What are the Benefits of Blockchain in Finance?
The Ethereum blockchain enables more open, inclusive, and secure business networks, shared operating models, more efficient processes, reduced costs, and new products and services in banking and finance. It enables digital securities to be issued within shorter periods of time, at lower unit costs, with greater levels of customization. Digital financial instruments may thus be tailored to investor demands, expanding the market for investors, decreasing costs for issuers, and reducing counterparty risk.
Over the last five years, the technology has matured for enterprise-grade use demonstrating the following benefits:
- Security: Its distributed consensus based architecture eliminates single points of failure and reduces the need for data intermediaries such as transfer agents, messaging system operators and inefficient monopolistic utilities. Ethereum also enables implementation of secure application code designed to be tamper-proof against fraud and malicious third parties— making it virtually impossible to hack or manipulate.
- Transparency: It employs mutualized standards, protocols, and shared processes, acting as a single shared source of truth for network participants
- Trust: Its transparent and immutable ledger makes it easy for different parties in a business network to collaborate, manage data, and reach agreements
- Programmability: It supports the creation and execution of smart contracts— tamper proof, deterministic software that automates business logic – creating increased trust and efficiency
- Privacy: It provides market-leading tools for granular data privacy across every layer of the software stack, allowing selective sharing of data in business networks. This dramatically improves transparency, trust and efficiency while maintaining privacy and confidentiality.
- High-Performance: It’s private and hybrid networks are engineered to sustain hundreds of transactions per second and periodic surges in network activity
- Scalability: It supports interoperability between private and public chains, offering each enterprise solution the global reach, tremendous resilience, and high integrity of the mainnet
According to a report by Jupiter Research, blockchain deployments will enable banks to realize savings on cross-border settlement transactions of up to $27 billion by the end of 2030, reducing costs by more than 11%. Ethereum specifically has already demonstrated disruptive economics, creating over 10x cost advantages against incumbent technologies. Financial institutions acknowledge that distributed ledger technology will save billions of dollars for banks and major financial institutions over the next decade.
How does the Digitization of Financial Instruments Impact Finance?
The digitization of financial instruments – comprising digital assets, smart contracts and programmable money – takes the benefits of blockchain further by forging unprecedented levels of connectivity and programmability between products, services, assets and holdings. These digitized instruments will redefine the processes of commercial and financial markets, creating a new paradigm where value is brought at every touch point.
Digital financial instruments offer the following business benefits:
- Authenticity and scarcity: Digitization ensures data integrity, and enables asset provenance and full transaction history in a single shared source of truth
- Programmable capabilities: Code that addresses governance, compliance, data privacy, identity (KYC/AML attributes), system incentives and features that manage stakeholder participation (for voting and other rights)— can be built into the assets themselves
- Streamlined processes: Heightened automation increases overall operational efficiency. It enables real-time settlement, audit and reporting; and it reduces processing times, the potential for error and delay, and the number of steps and intermediaries required to achieve the same levels of confidence in traditional processes
- Economic benefits: Automated, more efficient processes trigger reduced infrastructure costs, operation costs, and transaction costs
- Market reactivity: Digital securities allow greater customization than standardized securities, and can be issued within shorter timeframes. Issuers can create bespoke digital financial instruments directly matched to investor demand.
- New products and markets: Secure, scalable and rapid asset transfers, fractionalized ownership of real-world assets, tokenized micro-economies, and more
Together, these benefits result in more accountable transparent governance systems, more efficient business models, improved incentive alignment between stakeholders, greater liquidity, lower costs of capital, reduced counterparty risk, access to a broader investor and capital base, and access to all other digital financial instruments.