The Advantages and Challenges of Blockchain Banking

The financial industry in its many forms has seen a shift in recent years to be more interactive and more digital. The market entry for blockchain technologies has been hailed as the most disruptive change in banking, for instance, and is set to completely change how transactions and communication are organized.

But blockchain is still in its infancy and getting a foundation underneath it, which means it still has a lot of ambiguities tied to it. The technology was brought to light in a decade ago when Bitcoin (which has been making it own waves lately) also came on the scene. Bitcoin is the digital currency and blockchain is the technology that enable digital currencies–like Bitcoin–to move its assets.

With all this possible confusion and opportunity for education it’s the perfect time to look at the advantages and challenges that come with blockchain technology.

Advantages

Distributed Protection

Blockchain opens up the opportunity for a wide network of computers to come together. Some blockchain companies allow almost anyone to add to their computer network just by installing certain software.

One way this helps out the network is that is reduces risk in tampering, fraud, and cyber crime. Financial institutions can feel safer if sharing networks in a blockchain, and can also feel safer by investing in additional coverage, like financial institutions insurance. Think of this structure as a “strength in numbers” approach to protecting banking.

Immutability

When transactions are shared across the network, mentioned above, they become almost impossible to be reversed. In something like Bitcoin, for instance, this ultimately means financial institutions can explore the blockchain and see the number of currency in any account. It keeps everything, and everyone, transparent.

Decentralization

One threat that the financial services industry faces is going up against a monopoly. Blockchain helps the whole financial community by combating monopolies and removing costs. No centralized investments means increased competition in the market. This happens by putting pressure on all involved in the blockchain network to be more efficient in their practices.

Challenges

Wastefulness

Blockchain does come with its own built-in weaknesses like being wasteful in its processing. Each Node (computer connected to the network) involved has to run the blockchain in order to maintain it. This opens things up to fault tolerance and makes data on the blockchain resistant to censorship. All this just eats up time and effort in the system, taking focus away from efficient operation.

Market Value

Blockchains typically run using currency models to help manage the economics of the computer system. Traditional currencies like the dollar or British pound are tied to a general respective value in the country they’re based in. Blockchain currency is not. Where regulations are stable in certain countries’ currency, something like Bitcoin is totally different.

What’s more, with blockchain technology in its early stages still, there are limited regulations and is possibly open to rapid fluctuation and manipulation. This can really cause a roller coaster of transaction value.

 

About Financial Guaranty Insurance Brokers

Since 1983, Financial Guaranty Insurance Brokers has distinguished itself as a provider of Professional Liability, Cyber Liability, and Crime insurance products for entities of all types. To receive timely, personalized service from a knowledgeable and experienced staff, call us today at (626) 793-3330 to speak with one of our professionals.

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