Marked by announcements such as Citi, NASDAQ, Visa and other major financial institutions investing into the chain, Com, a Bitcoin Blockchain service provider, news channels, and websites are bombarding the people with the concept that how blockchain will transform the financial services. According to the Elite Trader, Block chain Bitcoin wallet start-up raised $ 40 million from Richard Branson, a Google billionaire. In fact, it has also been estimated that so far, over $1.4 billion has been invested into blockchain ventures globally.
According to Bitcoin Magazine, Accenture has estimated that blockchain technology could allow financial institutions to save between $8 billion and $12 billion in annual infrastructure costs. A French consulting firm, Capgemini also claims that consumers could save up to $16 billion in banking and insurance fees annually through blockchain-based applications.
Ever since the inception of double entry bookkeeping in 1458, the General Ledger (GL) has formed the basis of financial accounting. For centuries, it remained fundamentally unchanged and true to its original principles, and even when technology changed its form, it remained unchanged. But now with the arrival of Distributed Ledger System, of which Blockchain, Ripple, and Ether are the best examples, it will change the way transaction is recorded.
The blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.
So, what is the significance of using Block chain?
Revisiting our three golden rules of accounting:
- Debit the receiver
- Credit the giver
- Debit loss and expense
- Credit profit and gain
- Debit inflow and credit outflow
These principles remain UNCHANGED.
One of the key rules of General Ledger is that there are only two parties involved in a transaction which is not so in the case of Distributed Ledger System. In the distributed ledger system, the transaction is visible to all the participants on a particular network. As every member of the network has the same copy of the distributed ledger, the network itself is able to certify ownership and clear transactions, providing a mechanism that provides higher security and transparency as compared to the centralized mechanism as transactions once recorded are immutable.
Moreover, the Distributed Ledger System could increase transaction speed and decrease transaction costs, as nodes are responsible for the maintenance of the ledger and the verification of transactions. The Distributed Ledger Technology is a network approach that benefits from a high number of nodes. The higher the number of network nodes working on the verification of transactions, the higher the mutual processing power. Eventually, the transaction speed costs could improve accordingly. Also, the networks of nodes perform consensus mechanism to prevent manipulation of transactions.
There are a lot of legal processes and paperwork attached to validate the opening of a bank account, it costs the bank to collect, verify, validate and maintain these papers. It also makes the customer go through the same process which is time-consuming and, at times, irritating. A good KYC/identity system that works on top of blockchain does solve this issue.
Distributed data storage systems like ‘Inter Planetary File System’ (IPFS) which is a peer-to-peer distributed file system capable of sharing the same files among nodes can be used to replicate documents. All legal documents can be hashed and stored on the blockchain. Thus when the user wants to go through any process which requires KYC papers, can give access to the bank with their private key and the bank can verify it.
Bank carries out thousands of interbank payments on behalf of their clients each day. Cheque payments, wire transfers, loan verifications etc. Banks could categorize such payments and use blockchain to make the transfers quicker and in a more secured fashion. That is why such proposition is obviously very attracted to banks and thus they are investing in Block chain Technology.
The current news of IBM building blockchain for European banks is the example that validates this statement. IBM is building blockchain technology that will be used by seven of Europe’s largest banks, including HSBC and Rabobank, to facilitate international trade for small and medium-size enterprises. It is building this new blockchain, Digital Trade Chain, to help parties track, manage and transact internationally.
Many banks have so far have done such one-off trials with blockchain technology. For example, Wells Fargo and the Commonwealth Bank of Australia used blockchain last year to process and execute a shipment of cotton from the U.S. to China. And Barclays gave a trial at derivatives trading using blockchain technology.
The former Chief Executive Officer of Barclays has warned that banks could be faced with their own ‘Kodak moment’ by falling into irrelevance if they fail to keep up with the pace of rapidly developing fin-tech technologies.
In few years, we will see a drastic change in the banking sector and it has already started with the evolution of non-banking sector marking the rise of Fintech start-ups, soon our need for money as well will start eliminating.