The global financial system is a network that efficiently moves trillions of dollars among billions of people every day, but it’s constantly threatened by fraud and crime.

According to a 2018 PwC survey report, 49 percent of financial intermediaries experienced crime in the past two years, causing losses and raising regulatory costs. Blockchain technology may provide a solution to the problems of delay, increased fees, and vulnerability to crime.

What is Blockchain? Combining Distributed Networks, Cryptography, and Algorithms

Originally developed as the technology behind Bitcoin and other cryptocurrencies, blockchain is a distributed ledger that can securely record the ownership of any asset. Transactions involving anything of value can be verified without the presence of an institution such as a bank or government.

Blockchain facilitates transfers from one business or individual to another without the need to go through a third party. The technology relies on a distributed network of users, all of whom are engaged with a cryptographic algorithm that validates both them and the transactions that are taking place.

Blockchain is based on:

• Distributed database of computers: Participants in a blockchain access the relevant database through a unique key generated by an algorithm. Every participant can add or verify transactions without going through a third party.

• Peer-to-peer transmission: Communication goes directly to each participant without involvement of an intermediary (such as a bank).

• Transparency and anonymity: Each transaction is visible to anyone with access to the system. Each user has a unique address comprising 30 or more characters. Users can choose to be identified by only those addresses or to send additional information as may be needed for individual transactions. Cryptography ensures users can only create portions of the file for which they possess the necessary permissions.

• Irreversibility of records: Records cannot be altered once transactions are entered and the database updated. Each block has a time stamp and an irreversible link to the previous transaction. Computational algorithms ensure recording is permanent and in chronological order.

Where Blockchain Could Drive Savings for Financial Institutions

Banks and financial services companies connect with each other to transfer funds for the purchase and sale of assets. The process of moving money in accordance with the terms of an agreement can be cumbersome and risks the possibility one of the parties may back out of the deal during the settlement process, or that fraud may be involved.

One estimate puts the cost savings of adopting distributed ledger technology for settlement purposes at $15 billion to $20 billion per year by 2022. Blockchain has the potential to lower or eliminate these costs by making fraud more difficult and ensuring the transaction occurs in a secure manner.

Besides streamlining the settlement process, other financial services applications could include tighter security of related transactions, as well as cutting fraud by dispersing sensitive financial information with time stamps away from one centralized database, hopefully reducing the consequences of breaches.

Other advantages may include more efficient know-your-customer and due diligence procedures designed to meet money laundering regulations by allowing banks to access others’ verification information.

Distributed ledger technology and blockchain are not yet ubiquitous in the financial services sector. Additional capabilities are coming online rapidly. Financial services companies that embrace the possibilities may be able to harness significant savings.