Blockchain technology has been consistently in the news for the past several years, most commonly associated with the stories surrounding cryptocurrency (like Bitcoin or Ethereum). These cryptocurrencies and blockchain technology actually go hand in hand, as blockchain is the record-keeping tool that keeps cryptocurrency afloat.
But there are more uses for blockchain technology than we realized at first, uses that go way beyond cryptocurrency. In fact, blockchain may wind up having significantly more staying power than cryptocurrency when all is said and done.
With the continued development of financial technology (also known as fintech), blockchain has found another way to be useful. Here, we will look at how blockchain technology works and how it is changing fintech for the better.
What Does Blockchain Technology Actually Do?
If we just look at the name blockchain, it sounds like it’s referring to a chain of blocks. And honestly, that’s not far from the truth. In this context, a “block” refers to a piece of digital information and the “chain” is the public database that stores the blocks. The digital information stored in the blocks is related to the transaction, such as the date, time, amount, and a digital signature from the parties involved (rather than your name). The blocks also contain a “hash,” a unique identifying code to separate them from other similar blocks. These blocks can store an enormous amount of information: One single block can hold up to 1 MB of data, which could translate to thousands of transactions depending on the size of the data involved.
Thus, blockchain technology creates an extremely useful digital ledger, different from those used in the past in a few fundamental ways. Blockchain technology is decentralized, which eliminates the need for a third party to store and process information. Not only does this make hacking more difficult, but it also makes the technology cheaper and more accessible by removing third-party control over the transactions. The encryption used to secure the digital ledger means that data can only be accessed by individuals with a unique key code. This feature, combined with the decentralization of the data, means that it is almost impossible to hack the blockchain.
Blockchains are also impossible to alter, which means that the integrity of the data stored in them can be trusted. Processing all the data in these transactions is completed by using individuals or companies commonly known as “miners.” What this means is that companies need not invest in large and expensive server systems or pay for unnecessary extra processing power, because blockchain technology uses distributed computer processing for the transactions.
How Is This Useful in Fintech?
This is all interesting, but how and why does it apply to financial technology? The obvious answer is that any option that provides greater data security is going to be valuable in the financial industry. Domestic and international transfers stand to see significant gains from the use of blockchain technology. International transfers, in particular, often run into issues with slow processing speeds (especially from developing countries) and dealing with the disparities of rules and regulations between banks in different countries. Blockchain technology could eliminate these issues.
These international transfers are also vulnerable to cyberattacks due to a lack of infrastructure; this leaves these systems open to hacking, resulting in disrupted transfers or money ending up in a third-party account.
There is also the potential for blockchain technology to significantly improve record keeping for banks, providing greater data security due to the decentralization of customer and financial data. The encryption technology in blockchain can also help with customer identification—always important in protecting financial transactions and personal information and preventing fraud or money-laundering activities.
The stock market also could see great benefits from implementing blockchain technology. Blockchain’s ability to store information securely and process transactions with greater speed and accuracy could be a huge benefit for traders. The records created by blockchain technology of these transactions can help to eliminate issues of human error, improving accuracy across the board. Also, fees associated with transaction and clearing costs would likely go down significantly, since changes in ownership can be confirmed instantly. Currently, buying a share of stock on a US stock exchange can take up to three days to settle; blockchain technology could potentially cut that time down to just 10 minutes.
The Future of Blockchain
Fintech startups and other companies are already acknowledging the value of blockchain technology. If banks want to stay relevant, they will need to start accepting these new options as well. Customers have more and more options for how to take care of their financial needs, and many of these new fintech solutions using blockchain technology are significantly more secure than current banking technologies. Blockchain technologies are likely to become more accepted by financial tech companies in the future, driving change and innovation as they are implemented into our daily lives.