Terry The eight-core functions of financial services are Value Validation, Value Transfer, Store of Value, Lending for Value, Value Exchange, Financing and Investment, Value Insurance and Risk Management, and Value Accounting.
Today’s global financial industry is fraught with problems: it is outdated, built on decades-old technologies that are out of step with our rapidly evolving digital world, making its operations often slow and unreliable. It is non-inclusive, leaving billions of people without access to basic financial services. It is centralized, leaving it at risk of data breaches, other attacks or complete failure. It is monopolistic, preserving the status quo and stifling innovation. Blockchain technology promises to solve these and many more problems as innovators and entrepreneurs seek new ways to create value on this powerful platform.
The financial services sector is a technology stack made up of legacy systems. In this system, change is a very difficult thing to do because every improvement must be backward compatible. On the other hand, blockchain, as an open source technology, is able to innovate, iterate and improve itself on the basis of network consensus. These benefits (forensics, cost reduction, speed, risk reduction, innovative value, adaptability) have the potential to transform not only payments, but also the securities industry, investment banking, accounting and auditing, venture capital, fixed income, and credit rating agencies.
Value Verification
Today we generally rely on powerful intermediaries to build trust and verify identity in financial transactions. To access basic financial services like bank accounts and loans, we ultimately rely on the arbitration of these intermediaries. Blockchain can reduce or even completely eliminate the reliance on these institutions for trust in certain transactions. This technology will also allow nodes to create identities that are authenticated, robust and cryptographically secure, and to build trust when it is needed.
Value Transfer
Every day financial institutions move money around the world and ensure that there are no double payments: from multi-billion dollar inter-company transfers, asset acquisitions or company buyouts, to 99 cent songs purchased on iTunes. Blockchain can be the universal standard for any form of value transfer, ranging from currency, stocks, bonds and property rights, and can perform transactions in the form of high volume, low volume, near and far, known and unknown counterparties, etc. Using blockchain can significantly reduce costs, increase speed, reduce friction, and facilitate economic growth and prosperity.
Store of Value
Financial institutions are the repositories where institutions, governments and ordinary people store value. For ordinary people, banks store value in safe deposit boxes or current savings accounts. For large institutions, they need ready liquidity and the assurance that their cash equivalents will receive a small return, known as a “risk-free investment,” such as money market funds or treasury bills. Individuals will no longer have to take banks as their first choice for depositing value or as providers and current accounts; institutions will have a more efficient mechanism for acquiring and holding risk-free financial assets.
Lending for Value
From home mortgages to Treasury bills, it can be said that financial institutions have driven the issuance of letters of credit, such as credit cards, mortgages, corporate bonds, municipal bonds, government bonds, and asset-backed securities. These lending operations have led to the rise of a number of ancillary industries, such as credit checks, credit scoring, and credit ratings. For individuals, it’s credit scoring. For institutions, it’s credit ratings (from junk to investment grade). On the blockchain, anyone can directly issue, trade, and settle traditional debt certificates, which reduces friction, reduces risk, increases speed, and increases transparency. Consumers would also be able to obtain loans from their peers. This is especially important for the unbanked population and entrepreneurs around the world.
Value Exchange
Money keeps the world running. Every day markets exchange trillions of financial assets around the world. Transactions are the buying and selling of assets and financial instruments for investment, hedging and arbitrage purposes, and range from clearing, settlement, storage and other post-trade processing. Blockchain can save the settlement time of all transactions from days and weeks of cycles to minutes and seconds. This speed and efficiency provides the opportunity for the unbanked and those without access to adequate financial services to participate in wealth creation.
Financing and Investment
Investments in assets, companies or new ventures offer individuals the opportunity to earn returns that can come in the form of capital appreciation, dividends, interest, rents or some combination. There is a market for the industry: at every stage of development, this matches investors with business owners and entrepreneurs (from angel investors to public companies). Fundraising generally requires the involvement of intermediaries, such as investment bankers, venture capitalists, lawyers, and the like. Blockchain enables new forms of peer-to-peer financing, which can improve the efficiency of recording and paying dividends and coupons, and make these links more transparent and secure.
Value Insurance and Risk Management
The goal of risk management (of which insurance is a subset) is to protect individuals and companies from uncertain loss or disaster. More broadly, risk management in financial markets has also driven the emergence of a range of derivative products and other financial instruments to hedge against risks arising from circumstances that cannot be predicted or controlled. According to the latest calculations, the total notional value of all outstanding OTC derivatives amounts to $600 trillion. Blockchain supports a decentralized insurance model that makes the use of derivatives in risk management more transparent. The use of reputation systems based on an individual’s social and economic capital, behavior and other factors enables insurers to calculate a clearer actuarial risk and thus make well-informed decisions.
Value Accounting
Accounting is the measurement, processing and communication of financial information about economic entities. This multi-billion dollar industry is controlled by four major accounting firms, Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG. Traditional accounting practices will not be able to adapt to the complexity and operational speed of modern finance. An accounting approach using blockchain distributed ledger technology will make audits and financial reporting more timely and also enhance their transparency. In addition, it will improve the review function, which will greatly enhance the ability of regulators to review the internal financial practices of companies.
The combination of these core functions and blockchain will greatly enhance the security and efficiency of financial services.
