Why can blockchain transform finances?

15-01-2018 | Redacción CEU

The most interesting thing about bitcoins could be found just behind them, in the blockchain technology. This system is more than a platform for the cryptocurrencies' exchange, although it constitutes its main showcase. Blockchain seems to take impulse for what is coming. Its use could mark a milestone in multitude of sectors and, in a particular way, in the financial world. Many experts claim that blockchain will transform the traditional management. What are the reasons that they argue for? How can the distributed digital accounting change the financial system?

 

Every day, people perform many operations without being aware that they are constantly relying on an intermediary to carry them out. The Internet arrival favored this type of actions to be completed  faster and more frequently; so much, we increasingly rely on third parties for previously unthinkable issues like buying airline tickets in search engines and websites, making transfers through online banking and specialized applications, sending important work documents thanks to email or exchanging personal pictures with friends through instant messaging. This relationship is so normalized that we do not even question its reliability, but these operations may be subject to conditions and, even, to commissions. Also, are these intermediaries always infallible and reliable? Is it necessary to provide all these data to third parties? And, what if it is possible to do them without them? Blockchain aims to eliminate these third parties of the equation and reduce risks to zero.

What is blockchain?

Blockchain is a system of distributed register that is built through nodes, computers connected to each other that share a language and protocol and that allow the transmission of encrypted information packages –blocks– in a verifiable, efficient and immutable way between two parties. In other words, blockchain is a unique ledger where these exchanges of information and transactions are registered and archived in a way that anyone can confirm them –as long as they are public, not private networks only visible to those indicated by their owners–. This technology makes it impossible to alter these transactions without establishing new blocks, without anyone noticing or eliminating them.  So that transactions are carried out, it is necessary that these nodes verify them, which implies that this system is very secure.

The bitcoin network was the first blockchain. Due to the unstoppable and exponential growth of the value of this cryptocurrency, the blockchain technology was at first eclipsed. But, although at first glance it could seem a simple digital currency exchange platform, its potential is greater. Blockchain allows to work not only with bitcoins, but also with other assets like shares, votes, contracts, documents, basic products, loans, etc. and without the need to resort to an intermediary, meaning, in a direct way –one to one–. An example of the multiple uses that the blockchain can have is the last advertisement of Kodak and Wenn, they want to use this network to create solid links between the authors and their photographs and, in this way, protect their image copyrights.

Why can blockchain transform finances?

A revolutionary tool

According to the Canadian expert Don Tapscott, considered one of the most influential people worldwide in the impact of technology on business and society, the blockchain technology means a "second age of the Internet". This expert explains that blockchain is a way of being able to trust one another without the need of third parties like banks, card companies, governments or social networks. For many people, blockchain means the democratization of the creation of value, as with the Internet, nobody owns it, but everyone can benefit from it. Even some analysts, like Tapscott, refer to its inclusive nature on population sectors that are difficult to reach, such as the unbanked. Among the great advantages that its enthusiasts highlight we find the reduction of costs and times, the fight against corruption, the increase in transactional confidence and its high level of security.

Although it is a technology still little explored and in an initial phase of development, blockchain might open the doors to a decentralized economy where users have greater freedom and a higher level of participation and autonomy. What really turns blockchain into a disruptive technology is its ability to transfer the trust to users without the need of having intermediaries to provide value to something. This network is not limited to the information exchange like the Internet, but to the value exchange.

Blockchain has to face certain legal and confidentiality obstacles, as claimed by a survey of the Alternative Finance Center of the University of Cambridge and, also to another energetic, organizational and, even, social problems. Only time, regulatory development and innovation can help to save them. On the other hand, its detractors also point out the risk that, deliberately or accidentally, someone introduces an error in the record, being very difficult to undo it, or the danger that the absence of arbitrators when these mistakes or frauds occur means.

The blockchain future in finances

The financial sector is one of the areas that has previously realized about the blockchain potential, due to its close relationship with cryptocurrencies to a great extent. One of the best-known examples is Ethreum that, apart from having developed a cryptocurrency called Ether, it has its own blockchain based on a system of smart contracts. These agreements between two or more parties allow that through verifiable requirements on the network, these can manage in a decentralized way, without direct intervention, and automated micro-payments and other business processes. This technological innovation reduces the cost of the contracts management and, in case of disagreement between parties, the contract itself could discern how the dispute will be solved.

One of the symptoms that points that blockchain will be key in the future of finance, is that banks are working increasingly in the development of this technology. Many of these experts are even betting on creating their own startups or leaving large entities to work in these ones. Among the changes that the blockchain development promises in the financial sector we have the reduction of the necessary bureaucracy in financial operations, the ability to make cross-border transfers between banks quickly and safely, the transparency and audit promotion or the improvement of  relationships between financial institutions.

The blockchain future could revolutionize not only the world of finance, but many other areas like resource management, digital identity, property rights, logistics, music distribution, public health,... The blockchain's brakes are, at least so far, in the limits of imagination.