The blockchain or chain of blocks “is a type of database in which individual transactions are processed and stored in groups or blocks, connected to each other in chronological order to create a chain. The integrity and security of the data stored in the chain are guaranteed by cryptography”[1].
The blockchain is, therefore, a particular case of distributed ledger technology, which implies that not all distributed ledgers are blockchain.
The main difference between the two is that distributed ledger technology does not require the existence of a sequence of blocks to function, as in the blockchain.
According to Mckinsey & Company[2], the strategic value of the blockchain is defined by the following characteristics:
- You do not necessarily have to disintermediate, which encourages the creation of commercial applications accessible with permission, not open.
- Initially, cost reduction will prevail over the creation of transformative business models.
- The first difficulty to overcome will be the “paradox of coopetition”, in order to establish common standards: Natural competitors have to cooperate. The value of blockchain derives from network effects and interoperability, so all stakeholders must agree to achieve this value.
Beyond the above, the following could be cited as possible advantages of the blockchain:
- Improved data quality. Due to the regulation to which the financial system and, more specifically, banks are exposed, the data they handle is of great importance to comply with regulatory requirements. The blockchain could cause the data held by banks to be stored on a secure network that could only be accessed under certain criteria.
- Faster transactions. The blockchain can be applied to make not only faster money transfers, but also asset transfers.
- Cost reduction. The blockchain allows an increase in security and efficiency in financial system transactions, which in addition to reducing costs, will translate into greater customer satisfaction.
- Financial inclusion. If blockchain succeeds in reducing costs in the financial industry, this will likely cause the number of companies operating in that industry to increase, fostering competition and pushing costs for customers even further down, which could “capture” a greater percentage of the population that is excluded from the financial system.
Blockchain technology is expected to influence digital services and transform business models in a wide range of sectors, such as finance. Blockchain raises new paradigms in relation to disintermediation, trust, security and traceability, from which new challenges arise that deserve an adequate response.
Analysts and industry experts believe that this technology can have a great impact in different areas of work in the financial sector.
In addition, the blockchain can have applications on payments, since when making a purchase by paying with a card, for example, there are a series of intermediaries that act in the transaction (entity issuing the card, entity receiving funds, entity owning the brand under which the card has been issued) who expect to receive a small percentage of commission for the transaction. With payment systems based on the blockchain, these commissions could be reduced, by reducing the complexity of a transaction such as a card payment.
[1] Bank of Spain (2018): “Tecnología de registros distribuidos (DLT): una introducción”, Boletín Analítico 4/2018.
[2] Mckinsey & Company (2018): “Blockchain beyond the hype: What is the strategic business value?”, Digital Mckinsey, June.
