Every futurist research lab in the world has posed this question, as have many of the world’s biggest banks, central banks, financial institutions, think tanks, consulting companies, and government committees.
R3CEV, a collaborative effort backed by some of the world’s biggest institutions, is working to find a solution. On this topic, McKinsey Consulting, Goldman Sachs, and Consumers’ Research have all published outstanding studies. The UK government, as well as the Senates of the United States, Australia, Canada, and the European Union, have all conducted investigations in this area.
Many companies also publish white papers on their specific breakthroughs or use of blockchain technology, which often address the broader societal issue of “How will this change things?”
A large portion of this study focuses on four main areas of change:
Infrastructure for international transactions
As we all know, the digital revolution has completely changed the media. It has had an impact on the financial sector as well. Financial institutions, of course, rely on computers. In the 70s and 80s, they were used to create databases. In the 90s, they were used to create web pages, and now, in the new millennium, they are used to create mobile applications.
Cross-border transactions, on the other hand, have yet to be transformed by the digital revolution. Western Union is still a household brand, doing business in much the same manner it has for decades. For basic operations like transferring money overseas, banks continue to rely on a complicated infrastructure.
Richard Gendal Brown created the infographic below, which depicts the infrastructure and middlemen in cross-border banking that have been in operation since the 1970s.
The financial industry’s use of highly secure private databases has resulted in this design. Because of digitization, we can now organize information into private databases much more quickly.
Financial institutions may use blockchain technology to establish direct connections with one another, eliminating the need for correspondent banking. Corda, R3’s main product to date, is aimed at correspondent banking. Corda is a pun on the terms “accord” (agreement) and “cord” (the straightest line between two points in a circle).
The circle, in Corda’s instance, consists of banks that would utilize a common ledger for transactions, contracts, and key documents.
Brown formerly worked for IBM on blockchain technologies, but now works at R3CEV.
Without the requirement for a central database or management system, competing financial institutions may utilize this shared database to maintain track of transaction execution, clearing, and settlement. In other words, banks will be able to establish and safeguard digital connections in ways they couldn’t before.
On a frictionless P2P basis, transactions may take place directly between two people. Many of these issues are addressed by Ripple, a permissioned blockchain.
Digital assets as a class
Bitcoin pioneered a new concept: digital property.
Before bitcoin, the term “digital” did not connote scarcity. Everything can be copied with the press of a button.This narrative is persuasively told by a short glance at the music business and record sales.
Bitcoin, on the other hand, accomplished something unique: it generated an uncopyable digital code.
For the first time since the invention of bits and bytes, there was a method of possessing something digital that couldn’t be duplicated. The digital code was given a value as a result of this. Bitcoin’s value is still determined by the blockchain’s ability to prohibit double-spending and the production of counterfeit coins.
With this in mind, bitcoin developers created colored coins that may be used as business shares. The coin’s “color” conveys information about the private cryptographic key’s ownership rights.
Overstock announced that, following SEC clearance, it would sell public equity shares of the business on its blockchain platform. Initial coin offerings (ICOs) and appcoins have also become popular (Cryptocurrencies that are local to an app and that aid in the funding of the project’s development).
These are just a few examples of how blockchains may be used for digital assets. Blockchains may be utilized as an asset, but they can also be used to manage the market.
Essentially, these initiatives regard digital assets as a bearer document, which has a broad range of uses.
Compliance and Regulatory Reporting
Regulators may use blockchains as a completely transparent and accessible system of record. They may also be programmed to permit transactions that meet regulatory reporting requirements.
Banks, for example, have strict reporting requirements to authorities like FinCEN. Every time they approve a transaction worth more than $10,000, they must disclose it to FinCEN, which keeps it in a database to combat money laundering.
Markets and Governance
This capacity, on the other hand, isn’t limited to simply documenting transactions. Nasdaq, for example, was one among the first to develop a blockchain-based platform that allows private businesses to issue and exchange stock.
In addition, financial instruments that may be pre-programmed to carry out company operations and business logic are being developed by other programmers.
Auditing and Accounting
Blockchain databases are created from their own transaction history, unlike conventional databases, which are snapshots of a point in time. They’re a database with context, a self-contained record system, and a record of themselves.
The consequences for accounting and auditing are huge.
Settlement and Clearing
The time period for settlement and clearing of a transaction in paper-world trading is often referred to as ‘T+3′, meaning that the transaction is settled three days after the deal (T).
The whole lifespan of a transaction happens at the trade stage using blockchain technology, including execution, clearing, and settlement. Trade involves settling with a digital asset, and it may reduce post-trade delay and counterparty risk by controlling cryptographic keys and digital ownership.