What’s the hype for blockchain?
The use of blockchain within the financial sector has been mixed with both excitement and uncertainties. But since the start of 2018, banks have begun to see the benefits accorded to early adopters of blockchain and due support for regulatory guidance.
Opportunities of blockchain:
Faster and simpler payment processes
The transfer of money has always been an expensive and slow process. This is particularly true for cross-border payments. The influx of blockchain technologies has however allowed transactions to be settled within minutes; cost-effectively; irrespective of location; whilst participants remain anonymous with their data protected.
Given the retirement of redundant systems, not only is time saved, it has also resulted in a more efficient management of data. Discarding incumbent processes provides a greater opportunity for the innovation of new products and services.
Project Ubin for instance is an example that enables blockchain-based interbank payments, leading to faster settlements within securities and bond trading.
Economic benefits for the financial market to prosper
Blockchain is a key driver of economic growth within the financial sector in 2018. Its technology is expected to grow quickly, with a potential compound annual growth rate up to about 79% from now to 2021. Today, the token economy of blockchain, represented by its various cryptocurrencies, is worth more than USD400 billion.
As mentioned in my previous article on the efforts JP Morgan has initiated, the bank had also released a report on how blockchain is generating a radical shift in the operations within the financial market. In particular, they explored the benefits of blockchain within asset management – a growing market within the financial sector today.
Revenue opportunities will stem out of improved data sources, greater liquidity and lower frictional costs fostered by blockchain. Asset managers would be able to serve clients in new ways, for example, with real-time reporting or alternate trading strategies.
With the benefits mentioned above, it is no doubt that organisations would hop onto the bandwagon of implementing blockchain technologies.
Are people jumping onto the blockchain bandwagon merely to be ‘trendy’?
The answer is yes, to a certain extent. Research has shown that a significant motivation behind blockchain adoption that exist – the Fear of Missing out (FOMO). Despite the hefty costs associated with running a blockchain, banks are scrambling to get their hands on utilising this technology so that they are not ‘left behind’. But the main issue is the consequence of this intention as banks are adopting such technologies faster than they are able to manage in terms of its risks.
Potential challenges to take note of:
1. Compliance with regulatory frameworks
The finance market is highly regulated in Singapore. And given the risks and vulnerability of digital platforms, the existing regulatory framework imposes several constraints to the application of blockchain technology.
While blockchain adopters are looking to privatise their data, this is opposed to the tightened transparency requirements demanded by regulators in recent years. This implicates areas such as taxation, Know Your Customer (KYC), regulatory risk and compliance in terms of maintaining client anonymity within blockchain services.
Hence, there needs to be a ground for compromise or an enhanced framework to ensure that expectations of both blockchain adopters and regulators are met.
2. Security risks
As with all new technology, a mountain of security risks can be found beneath the hype of blockchain. Cyber-attackers are constantly finding new loopholes amidst the rise of blockchain. According to McAfee's Advanced Threat Research Team, these attackers are focussing on social-engineering attacks, malware, and are exploiting both businesses and consumers.
In most cases, blockchain's consumers are the easiest targets. McAfee's team broke blockchain threats into four groups: phishing, malware, implementation exploits, and tech vulnerabilities. Hence, this is a warning sign that banks and financial orgnaisations would need to approach the implementation of this technology with caution.
Success of integrating blockchain: a balancing act?
In order to fully benefit from the opportunities that blockchain can bring, banks would need to balance out the benefits against evolving risks. This includes the appropriate due diligence in adhering to regulations. Made aware of both benefits and risks, decision-makers would then be able to make conscious choices to better position their credit operations with the use of this technology, while keeping their organisation's strategy in mind. Have your organisation implemented the use of blockchain technologies? If yes, what are some of the challenges you faced?
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