Although blockchain technology underpins virtual currencies like bitcoin, its applications within financial services go far beyond that.
The transformative potential of blockchain is based on the fact that the traditional financial system is based on a middleman, such as a bank, to confirm a transaction. Experts say that with blockchain, the future financial services landscape will allow for more autonomous transactions. “Participants can transfer value across the internet without the need for a central third party. The buyer and seller interact directly without needing verification by a trusted third-party intermediary,” a recent paper from PwC noted. All transactions are recorded, but since identifying information is encrypted, personal information isn’t shared, the paper adds.
In this scenario, the middleman is not human. “The middleman is going to be a computer program; all of these peer-to-peer firms that seem so innovative now risk being disrupted by blockchain technology,” said Campbell Harvey, a Duke University finance professor.
That would make transactions cheaper and faster. Legacy payment technology levies additional fees that wouldn’t be required on a blockchain. “You swipe, and it’s a 3 percent fee that the retailer has to pay; it’s because of the chargebacks, fraud and security, but with a computer program, it’s going to be more efficient,” said Harvey, noting that transaction costs could be driven to zero.
Because transactions are recorded over a decentralized ledger, it makes changing the data harder. “On a regular database, you can go in, alter and steal the data, but it’s very difficult to change what the entries are on a blockchain because of the way the blocks are connected — it offers a level of security you couldn’t have with a database,” Harvey said. Blockchain can also be used as a digital identity tool, eliminating the need for cumbersome paper documents that can easily be lost or forged. For example, as Tearsheet reported in May, of the many startups looking to tackle digital identity, at least a dozen are focused on using blockchain technology to find solutions, including Blockstack Labs, Trunomi, uPort and Hypr.
This week, BNP Paribas announced a collaboration with SmartAngels to develop a blockchain-powered platform to act as a share registry to let private companies issue securities on primary and secondary markets. The advantage of using blockchain for trades of unlisted securities is that the information is housed in a a central place where it can be accessed by all stakeholders in the trading process, so there’s a clear record of who owns what.
Beyond these advancements, Harvey said the stock trading ecosystem of the future will rely increasingly on blockchain technology, which will bring about changes to the types of transactions individuals will make on it. For instance, Britain’s Royal Mint is working with U.S.-based derivatives exchange CME Group to create a blockchain-based platform to trade physical gold represented by units of RMG, which stands for Royal Mint Gold. Each RMG represents a gram of gold. The platform, which will go public later this year, will allow investors to trade very small amounts.
“Now they’ve got their own cryptocurrency that allows people to make very small investments in gold,” said Harvey. “This basically has the potential of creating millions of dark pools, where stock is traded but not on the [traditional] exchanges — you’re trading in coins that are given the right to a fraction of a share.”
Blockchain could help insurers reduce the time and cost to evaluate eligibility and process claims.
“What blockchain brings to the insurance industry is the ability to implement trust across multiple parties (whether those are insurers and policyholders, insurers and brokers, or insurers and reinsurers) in way that is transparent and automated,” said Jeff Goldberg, svp of research and consulting at Novarica. Goldberg adds that it also opens up the possibility to create trigger-based insurance products, such as automated flight insurance that relies on airline records or environmental products derived from National Weather Service data from hurricanes or earthquakes.
As Tearsheet reported in May, distributed ledger technology also has the potential to transform health insurance, removing what some have called a “paperwork crisis in the industry.” Every detail of a patient’s medical history could be codified on a blockchain.
“Anything that’s associated with making sure identities are registered properly and that data is managed securely through the blockchain is a great thing,” said Siva Kannan, vp of engineering at Gem, a blockchain startup that’s partnering with Capital One on a platform that uses blockchain technology to help insurers and medical providers track and verify medical information.
Potential use cases also include scenarios with rampant fraud. In May, the United Nations began distributing aid to crisis-affected populations in Jordan using the Ethereum blockchain. Retailers are prepaid, and instead of making payments with a smartphone or paper money, the U.N. worked with technology company IrisGuard to allow purchasers to pay with an eye scan. The financial transactions are settled on an Ethereum blockchain created for that purpose.