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Blockchain Technology and its impact on Finance

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What is Blockchain? This word has been creating a buzz over the last few months. In fact, many financial experts have termed it as“the next best thing after the internet”. Governments all over the world are showing keen interest in implementing this technology in various spheres of the economy. Blockchain technology uses an open network of databases and functions as a public, digital and distributed ledger. A network of computers maintains this in the form of a decentralised distributed ledger. It does not require central authority or third party intermediaries.

Advantages of Blockchain:

  • This shall eliminate the need for maintaining multiple local databases.
  • Ensures real time flow of information
  • Data is processed faster, as it does not have to go through multiple layers.
  • Chances of data corruption or breach of integrity are minimized
  • Enables transparency in accounting, thereby eliminating corruption
  • Easier document sharing and title transfers
  • Reduction in transaction costs

This technology shall bring about a huge wave in the business landscape all over the world.  It is making its way to the consumer market space, the legal industry and even real estate. In particular, it shall have an impact on the financial services industry, where banking sectors are working on blockchain plans for:

  • Payments and settlements
  • Trade finance
  • Identity management
  • Mortgage applications
  • Money transfer
  • Record keeping
  • Inter-bank deals

 

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Currently, banks have to go through correspondent banks to intermediate payments, which are time consuming and also involves transaction costs. For making inter-bank transfer, the originating bank branch prepares a message and sends the message to its pooling centre, which then forwards the message to the NEFT Clearing Centre. The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the destination banks(credit). Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre. The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.

On implementation of blockchain technology, banks will deposit cash as collateral in exchange for digital currency issued by the central bank. Participating banks can pay each other directly with digital currency instead of first sending payment instructions. After this transaction, banks can redeem their digital currency for cash.  Also, as data is stored across thousands of computers within a network, hacking into it is highly difficult. Hence, this is much more secure than conventional bank accounts.

Apart from the banking sector, blockchain shall cause paradigm shift in supply-chain, logistics and consumer market space. There shall be transparency, traceability and security which shall make supply-chain more reliable and efficient. Hence, blockchain technology shall make our economies safer and shall prevent implementation of questionable practices, eliminating corruption overall. When used in government operations, blockchain shall increase opportunities in transforming the government to citizen (G2C) perspective, government to government (G2G) and government to vendor (G2V). Given the rapid emergence and potential impact of blockchain technology, this definitely deserves special attention at this hour.

 


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