Most of the conversation surrounding cryptocurrency has focused on things like Bitcoin, NFTs, and the turbulent price swings of each. But blockchain technology is completely transforming the financial industry and changing time-honored accounting practices.
Here’s what your organization needs to know about these technological developments and how they might enhance your financial operations.
What Is Blockchain?
Typically, financial transactions are recorded in a centralized place known as a ledger. Blockchain technology, however, relies on a distributed ledger, meaning data is stored between shared participants of a public or private computer network.
A blockchain therefore makes it easy for users to conduct transactions swiftly and securely. And because the ledger is public, the ownership of any given asset is recorded on the blockchain, along with the identity and price of the asset.
How Is Blockchain Transforming the Financial Industry?
Blockchain technology is having a disruptive effect on the financial industry, replacing many legacy processes with new technologies and even new currencies. As a result, processes are faster and more secure than ever before.
This is especially true for the banking and lending industry. Processes that once demanded 30 to 60 days can now be completed almost instantaneously, thanks to data secured on an online blockchain network. Just as remarkably, mortgage lenders are now allowing applicants to use their digital assets to secure mortgage loans.
Other industries are adapting to new types of payments, allowing customers to make purchases using Bitcoin and other commonly traded cryptocurrencies. However, this requires financial controllers to institute procedures to convert crypto quickly into U.S. dollars to protect themselves from price volatility.
The Benefits of Blockchain Technology in Finance
Blockchain technology and cryptocurrency bring enormous benefits to the world of finance, including the following:
The very nature of the blockchain means that data is entirely public. This transparency makes it easier to determine the value and ownership of assets traded on a blockchain, likewise minimizing the risk of fraud.
Transactions conducted on a blockchain are easier to trace than those carried out in traditional banking, offering an additional layer of security for financial institutions.
When lenders can tap into a blockchain to assess an individual’s credit risk, they can complete loan applications much more quickly and accurately. Rather than relying on legacy systems to assess a borrower’s creditworthiness, distributed ledgers provide instantaneous assessments, resulting in faster approvals.
The same blockchain network can also be used to automatically distribute digital assets. This eliminates the delays that typically accompany banking loans, allowing borrowers to tap into the resources they need faster than ever before.
Traditional financial institutions charge administrative fees for everything from account maintenance fees to loan origination, along with other tasks and processes. Distributed ledgers have no such fee structure, which presents an attractive option for investors to manage their accounts and assets.
How to Navigate Regulatory and Security Concerns When Using Cryptocurrency
Regulatory measures are usually better at managing existing systems than novel disruptors. That said, cryptocurrency will likely become an area of renewed focus as it fully integrates into the current financial landscape.
If anything, the distributed data of a public blockchain makes it easier for companies to demonstrate compliance with critical government or industry regulations.
Even so, the financial industry must still reckon with the practical implications of blockchain technology and cryptocurrency. Here are some of the ways that companies are adapting to these new systems.
KYC and AML Data
Know Your Customer (KYC) and anti-money laundering (AML) technologies are designed to extend much-needed security to American businesses. The financial industry can rely on blockchain technology to digitize this data to increase protection for its core processes.
Sybil attacks occur when cybercriminals create fake nodes within the blockchain network. Financial professionals will need to leverage the skills of technological administrators to monitor the blockchain carefully using algorithms and other best practices to minimize vulnerability.
Blockchain networks bring unprecedented levels of transparency to financial data. While such transparency has its upsides, it also means that data is vulnerable to hackers, phishing scams, and more.
Some of these privacy concerns call for improvements to the network itself, but other vulnerabilities can be addressed on a per-user level. Basic cyber protection measures like setting strong passwords and avoiding unsecured public networks can provide protection when using the blockchain.
The Future of Blockchain
Recent developments in both business and private finance have made one thing abundantly clear: cryptocurrency is here to stay, as is the blockchain technology that undergirds these new financial systems.
As things now stand, the financial industry is playing catch-up, seeking to adapt to the disruptions this technology poses. Consequently, financial professionals can expect an increased focus on regulation in the coming months and years while at the same time seeing increased demand for cryptocurrency-related financial solutions.