Blockchain has only been around since 2008, so one can be forgiven for not understanding what it is or what it can do. But having been developed to solve a single problem, that of transferring cryptocurrencies, its use across the financial services industry (and beyond) has grown exponentially as its true potential became apparent.
A truly disruptive technology, it is now reshaping businesses across the globe, with the result that the associated innovation is outpacing existing business models, ecosystems, policy and legislation.
Blockchain is one of the most significant technological breakthroughs of the 21st century, and has led to exponential growth in fintech innovation, says Dave Feenan, network manager, Technology Ireland ICT skillnet. He notes that the blockchain market is projected to grow from $4.9 billion in 2021, to $67.4 billion by 2026, as its use snowballs across sectors and industries.
The traditional financial industry requires multiple third parties and intermediaries to perform certain transactions, Feenan points out. “Blockchain technology removes the need for many of these intermediaries by streamlining payments services, reducing friction in post-trade settlement systems, and supporting fractional ownership of high-value assets.”
Essentially, blockchain provides unrivalled data security and protection because of its distributed nature, he says. “A blockchain doesn’t require a centralised authority to validate transactions; instead, a blockchain stores data in fixed structures or ‘blocks’. These blocks create a chain of verified transactions that acts as a distributed ledger.” A distributed ledger creates a publicly available ledger that is updated and verified by a computer which maintains a history of all transactions known as a node. “The objective is to create a single version of the truth, used by all participants, containing an immutable, transparent, and verified data set,” Feenan explains.
This integrity means it has an ever-growing list of use cases including several in the financial services sector, says Róisín Culligan, associate in technology with William Fry. “Cryptocurrencies heavily rely on blockchain networks but the growth of decentralised finance or De-Fi has also been significant. De-Fi permits people on a blockchain to conduct financial transactions without intermediaries,” she explains. By itself, DeFi is a rapidly evolving industry within the financial sector, growing from $1 billion in value in June of 2020 to more than $100 billion today.
There are also other use cases for blockchain, such as the use of smart contracts — automatically executing contracts composed of code that sits a layer above the blockchain. These types of contracts may be used, for example, to give an automatic insurance pay-out if a flight is delayed.
Yet the use of blockchain isn’t always necessary, or even relevant, according to chairman of Financial Technology at Ulster University, Prof Daniel Broby.
“When you speak to people, a lot of them will say that blockchain is ‘a solution in search of a problem’,” he says. “It might seem a funny thing to say about an innovation but because it’s an immutable record of data, a lot of people think that it is a database and they think they can put any database on the blockchain.”
There are pre-criteria that need to be met in order to make it useful in terms of the transfer of digital assets; the data needs to be tamper-resistant, it needs to exist full-time and it needs verification. The latter is key, says Broby, who points out that blockchain was developed as a result of a lack of trust when it came to transferring assets digitally.
“This provides trust in an untrusted world. But because it’s a disruptive technology and there is a bit of buzz about it, everyone is rushing around saying you can put everything on the blockchain and it’s not helpful to do that, it’s helpful when there are problems that need to be solved such as people trying to tamper with information and when you need to handle untrusted parties. You wouldn’t want your banking to be done via blockchain — you want your bank to have a private ledger.”
The application of blockchain, both in business and in everyday life, is still set to soar, although its wings may be clipped if regulation begins to catch up. “It seems likely that the different use cases of blockchain in the financial services sector will grow exponentially in the coming years although that growth may not be uniform and will heavily depend on how it is regulated,” Culligan notes.