Table of Contents
Key Takeaways:
- Blockchain technology enables companies to leverage new financial controls on transactions.
- Common use cases for blockchain in finance include supply chain management, ownership records, and cross-border payments.
- Blockchain transactions offer real-time and secure payments in fiat currencies or digital assets.
Blockchain technology, also referred to as distributed ledger technology, has been around for well over a decade, with clear appeal to financial institutions. But, as with any new financial management technology, there’s a learning curve.
Blockchain was initially created to support Bitcoin and other cryptocurrencies, but it also has enormous potential for other finance-related applications–a fact that finance executives appreciate today
In the early days, adopters attempted to put everything on the blockchain—remember the NFT digital art hype—but now it is an established technology. A Bain & Company survey reported that roughly 80% of executives at financial institutions expect to start using blockchain technology before 2020. A more recent survey from FTI Consulting discovered that 75% of respondents felt their investment in blockchain technology was very successful.
In this article, we’ll cover the basics of blockchain in finance, its advantages and disadvantages, and key use cases in strategic finance to consider.
Back to Basics: What is Blockchain Today
At its most basic level, a blockchain is a decentralized database. Traditional databases, like those that store all the information for accounting software programs, exist in one place. Similarly, each datum inside the database exists in only one location. If someone accesses a traditional database and opens a record, that record will be locked so that no one else can edit it until the first person is done with it, eliminating human error.
Blockchain, on the other hand, gives each user their own copy of the database. Everyone who has a copy of that database is a node, meaning that they’re a member of blockchain networks. Any node can access and edit any record at any time, since each one has a unique copy of the database.
All of those nodes work together to maintain the database, validating transactions and adding them to the blockchain once they’re verified. This works by a sort of majority vote system: each node reviews each transaction, and if at least 51% of the participating nodes agree that the transaction is valid, it’s added to the blockchain. That helps keep individual bad actors from forging transactions or otherwise altering the database.
In other words, blockchain lacks a single point of failure, making it more secure than traditional databases—and a promising technology for financial institutions.
Why Use a Blockchain Solution: Pros and Cons
Blockchain’s unique structure gives it some major advantages, but like any solution, it isn’t a “cure-all.” Before diving into key use cases, let’s consider why blockchain technology is on the table for more and more businesses—and what risks might need to be mitigated.
Blockchain Advantages
- Because everybody has a copy of the blockchain data, it’s a totally transparent system
- Blockchain removes the need to have a single party or central authority control all the data.
- A distributed database is much harder to hack or illegally alter because the hacker would have to break into and alter at least 51% of the existing nodes to get his changes accepted by the blockchain.
- There is no single point of failure. The more nodes a blockchain has, the more copies of the database exist, and the less likely it is that any data would be lost.
- Once a piece of data is added to the blockchain, it can never be removed, an immutably record. That means it’s possible to review every transaction that’s ever occurred in the blockchain.
Blockchain Disadvantages
- Having numerous copies of the same database is inefficient, particularly when the blockchain must constantly push updates to all those copies. This can make blockchain technology much more expensive to operate than traditional databases with a high computational power.
- Transactions can take a long time to post because each transaction has to be pushed to the blockchain, validated, posted to the blockchain, and then pushed back out to every node on the system.
- Like any database, blockchain can suffer from security issues. A blockchain with a small number of nodes is more vulnerable because a bad actor could potentially alter 51% of those nodes. And if a hacker finds a vulnerability in the blockchain protocol, he/she could potentially alter it without needing a majority consensus.
- Controlling access to the blockchain can be a challenge, since blockchain technology is public by its very nature.
- Once a piece of data is added to the blockchain, it can never be removed. This means that the blockchain can end up laden with junk data, resulting in bloated databases requiring tons of space to store on each node.
Because of these drawbacks, blockchain work isn’t suited to every possible use and the financial goals for a business. For example, if proprietary company data was stored using blockchain technology, competitors could simply join the blockchain, become a node, and get a complete copy of the data. It is possible to limit access to a blockchain, but it’s a challenge–and arguably not worth the extra effort when proprietary data is easier to protect in a traditional database.
To compensate for some of these disadvantages, different companies and developers have designed multiple types of blockchain ledgers: Public blockchains, private blockchains, hybrid blockchains, and consortium blockchains. There are pros and cons to each type, but in general:
- A public digital ledger is open and fully decentralized, while private blockchains sacrifice node size and transparency for greater control and speed.
- Hybrid ledgers combine public and private blockchains that balance user privacy with security, but require specific use cases to incentivize users to opt-in.
- Consortium blockchain ledgers, also called federated blockchain, is similar to the hybrid model but makes use of member consensus in transactions. This model is more secure in terms of authorized access but lacks wide enough node distribution to safeguard against hacking and lacks transparency.
If the same company from the previous example leveraged a hybrid or consortium blockchain, their competitor would not have been able to easily get copies of the data. As a result, hybrid blockchains are typically more popular with financial institutions.
Blockchain in Finance: 4 Use Cases
Finance, in particular, has a number of processes that fit the blockchain model quite well, though some challenges still remain to be overcome before the technology is mature enough to manage them. The below chart gives some examples of general use cases along with the challenges that are holding them back (note: DLT stands for distributed ledger technology, aka blockchain)
Here’s how the blockchain would play out in some specific use cases:
Supply chain management
Blockchain technology is well suited to track items in a supply chain, particularly high-value items or ones that are likely to be subject to fraud. For instance, a vendor providing organic fruit might be tempted to substitute cheaper non-organic fruit instead. Blockchain supply chain technology could prevent such fraud by using digital tokens to track each item’s provenance across the entire purchasing process.
A blockchain is superior to a traditional database for this purpose because of its total transparency and resistance to tampering. Since nothing in the tracking process is confidential, there’s no need for concern about revealing sensitive information. Platforms like VeryGoodSecurity or Paystand, use tokenization to secure sensitive data like customer names, addresses, and payment data.
Ownership Records
A blockchain is an excellent way to store and maintain public records of ownership. Take corporate assets such as buildings, vehicles, and machinery. If all such assets are registered with a blockchain, there will never be any questions about who holds the title for each of these items. It would also be easy for interested parties to research asset information within the ownership blockchain. Consider this scenario: a bank trying to decide whether to make a loan could access the ownership blockchain to see the proposed collateral’s history and find out how much it’s really worth.
Several governments are working with blockchain companies to put their land title information on blockchain-driven registries. The Republic of Georgia was the first nation to adopt blockchain for official records; in 2017 it moved both public and private land ownership records onto a registry created by blockchain startup Bitfury. Japan, Russia, and Sweden all ran blockchain land ownership registry test trials in 2018.
Improving Operational Efficiency
One of the top reasons companies within real estate and many other industries employ blockchain technology is to improve operational efficiency while reducing the risk. And it’s effective.
A 2024 study titled Maximizing Operational Efficiency: Utilizing Blockchain for Comprehensive Tracking and Visibility throughout the Supply Chain found that blockchain reduces fraud by 50% while boosting efficiency by 30%. One of the initiatives tracked in the study was Walmart’s food traceability project, which dropped traceability time alone from six days to seconds.
Operational efficiency in finance using blockchain technology can be accomplished through integrating the next technology with AI and IoT platforms at different levels of the transaction process, from risk management to transaction processing.
Cross-border Payments and International Transactions
Sending money between different nations typically involves routing the money through various middlemen before it arrives at its final destination. A blockchain could cut out most, if not all, of the intermediate steps, resulting in a much faster transaction without raising the cost. This could make it considerably easier for businesses to both purchase supplies from and sell products to other nations. The blockchain used for this purpose would most likely employ cryptocurrency for these transactions.
For example, say a business in the United States needs to send $5,000 to a supplier in China. The business would purchase $5,000 worth of the blockchain’s cryptocurrency–most likely a token unique to that particular blockchain–and deposit the tokens in the supplier’s “wallet,” a special program for storing cryptocurrency. The supplier could then withdraw the tokens and exchange them for yuan. Deloitte estimates that the fees for such a transaction would be just 2%-3%, compared to the 5%-20% charged by traditional remittance programs.
Which companies are offering blockchain-based solutions to streamline cross-border payments in finance?
There are more and more companies that offer almost instant cross-border transactions with blockchain technology, including J.P. Morgan, Ripple, and Revolut. In the B2B space, organizations can use Paystand’s blockchain-based network to receive and process payments.
Best in Blockchain Technology: Scalability and Security Features for Financial Services
When looking for a blockchain financial solution while scaling finance, you’ll want to consider more than the type of blockchain. In most cases, you’ll end up using a hybrid or consortium solution, which makes integration with third-party applications easier and provides centralized controller support.
But you’ll also want to look for things like:
- PCI-DSS compliance
- Usable interface
- Encryption and tokenization for sensitive data
- Cross-border payments and currency support
- Custom accounting controls and permissions
- Auditable records
Preparing for Blockchain and How Will Blockchain Change Finance
A recent Deloitte survey on blockchain adoption found that 78% of respondents believed they needed to adopt blockchain to maintain competitive advantage, yet one-third of respondents said their ROI on blockchain based technology was uncertain. Because blockchain is still an immature technology, it’s not clear just how it will develop, which means finance professionals must commit to staying informed. As the aforementioned Deloitte survey put it,
“…the only real mistake we believe organizations can make regarding blockchain right now is to do nothing. Even without a completely solid business case to implement, we believe that organizations should at the very least, keep an eye on blockchain so that they can take advantage of opportunities when they present themselves.”
A blockchain roadmap, such as the below example, can help you prepare for the day when you’re ready to implement this technology at your own company.
Transparency Is Everything
For accounts payable and spend management solution, transparency is the name of the game. While blockchain provides additional layers of visibility, it isn’t the end-all-be-all of in-depth record keeping.
At Teampay, we emphasize proactive reporting features with granular data to ensure organizations have complete control over spend. Users can easily identify finance department challenges and opportunities with data linking to corporate cards, vendor transactions, ERP data, and more.
Discover how we empower teams with Teampay’s innovative finance tools today.
