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How blockchain technology can be applied to brokerage firms and investment banks

Cryptocurrency

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Blockchain, a distributed accounting technology, is considered one of the major emerging disruptive technological forces, along with Artificial Intelligence, Cloud Computing and Quantum Computing.

If the development of blockchain technology matures as planned, it will transform business and society as a whole in the coming years.

Considering the search for a continuous increase in profitability, one of the sectors that can benefit from the adoption of blockchain technology is banking investment.

In this article, I will explore how blockchain technology can be used to benefit investment banks.

Why is there so much hype around Blockchain?

Blockchain technology refers to an emerging database structure that allows different network participants to distribute access to data in real time and with an unprecedented degree of certainty.

Data reconciliation is at the heart of most business models. However, in the current scenario where each organization stores its own data, the process is generally characterized by inefficiencies.

Therefore, it is necessary that different entities communicate to process the information.

Considering that reconciliation is a vital component of bank investment procedures, blockchain technology has the potential to facilitate the progress of different current data reconciliation techniques and create a much more efficient process.

How can investment banks profit from this?

Long-term opportunities for banks include restructuring their operating, risk and financial systems on shared data platforms, supported by blockchain.

The impact of this transition would be the elimination of most current procedures and data structures.

Although the implementation of this new system would require a lot of patience and several attempts, the great potential regarding cost and efficiency should be sufficient reason to sustain interest and investment in blockchain-based solutions.

What challenges do investment banks face?

The intermediary and administrative operations of investment banks are very inefficient and characterized by:

  • Expensive reconciliation procedures and systems
  • Slow business verification processes
  • Challenges regarding data quality, which result in commercial interruptions
  • Obligation to report transactions to regulatory agencies

There are still doubts and questions related to the adoption of this technology. However, as the misunderstandings are cleared up, investment banks will be able to enjoy the benefits associated with blockchain.

Among which we have the greatest return on investment, is an increase in competitive advantage.

What solutions does Blockchain offer?

Regarding the activities involved in banking investment, blockchain technology offers:

  • Improved security
  • Greater transparency
  • Increased efficiency
  • Cost reduction
  • Smart Contracts

Improved security

The main benefits for banking institutions are, in general, the reinforcement of security and the minimization of expenses.

When we consider traditional accounting, its external security measures are added to the system.

Databases need to be protected against unauthorized access and tampering with information. This is because modifying a record for an individual transaction may go unnoticed if the record is not inspected.

The blockchain can automatically guarantee the security and integrity of transaction records for all transactions. Even the slightest change in a record will be detected immediately by the network.

Enhanced transparency

Characteristically, in a negotiation involving two or more parties, the commercial information related to that transaction is kept in the database of each involved party.

The problem with this approach is that it results in duplication of effort, not to mention creating challenges for data reconciliation in the front, mid and back office systems in each entity.

However, blockchain is, in essence, a distributed technology. Consequently, it can be used to simplify, optimize and reduce transactions, in addition to reducing operating expenses.

Greater efficiency

Depending on the underlying assets and obligations of the counterparties, blockchain technology promises to optimize deals, minimizing time or even completely eliminating waiting times between payment and delivery.

Cost reduction

The cost of creating and maintaining secure transaction records in today's banking industry is enormous.

While potential adoption of the blockchain is unlikely to end security-related expenses, it can reduce those expenses to only a fraction of its current value.

This view is reinforced by a recent report from Reuters, which states that banks can cut costs by up to $ 8 and $ 12 billion by 2025 by adopting blockchain technology.

The report was based on a cost analysis of eight of the ten largest investment banks in the world.

Smart Contracts

For investment banks, blockchain technology promises a specific benefit.

In addition to offering advantages associated with the registration of transactions, it also allows automating contractual processes such as execution, transportation, payment and guarantee.

This benefit is of significant importance for investments that require speed in their processes or in markets such as commodities, where delivery depends on several factors.

Finally, there is much reason for all the optimism surrounding blockchain technology, especially in the financial services sector.

While I do not believe that it will completely replace the current ecosystem, I am convinced that its impact will be transformative.

About the author

Fares Alkudmani has a degree in Business Administration from Tishreen University in Syria, with an MBA from Edinburgh Business School, Scotland. Since January 2019, he works at the cryptocurrency company Changelly as general manager for Latin America.

Disclaimer - OBN is an informational website which aims to give the latest blockchain related news to the readers. Articles on OBN should not be considered as investment advice. Trading cryptocurrencies is a high-risk investment, every user is advised to consult an expert before making any decisions.