During the 2008 financial crisis, Lehman Brothers collapsed just a few months after having posted a profit of $ 4 billion, reduced to nothing by hidden problems in opaque accounts and complex financial instruments. Almost 15 years later, history was repeated when FTX’s collapse wiped out 12 billion dollars in customer funds, many of which thought they would be their savings.
His supporters have long said that Blockchain technology, born after the 2008 crisis, offers a potential solution to these financial disasters thanks to radical transparency. Blockchain’s distributed register system could make the deceptions like those of FTX almost impossible by creating an unchanging and shared recording of all transactions.
Although important obstacles remain-from technical challenges to the type of institutional resistance that Sam Bankman-Fried himself has decried by committing his own massive fraud-the promise of transparency and technology security has led Many giant companies today invest hundreds of millions to integrate it into their systems. process. Below, we take you beyond marketing and overhaul to explore the real possibilities to come for this technology.
Key points to remember
- By creating a shared and infalcable transaction register, Blockchain technology could allow regulators, investors and the public to check the accuracy of real -time financial information.
- This could mitigate fraud, improve risk assessment and increase responsibility within the global financial system.
- According to his supporters, the transparency, immutability and traceability inherent in blockchain can be used to improve the management processes of the supply, manufacturing, health care and other sectors.
- They argue that this could improve the monitoring of goods, increase efficiency, reduce costs and guarantee much better data security throughout the world economy.
The arguments in favor of blockchain in financial security
The blockchain offers shared digital registers that everyone can see but that no one can modify everyone. It is a bit like the way a group of friends could use a Google spreadsheet to follow shared expenses, except that this register is encrypted, permanent and extremely difficult to falsify.
Supporters of this technology highlight its potential to protect the global economy through transparency. When an investment bank or a transaction on a blockchain, they say, it is like writing in permanent ink: it is not possible to erase or hide it. This visibility, they suggest, could help prevent the type of hidden financial problems that led to disasters such as the 2008 financial crisis.
For example, supporters of the blockchain stress that if Lehman Brothers had worked on a blockchain system in 2008, regulators might have identified their dangerous levels of risky investments in months before their collapse. Likewise, they argue that such transparency could have revealed the abusive use of customer funds by FTX before billions were lost.
Many people count on banks to protect their savings and provide capital if necessary in the form of loans or credits. Brokerage houses have billions of dollars on investment accounts and money circulates between people, institutions and governments through third parties. Thus, confidence is one of the most important factors that determine the need for a blockchain or something similar. Right next to confidence on the scale of financial importance is verification. It doesn’t matter who or what is or claims to be an entity, the confidence that is granted to it must always be supported by a verification.
Blockchain supporters say that technology meets these needs by offering any other interested party the possibility of verifying the confidence it grants to people and institutions.
For supporters of blockchain, the idea presents itself as follows: a central bank would no longer rely on the reports of individual banks to examine their operations and their files. Thanks to a shared registration of transactions, regulators could monitor cash flows as transactions are carried out, which means that central banks always have a realistic image of liquidity and distribution of risks. They would also include the behavior of each financial company. This could eliminate a large part of the uncertainty linked to the process of assessing the health of the financial system. The regulators would know in advance when there is instability on the markets and could adjust monetary policy as a result before a crisis is developing.
Financial institutions and blockchains
The adoption of Blockchain technology requires the adhesion of a wide range of financial institutions, from world banks to local credit cooperatives. However, many major financial players have already developed private blockchains for their internal operations rather than adopting the transparent public systems envisaged by their defenders.
Although these private blockchain implementations are not necessarily designed to deceive, criticism fear that they fail to ensure public responsibility which could help prevent future financial scandals. Blockchain supporters argue that only systems allowing public or regulatory control could effectively dissuade misleading practices, because participants would know that their actions could be monitored by any interested party.
Private blockchains in financial services
Large financial institutions such as Jpmorgan Chase & Co. (JPM), Goldman Sachs (GS) and Citigroup Inc. (C) develop private blockchain networks which offer some of the advantages promised by blockchain. These private or “authorized” systems give institutions more control while offering the following elements:
- Internal transparency: Transactions between departments and subsidiaries can be followed and checked instantly.
- Operational efficiency: Automated regulation and compensation processes reduce the time and costs of international transfers, the financing of trade and the trading of securities.
- Selective data sharing: Banks can share specific transaction data with regulators or partners while preserving the confidentiality of sensitive information.
- Automation of intelligent contracts: Standardized agreements and processes can be executed automatically, thus reducing manual treatment and potential errors.
For example, the JPMorgan Kinexys platform uses Blockchain technology to treat billions of daily transactions between institutional customers, and the Contour network, supported by HSBC, aims to simplify the documentation relating to trade financing between banks and businesses.
However, these private systems do not have public responsibility that Blockchain supporters consider as necessary to prevent future financial crises. Critics say that by keeping their closed blockchains, financial institutions maintain the same opacity that has enabled financial scandals of the past, simply with more effective technology.
Challenges and limits
Despite the promises of the blockchain, several obstacles remain before a generalized adoption can take place:
- Technical scope: Current blockchain systems can only deal with transactions fraction that traditional financial networks treat daily.
- Regulatory framework: The absence of clear regulation around Blockchain technology creates an uncertainty for institutions planning to adopt it.
- Implementation costs: The conversion of existing financial systems to blockchain requires significant investments in infrastructure and training.
- Energy consumption: Some blockchain systems, in particular those using the verification by evidence of work, require significant calculation and electricity power.
- Industry resistance: Financial institutions can resist changes that increase transparency and reduce their control over financial data.
The way to go
Even if Blockchain technology offers potential solutions to many vulnerabilities of the financial system, its implementation will probably be progressive. Some industries can adopt blockchain faster for specific use cases, such as the following:
- Payments and shipments of cross -border funds
- Documentation on trade financing
- Regulation and compensation for securities
- Funding for the supply chain
- Digital identity verification
- Reporting and regulatory compliance
The success of these applications could open the way to a wider adoption in the financial sector, even if the calendar and the extent of this transformation remain uncertain.
How will blockchain affect the economy?
The impact of the blockchain remains uncertain, but its supporters claim that it could reduce transaction costs, increase transparency between sectors and help prevent fraud. Technology could make financial systems more effective by automating verification processes and suppressing intermediaries. However, important technical and regulatory challenges must be overcome before such changes can be made.
How can blockchain help emerging savings?
Supporters suggest that blockchain could help emerging savings by reducing corruption, lowering the cost of cross -border payments and providing financial services to non -banished populations. However, implementation would require significant investments in technology and training.
What are the disadvantages of the implementation of the blockchain?
The main challenges are as follows:
- Technical limits in the treatment of large volumes of transactions
- High energy consumption, especially for work proof systems
- Regulatory uncertainty between jurisdictions
- Integration difficulties with existing financial systems
- Industry resistance to increased transparency
- Data confidentiality problems
- Implementation and training costs
Essential
Although Blockchain technology offers potential solutions to increase transparency and financial security, its general adoption comes up against significant obstacles. Financial institutions explore private blockchain systems to improve their internal operations.
As with all technology, the ultimate impact of blockchain will depend not only on its technical capacities, but also on the way in which institutions, regulators and markets will implement it.
