Blockchain technology is disrupting and transforming the financial industry in many ways. Some key examples of how blockchain is being applied in finance include:
Cryptocurrency and digital payments – Cryptocurrencies like Bitcoin were one of the earliest widespread uses of blockchain technology. Bitcoin created a decentralized digital currency and payment system not controlled by any central bank or authority. Since then, thousands of other cryptocurrencies have emerged. Beyond just cryptocurrencies, blockchain is also enabling new forms of digital payments through applications like Ripple which allows for faster international money transfer between banks.
Cross-border payments and remittances – Sending money across borders traditionally involves high fees, takes days to settle, and relies on intermediaries like wire services. Blockchain startups like Ripple, Stellar, and MoneyGram are developing blockchain-based cross-border payment networks to provide near real-time settlements with lower costs. This application has the potential to greatly improve financial inclusion globally by reducing the high costs of migration workers sending money back home.
Digital asset exchanges – Sites like Coinbase, Gemini, and Binance are digital asset exchanges that allow users to buy, sell, and trade cryptocurrencies and other blockchain-based assets. These crypto exchanges operate globally 24/7 and provide significantly higher liquidity compared to traditional foreign exchange markets since blockchain transactions can be processed and settled in minutes versus days. Some exchanges are also issuing their own blockchain-based stablecoins to facilitate trading.
Tokenization of assets – Blockchain makes it possible to tokenize both digital and real-world assets by issuing cryptographic tokens on a distributed ledger. This allows for fractional ownership of assets like real estate, private equity, fine art, and more. Asset tokenization provides new ways to invest in assets at lower thresholds, improves liquidity, and simplifies transactions of assets that were previously highly illiquid. Security tokens representing assets are beginning to trade on emerging crypto security exchanges.
Smart contracts – A smart contract is a computer program stored on a blockchain that automatically executes when predetermined conditions are met. Smart contracts allow for the automated execution of multi-step workflows like tracking loan terms, processing insurance claims, and more. Many startup insurtech companies are exploring using smart contracts for claims processing, premium payments, and policy management. Smart contract capabilities could streamline back-office processes and reduce costs for financial institutions.
Decentralized finance (DeFi) – DeFi refers to a new category of financial applications that utilize blockchain technology and cryptocurrencies to disrupt traditional banking. DeFi applications allow users to lend, borrow, save, and earn interest on crypto-assets without relying on centralized intermediaries. For example, Compound is a decentralized protocol that allows users to lend out Ethereum and earn interest. MakerDAO enables generating Dai, a cryptocurrency stablecoin whose value is pegged to the US dollar. These DeFi protocols allow easier access to financial services globally.
Trade finance and settlement – Complex international trade transactions traditionally involve multiple intermediaries and can take weeks to settle. Pilot projects are exploring how blockchain could streamline trade finance processes by digitizing letters of credit, bills of lading, and other trade documents. Leveraging smart contracts could automate conditional payments and shorten settlement from weeks to days with more transparency. This decentralized trade finance potential could especially help small- and medium-sized enterprises globally.
Supply chain financing – Blockchain provides a shared, immutable record of transactions that can help unlock working capital for suppliers. Projects are piloting blockchain-based supply chain financing platforms to help suppliers get paid earlier by large corporate buyers in exchange for a small fee. With automated tracking of inventory and invoices, suppliers could get closer to immediate payment which helps their cash flow compared to waiting 30, 60, or 90 days for invoices to clear. This reduces risks for buyers as well.
Compliance and know-your-customer (KYC) – Regulatory compliance, particularly for anti-money laundering (AML) and KYC processes, involves high costs for financial institutions to manually review and verify customer identities and transactions. Startups are developing blockchain-based solutions to digitally verify customer IDs and share verified customer profiles across institutions to reduce redundant KYC checks. This could significantly lower compliance costs while strengthening financial crime monitoring through the transparency of blockchain transaction data.
Clearly, blockchain technology is poised to revolutionize many areas of the financial industry through applications across payments, banking, trading, lending, and more. By improving transparency, reducing intermediation, minimizing settlement periods, and automating processes, blockchain promises to make finance more inclusive, efficient and trustworthy on a global scale. While the technology remains new, the pace of innovation and adoption of blockchain within finance continues accelerating.