image taken from cnbc.com
By Nicole Dugan
Back in May, the NYSE created a Bitcoin index to track the performance and add transparency to bitcoin as an asset. Many devoted bitcoin fans took this as sign that bitcoin had potential to become a trusted, global currency. Whether or not you believe that the future of global commerce rests with bitcoin, the truth is that bitcoin itself has had to overcome many hurdles. The FBI shutdown of Silk Road, a drug trafficker that transacted in bitcoins, and the downfall of the once-dominant bitcoin exchange, Mt.Gox come to mind as recent examples of bitcoin’s struggles. Many experts in the fintech world hold that although bitcoin itself is volatile and may not turn out to be the global currency people had once hoped it would be, the technology behind bitcoin, blockchain, shows promise.
What is blockchain?
Essentially, blockchain is what makes the use of bitcoins and other cryptocurrencies possible. It is a public ledger of all bitcoin transactions that have ever been executed in chronological order. One of the key advantages of blockchain is that it is difficult to tamper with the transaction records.
What Can Blockchain do?
According to Peter Shia, cofounder and CEO of Blockstack.io, a startup that supplies private blockchain services for real assets, blockchains “allow for a transaction to occur between financial institutions or people but without the need of that intermediary, because you can reliably send the assets to each other very quickly and in basically near real time and without any chance of having that transaction be reversed or changed.”
So, in theory, blockchain technology has the potential to speed up the time needed to securely clear financial transactions and render middlemen obsolete. It seems that many veterans in the financial services industry recognize the potential of blockchain to revolutionize the way they do business. For example, last week, several large financial institutions, including Citi and Nasdaq, invested in Chain.com, a blockchain services provider.
In November, Nasdaq plans to go live with blockchain trading of pre-IPO private companies. And, Nasdaq isn’t the only financial big wig jumping on the blockchain bandwagon. According to fastcompany.com, fintech company, R3 is working with big name companies such as Barclays and Goldman Sachs to develop and test the use of blockchain technology in banking.
Other industries have already begun to create blokcchain software to improve security of transactions. A London based startup, Everledger, has developed software that utilizes blockchain technology in the diamond industry. Leanne Kemp, founder of Everledger says that the technology will be used to verify the authenticity of diamonds and stamp out the crimes of diamond fraud and theft. If blockchain technology can effectively add transparency and security to the diamond industry, its application to the world of banking and investing could permanently change the financial services industry.
Why Does the Financial Services Industry Seem Eager to Disrupt Itself?
If blockchain technology has the potential to disrupt the financial services industry and eliminate the need to middlemen in transactions, why are so many financial services firms investing in blockchain and, therefore, funding their own disruption? There’s several reasons why large financial institutions are embracing this new technology. One reason, and one that I believe is very likely a motivating factor for financial institutions, is that the financial services industry as a whole has played a part in helping startups disrupt other industries. Think about where companies like Airbnb or Uber got some of their funding. The financial services industry has witnessed and facilitated and it wants to be ahead of the game when it comes time to innovate industry practices that, let’s face it, are over 100 years old.
Is there a “chink in the chain?”
Supporters of blockchain technology state that the beauty of the network is that it “decentralizes trust.” Blockchain is not run off a single server, but rather a network of bitcoin miners, so users do not need to put their faith in the integrity of one bank. It sounds great in theory, but how is the blockchain regulated?
The short answer is that it’s not. The blockchain is supposed to be a highly secure, imprenetrable technology, but there have still been many instances in which bitcoins have been stolen or used for illegal activity.
Technological Weakness may be an Opportunity for Financial Services
The pioneers of bitcoin and many of its supporters envisioned the overthrow of Wall Street and an end to traditional banking. However that does not seem likely to happen. What could happen is that the financial services industry, as a highly regulated sector, could become a good breeding ground for innovations with blockchain technology. Blockchain needs some sort of governing body to protect against fraud and theft and if financial giants like Nasdaq are interested in using blockchain technology, they will most likely find a way to ensure the security of transactions.
[“source-drivewealth”]
