The Blockchain Technology – its benefits and challenges

blockchain

Be it a local fund management or cross-border fund distribution, the process is lengthy and costly too. The function beneath the successful transaction depends highly on how actively intermediaries and trusted counterparts perform. However, their performances bring with it an additional cost burden on the companies that leverage their services.

In a report by Deloitte, it estimated that the fund distribution processing cost in Luxembourg during the year 2014 cost around 1.2 billion euro. More to it, 23% of the fund processing is handled manually using fax orders, adding more additional burden of costs on the distribution process.

Here comes the Blockchain technology to reduce that additional cost burden by automating the manual process and preventing the need of those middle men. So, Block chain is a great opportunity for investment funds to improve the functionalities of the investment fund by increasing the transaction speed, efficiency and reducing costs. Even though we can’t deny its greatest threat on the employability through automation, it is poised to add a new era of disruptive technology to every industry including automotive, healthcare, banking, science and pharma and more.

What is the Blockchain?

It is more of bitcoin and virtual currencies, which Blockchain technology is all set to disrupt intermediation in almost every industry. A survey by the World Economic Forum states that Blockchain technology is going to transform the financial services to a greater length and at least 10% of the global GDP is estimated to be stored on this technology by 2025. So, what the Blockchain technology is? Ledger is nothing new to the financial experts and its related industries, but Blockchain depends on a digital and distributed ledger. The performance of every transaction takes place on a transparent platform without a need of the third-parties such as trusted authority to validate transactions. Rather, the whole Blockchain platform uses computer nodes integrated with consensuses and protocols to perform an automatic ledger efficiently. Even though this technology is efficient in managing typical Smart Contracts and some easy manageable computer programs, it is able to do sophisticated application as well. Thereby, Blockchain technology merges Smart contracts and transaction history in its ledger to eliminate any services from intermediary. So easily the complexity of transaction is executed with a more advanced flow in the Blockchain technology. Theory wise, this technology is going to eliminate the job role of transfer agents and partly those in the financial administration. For example, the manual process as executed by intermediaries or agents, it asks for a lengthy process of documentation, more over it takes more than two days to exchange fund share against payment. However, Blockchain technology integrates the fund registry to its ledger, while the smart contracts ask for KYC or AML for every transaction upon a subscription. Besides, each and every transaction history is recorded into the system quite easily. Overall, it reduces the manual time and efforts in the transaction process.

Primary Characteristics Of Blockchain Technology

·         Quick transaction settlement

·         Ledgers are automatically updated

·         No functions of the intermediaries, hence peer-to-peer transaction process takes place faster

·         Transaction of both sides takes underway simultaneously

Transparent And Audited

·         Orchestrated upon an open source technology, Blockchain functionalities are performed by a set of protocols known as miners.

·         No loopholes during transaction. Every transaction history is traceable and visible within the ledger platform

·         It uses pseudo-anonymous identity technique for accounts to make them visible on the ledger

Cost-efficient

·         It does not need more than the computing power to validate transaction, thus reducing the cost of manpower activities

·         No or less activities by intermediaries

·         No reconciliation required

Trusted and Reliable

·         This technology is flexible and has no point of failure

·         Transaction in Blockchain cannot be reconstituted, so no chance of discrepancies

How Does The Technology Work?

The process of creating and validating transactions between the parties are simple and fast.

i.                    Transaction agreement between both parties. First party send all transaction related information viz, history of previous transaction, amount, type of transaction and second party’s public key and more. The first party agrees upon the transaction using his private key.

ii.                  The Blockchain technology sends alerts about the pending transaction to its miners all around the network.

iii.                The entire process of transaction happened via the Blockchain is validated in a group of blocks within a given timeframe. Each block has a separate reference number to the transaction history and cohorts with the previous blocks for further references.

iv.                 Based on the complex cryptographic computational work, the miners execute the verification process. It is the first miners who first takes the charge and publishes the report of the successful transaction history to the whole network.

v.                   When the first block is validated, it is reflected to the entire blocks and forming a chain of blocks.

Benefits of the Blockchain

The foremost benefit that the Blockchain technology offers to its users is the credibility and integrity. It does not allow any third-party interference for a successful transaction between the parties, improving resiliency in the transaction performance and speed. No discrepancies are allowed in this technology as it performs as programmed. The technology is a reliable platform because of the immutable and irrevocable ledger. This enhances its capabilities to prevent any further error in transactions. Provided its data and privacy concerns, cryptographic functions make its data secured. Finally, there is no scope for any disagreement between the parties as both of them can see its transaction performance and can access the distributed ledger and also recorded history.

The Blockchain alone has the power to help banks reduce the transaction costs by $20 billion as per a study conducted by SantanderInnoventures. Simultaneously, the Blockchain uses its time-stamped information feature to bolster and simplify the verification and tracking process. With this technology, audit trail and KYC/AML compliance are easy to follow. It reduces the complexity of connecting multiple users to each other. It has one single common source of information which users can access and share encrypted data about transaction history of clients instantly.

Challenges of the Blockchain

 Despite being the leading edge technology for fund management and administration, its key challenges is lack of awareness among the companies CEOs and short of knowledge about its functionalities. Since technology deployment is a long process, it is a long a way to go for companies to leverage this technology. Besides, it needs a cultural acceptance and transit from the traditional method to the new business infrastructure. However, even CEOs are convinced of its benefits, the complexity involved with its functions due to complex software is a major hurdle. Companies must understand its complex underlying process to use this technology.