Implementing blockchains and distributed infrastructure
Blockchain and distributed ledger technology is quickly gaining traction in the financial services industry. Both incumbents and start-ups are actively looking to apply the technology to reduce costs or improve efficiency. The technology’s potential to make ledgers more transparent, trustworthy and efficient leads to suggestions that it can possibly revolutionize financial services and other industries.
Applying the blockchain within each firm’s context is complicated, however: despite companies’ enthusiasm and its rapid evolution, the technology is still in its infancy.
What are blockchain distributed ledger and distributed infrastructure technologies?
Distributed ledger technology, of which blockchain is the most widely known example, allows for the sharing of a ledger of activity — such as arbitrary data or tokens to which value is assigned — between multiple parties.
A distributed ledger can take over many of the functions performed by central third parties, by enabling the network itself to be the intermediary (see figure 1). This is particularly relevant for financial services, a field in which reputable third parties are widely used to create trust and decrease risk.
Figure 1 - In a traditional setup, a central third party controls the flows of information in its central ledger, and each connected party has its own copy of its individual activity. A distributed setup allows each connected party to interact with one another using the same distributed ledger.
Potential applications for harnessing the power of distributed infrastructure technology
Distributed infrastructure technology has many potential applications, through its abilities to disintermediate, reconcile and scale. The following potential applications could harness the power of the technology.
- Clearing and settlement
A distributed infrastructure solution could potentially replace a clearing house or exchange’s infrastructure by allowing the activities to be performed directly peer-to-peer. Such an infrastructure in clearing and settlement allows for disintermediation, and, as a result, potential reductions to time and costs.
- Trade finance and supply chain management
With the ability for any party in the chain to record its activity and for any other party to verify the activity, the technology may allow for more efficient, less burdensome trade finance and supply chain management for buyers, suppliers, transporters and financiers.
- Closed economies and loyalty points
Other use cases may benefit from the immutable ledger’s ability to automatically reconcile multiple sources. Companies that offer credit card rewards programs, through which customers earn redeemable points or miles when purchasing goods, often find it difficult to reconcile the points earned to the points redeemed.
- Insurance claims management
A distributed ledger could enable the insurer and various third parties involved in the process to easily and instantly access and update relevant information regarding a claim (e.g., claim forms, evidence, police reports, third-party expertise reports).
- Internet of Things applications
When combined with distributed infrastructure technology, the Internet of Things (IoT), can significantly expand the ROI of an asset — its utilization.
The blockchain and distributed infrastructure technology are exciting developments that show promise for the financial services industry. While there are significant potential benefits to applying the technology, doing so successfully is a challenge. By thoroughly considering how the technology could meet business needs, and the role of other external and internal factors, firms can significantly improve the likelihood that their initiatives for distributed infrastructure will succeed.
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