Concerns have been raised about how far blockchain technology, the basis for crypto asset trading platforms, may be taken in the broader financial services industry.
The blockchain system has been called a “quiet revolutionary.” At its heart, it is a decentralised database that maintains a growing catalogue of data in the form of blocks. When it was first introduced, it facilitated the beginnings of decentralised finance by allowing crypto assets to be traded.
Although at first glance, blockchain and cryptocurrencies appear to be the same thing, blockchain has a far wider scope. Blockchain technology might be implemented to track commodities, provide digital IDs, and simplify information sharing.
While blockchain has become synonymous with digital currency, it is unclear if the technology is being exploited to its full potential across the financial services industry as a whole.
Putting the blockchain to use in the financial sector
The blockchain’s potential benefits are “slowly but surely” becoming apparent to the financial services industry. This is because blockchain’s role as a fraud protection for cryptocurrencies may appear very different from its use in traditional financial institutions.
Until open banking standards are fully implemented, and smart financial contracts are introduced as a mechanism to rectify the current impediments to adoption, legacy institutions will be able to begin implementing blockchain-based innovations. This is essential before blockchain’s full promise can be achieved.
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The use of smart financial contracts to ensure uniformity would make it feasible to record legally binding obligations, such as those pertaining to a mortgage, on the blockchain so that they can be read and executed by computers.
The genuine financial potential that has been missing until now will be realised, and the established financial world will gain fresh stability as a result.
Traditional financial services may also stand to gain from blockchain technology. Asset tokenisation will become a useful tool for streamlining the issuing of securities and expanding participation in previously inaccessible asset classes.
Private equity is a prime example of the limited funding options available to private enterprises such as startups. The tokenisation of assets improves the liquidity of these enterprises by opening up new markets to them.
Challenges in scaling blockchain
While the potential for blockchain to be used in conventional financial institutions is obvious, it will require massive scaling if it is to be adopted.
However, challenges arise because of this. Energy consumption concerns have been raised in relation to the conventional Proof of Work (PoW) architecture used by Bitcoin and other crypto networks.
However, the Proof of Stake (PoS) mining approach, which consumes less energy, maybe the future for banks. Since making the conversion from PoW to PoS, Ethereum, a platform for trading cryptocurrencies, has seen a 99 per cent reduction in the amount of energy required to secure the network.
In order to meet anti-money-laundering and anti-fraud regulations at larger scales, blockchain systems will need to develop novel techniques to perform real-time analysis on many more transactions.
Blockchain’s bright future
Therefore, even though the road to widespread adoption of blockchain technology in conventional financial services is still a little bit unclear, the standardisation of blockchain-powered financial assets, such as CBDCs, is moving forward.
Any assets that do not embrace standardisation will be at risk of not complying with regulations as these regulations become more stringent. There is always the possibility of exceptions, but if a project’s goal is to be supported by significant financial players, then it will almost certainly take this approach.
When fully implemented, financial assets that are tokenised have the potential to bring about more liquidity as well as new kinds of financing for the entire economy.
The tokenisation of physical assets may one day represent a market worth multiple trillions of dollars. However, in order for blockchain technology and cryptocurrency to become the norm in the future, significant strides need to be made in the areas of regulatory harmonisation, standardisation, and technology.
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