The Challenges involved in implementing the Blockchain Technology in Financial Industry
Blockchain technology is compared with the effect the internet had on us. It is known as the next big thing after the internet. Its purpose was to make easier and faster transactions with no central authority. It is cheaper, safe, secure, and transparent. Cryptography is used to protect all the data from any breaches.
In 2017, Accenture and McLagan researched eight banks to understand the impact of blockchain on banking. The results showed a savings of $8–12 Billion, which is 30% of the potential cost per annum.
With all the advantages, various institutes are researching to find out the ways of applying blockchains in many sectors. It made considerable changes to business in multiple areas, including well established financial institutes. It provides with a promising solution for the financial sector given its advantages. At first, the banks were skeptical about adapting Blockchain, but things change with time.
Each day, 100s & 1000s of funds are transferred from one location to another. And, the banks need a third party to keep their transactions safe and secure, which can be expensive and time taking. The chances of errors, fraud is proportional to the number of entities, and the manual processing involved in a transaction. Whereas, Blockchain tech targets for secure transactions and better customer satisfaction. Several Financials institutes are now implementing blockchain for various purposes.
Though the Blockchain Tech has advantages, there are several roadblocks and challenges as well.
Here are the challenges that need to be addressed before implementing Blockchain Tech in the Financial sector.
Blockchain Tech is now the center of attraction in the financial industry. The Blockchain tech isn’t capable of handling the scale of financial transactions that occur each day. Since multiple nodes are necessary to validate each transaction. Even the leading blockchain networks have encountered a decrease in transaction speed and increased fee per transaction. Hence, it remains crucial to research before the blockchain is adopted on a wide scale.
As Blockchain has no central authority, it has its security benefits. Nobody can make modifications to the ledger secretly since the ledger is public. On the event of a change to the ledger, each node validates the entry into the record. Although security issues might occur in case of a 51 percent attack. According to Satoshi Nakamoto when an individual or a group has more than 50% of the mining power, it is 51 percent attack. This attack prevents other miners from creating blocks or making any transactions altogether.
To avoid this, the mining pool needs monitoring at all times.
Blockchain tech is a nontraditional concept of asset transaction. It is a ‘new world’ experience one can have. Anybody is bound to have culture shock when introduced to a whole new world. It isn’t as easy to adapt even for the institutes that are now digitized.
It takes time, effort and outstanding knowledge transfer to accomplish it.
Regulations and Governance:
Governance relies on a set of policies and regulations. But blockchain doesn’t have standard rules and regulations. The regulations vary with country.
- The European union strictly believes in data privacy. The GDPR which is in effect since May 25th, 2018; it allows the European citizens to have ‘right to be forgotten’ online.
- Japan was first of all countries to use Bitcoin as a currency and to issue cryptocurrency transaction licenses to businesses. The Japanese strictly stuck to using only the Bitcoin and no other cryptocurrency.
- But the U.S. government agencies believe in “regulation first, business later” approach.
Cost and efficiency:
The Blockchain tech is quite competent in cost reduction. But it still faces specific challenges while implementing the legacy systems. Setting up the initial blockchain infrastructure is expensive. Small financial companies or Banks wouldn’t prefer investing in something that doesn’t hold a promising future. As we discussed, like scalability, many other factors contribute to high maintenance cost.
These will need to be addressed to assure any company to make the future proceedings.
Though the Blockchain future holds significant potential, very little can happen if challenges mentioned above aren’t improved. With an uncertain future ahead, a united front among all the countries and a standard set of regulations will be crucial to implementing these technologies to their most capacity.
Challenges involved in implementing the Blockchain Technology in Financial Industry was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.