wintergreen studies, the global blockchain market was valued at USD 708M in 2017 and is expected to reach USD 60 billion by 2024.

In this image you can have an idea of the ecosystem that is around the blockchain and its main actors:

blockchain-ecosystem

The blockchain technology can and should be seen as a strategic ally and not as a competitor of financial companies. “This technology is not going to make banks disappear, but it will allow them to explore new niches and market areas,” says Antonio García-Lozano, consulting leader of Grant Thornton, in an interview with the newspaper.

The blockchain will remain during 2019 as one of the first ten strategic trends to consider in the industrial and government spheres globally.

A BBVA report from the end of 2019 indicates that the next steps and challenges for the blockchain in 2019 are summarized in 3 words: privacy, scalability and sustainability.

The third wave of Blockchain will have to solve the slowness of transactions, generating the capacity to increase transactions per second, maintaining security, and achieving scalability.

It is necessary on the other hand, the establishment of private channels between the different actors that make use of technology, granting privacy.

Sustainability will be centered on moving from the current financing model, based on ICOs in the past and exhausted years, towards a model in which companies receive a constant flow of money over time for the different services and operations, and thus be more sustainable.

Is there a Paradigm change in finance?

The financial sector is changing. Up until now, fast growth in this sector was possible only through external growth. The advance of technology and innovation are changing the scene, enabling the pioneers who easily adapt to change, to quickly acquire relevant positions, as shown by the example of Transferwise in the field of international P2P Transfer.

This underlying trend is reflected in an article by Dave Michaels published in Bloomberg. It refers to the US Securities and Exchange Commission (SEC) revision of the possibility to allow stock exchanges to launch less regulated markets in order to enable small businesses to obtain liquidity. When authorities of this kind start considering such changes, it shows that the trend is coming to the turning point for the whole financial sector.

“The US Securities and Exchange Commission revision of the possibility to allow stock exchanges to launch less regulated markets in order to enable small businesses to obtain liquidity.”

Analyzing this trend in more detail, we come across the first detailed study about the Crowdfunding situation in Europe. The University of Cambridge (Cambridge Judge Business School), has managed to gather the information needed to show, in this report, some extremely revealing (recent) statistical and historic data.

This publication explains that since the global financial crisis (in September, it will have been seven years since it happened), alternative funding has considerably increased in the US and Europe. In particular, it refers to: equity crowd funding platforms, peer-to-peer lending, reward based crowd funding, donation based crowd funding, etc., all of which offer investors several ways to invest, encourage innovation, create jobs and/or finance social causes.

“since the global financial crisis, alternative funding has considerably increased in the US and Europe.”

Some of the data reflected in this study, about Crowdfunding in Europe is:

  • A 144% growth in Europe in 2014 (in comparison to 2013).
  • A total amount of transactions in 2014 of € 2,957M.
  • A specific weight of the United Kingdom with a total of transactions of € 2,337M, and a yearly growth of 159%.
  • The top down ranking of countries with the highest number of online platforms is: the United Kingdom, Spain, France, Germany and the Netherlands.
  • 9,743 SMEs have been financed in continental Europe between 2012 and 2014.

This transaction volume is still to be put into perspective as it only represents 0,4 per 1,000 so of traditional funding according to EBAN figures (European Business Angels Network). That is what traditional banks and supervisory authorities still think. However, given the crowd funding exponential growth, one can hope that SMEs, the greatest engine of our global economy, will get from it the financing needed to keep growing, to innovate and to create jobs.

“given the crowd funding exponential growth, one can hope that SMEs, the greatest engine of our global economy, will get from it the financing needed to keep growing, to innovate and to create jobs.”

This hope is very important for Europe given the drastic reduction in traditional financing for this type of businesses, which is due to the current trend to overregulate banks, in order to try to eliminate the risk from their activity.

For this reason, this way of creating closer and less restrictive collaborations is attracting companies and investors. Will crowd funding consolidate and, in such a case, how will traditional banks adapt to this new emerging paradigm?

Guillem Comi and Carmen Zamudio.