How Could Blockchain Technology Change Finance?

The financial sector is one of the largest entities in the business world. It comprises banks, lenders, treasuries, payment processors, and other organizations. Millions of people are employed in the finance industry. You are affected by the finance industry whether you like it or not. Every time that you spend money somewhere you are a willing participant in finance.

In 2009 something happened that might eventually alter finance in the world today and how it is conducted. That something was Bitcoin. With Bitcoin came the blockchain, a decentralized ledger system that has the potential to be a faster and more secure way of managing financial transactions. While it was originally conceived to support Bitcoin and other cryptocurrencies, the blockchain is now being investigated as a solution to some of the ongoing problems that have plagued the financial sector.

Here’s a brief look at how blockchains could change finance for the better.

Cross-Border Payments

One of the big problems that has always plagued the finance industry is the ability to manage payments across geographical borders. There are different currencies to contend with and foreign exchange rates. This makes it expensive for people to move money from one country to another. There is a vast amount of fiat currency in use around the world, and all of it is specific to a geographical region.

One of the benefits of cryptocurrency is that it has no such boundaries. Bitcoin is Bitcoin in all areas of the world. The adoption of digital tokens as a means of exchange has already made a difference for expats and freelancers around the world. They can now collect payment for their services without needing to involve a third-party processor.

Some banks are taking the concept of the blockchain even farther. They are beginning to invest millions of dollars in their own blockchain research and development. What this is going to do is potentially create a world where the problem of cross-border payments no longer exists.

The Creation of New Asset Classes

Blockchains were originally designed to support cryptocurrencies. Assets like stocks, bonds, and commodities have been a part of the financial sector for many years. The trade of these assets accounts for billions of dollars every year. Now, Bitcoin and other altcoins have created a new asset class. These tokens are also traded and held for investment purposes.

According to an article in Forbes magazine, there are four primary reasons why Bitcoin has formed a new asset class. Granted, it has not been easy for traditional investors to make sense of Bitcoin as an investment vehicle. Some big investors like Warren Buffet have even been very outspoken on their negative opinion of Bitcoin. Yet, there is an undeniable reality that cryptocurrency exchanges are doing a booming business.

There are four characteristics that traditionally define an asset class: investability, politico-economic features, correlation of returns or price independence, and a risk-reward profile. Bitcoin satisfies all of those characteristics, even though some balk at its designation of politico-economic features. What this really means, though, is that Bitcoin is subject to governance. But wait, you say. There is no governance for Bitcoin. Not so fast. Yes, it is true that Bitcoin is a decentralized digital currency, but that does not mean that it is not governed. It is actually governed by the blockchain.

Many people are beginning to think about Bitcoin as an addition to their portfolio of investments, and that interest will probably continue to grow along with the emergence of other digital tokens.

Regulatory Compliance

Everyone would pretty much agree that regulatory compliance is a headache for the financial sector. It is so because there is a difficulty in the sharing of data between different agencies. Think about finance in the US as an example. There is the Department of the Treasury, the Federal Reserve, central banks, and so on. All of these institutions are constantly making decisions for the finance sector.

Managing data across all the various regulatory channels is an expensive and inefficient task. The use of a blockchain could help to shore up regulatory compliance while also improving the speed at which these agencies can manage their tasks.

Blockchain technology is certain to have a lasting impact on the world as we know it today. There will be more advancements that entice financial entities to embrace the blockchain as a better way to do business.

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