Blockchain: the next windfall for the financial industry?

When it comes to blockchain technology, people may feel unfamiliar. But if you understand the connection between it and the famous Bitcoin, you will realize it. In general terms, Bitcoin is actually the first successful application of blockchain technology. As we know, money is the intermediary that completes transactions. Over the past few centuries, as the frequency and complexity of transactions have increased, these complex transaction records, or ledgers, have been held by different entities, isolated from each other, and the public has not been able to access the transaction information contained therein. As a result, in order to complete a transaction, the involvement of a trusted third party or intermediary between the buyer and seller is required, along with a much higher level of human input and cost. For example, governments, banks, notaries and various paper currencies play such a role. Only if they exist can we trust the other side of the transaction.

Bitcoin, on the other hand, is a decentralized currency that bypasses intermediaries and enables peer-to-peer exchange of value. Bitcoin works by distributing ledgers to every participant in a transaction through the cryptography of the blockchain, and each ledger is like the genes of a living creature - the participating individuals are different, but the content of their ledgers is identical. As soon as any transaction occurs in the network, a corresponding record is generated for all participants' ledgers. Once someone tries to hack and modify a single ledger, all the other ledgers automatically detect this fraud.

Miners are like replicators and propagators of genes, and their role is to validate transactions and ensure the consistency of the distributed ledger. Thus, the advent of Bitcoin or blockchain technology completely solves the problem of transaction fraud and information opacity. Imagine you want to buy a second-hand home, it would take you days to verify and notarize the quality and mortgage status of the home and complete the transaction, involving multiple institutions and individuals in the process. Blockchain technology can do all of this in a matter of minutes, cutting down on human labor and costs significantly. In addition to the transaction and payment fields, blockchain technology has other rich application scenarios.

To take a simple example, how can a supermarket dealing in organic food ensure that its sources are all organically produced and non-GMO? In the past, supermarkets had to spend a lot of manpower and resources to ensure the reliability of their sources, and this claim is not foolproof, because you can't eliminate the fraudulent behavior of unscrupulous merchants. With blockchain technology's distributed bookkeeping, the time, quantity and amount of each transaction is clear from the farm to the supplier to the logistics. With this information secured, supermarkets are more confident in their marketing efforts. The Boston Consulting Group therefore believes that blockchain technology has the potential to disrupt the current credit system and transaction system.

This is just one of the most basic applications of blockchain technology: asset and identity management. In the financial industry, blockchain technology can simplify and accelerate financial processes by settling a variety of real-world financial transactions through distributed bookkeeping without the need for third-party authentication. In the future, we may even see the emergence of so-called coded and encrypted smart contracts that allow stocks to become digital records that can be issued and traded on the Internet, dramatically reducing transaction costs, and digital stock trading systems that allow small and medium-sized businesses to raise capital from the public more easily and at a lower cost.

So while the first application of blockchain technology, Bitcoin (Crypto 1.0), has been subject to many limitations due to regulatory and other issues. However, the application of blockchain technology in other areas, such as distributed bookkeeping, payment settlement, and smart contracts (Crypto 2.0), is recognized and highly valued by regulatory and financial institutions in various countries. Regardless of the future of Bitcoin, blockchain technology will be a very important innovation in the financial industry in the near future.

I. Venture Capital Helps Blockchain Technology Take Off

Currently there are more than 750 innovative companies related to blockchain technology around the world. About 200 of them have received venture capital funding, and their businesses can be categorized into the following six main application areas: digital currency, payment and settlement, smart contracts, asset and identity management, infrastructure and open source development, and venture capital, media, and consulting.

In terms of investment stage, blockchain technology is clearly in its infancy. Of the 200 companies that received capital injections, 124 received seed investments, only 49 reached Series A funding, 12 reached Series B funding, and only 4 received Series C funding. In terms of investment amount, more than 2/3 of the financing is in the seed and A round stage.

Second, new opportunities for financial institutions

Although still in its infancy, financial institutions have reacted more positively to blockchain technology than other areas of technology. Nasdaq, for example, has partnered with startup Chain to explore new ways to issue stock. The traditional way of issuing securities is expensive, requires a lot of labor, involves many institutions and stakeholders, and there is a lot of room for improvement. Nasdaq announced that it is applying the blockchain technology provided by Chain to the NASDAQ Private Market, an equity trading platform for companies that are not yet publicly traded, making it the first financial institution to issue and transfer shares of privately held companies through blockchain technology. Nasdaq Chief Executive Officer (CEO) Bob Greifeld said, "As blockchain continues to reshape the global economy, Nasdaq wants to be at the center of the action."

For its part, Ripple Lab, a San Francisco-based digital payments company founded in 2012, specializes in the development of payment protocols. It is now the main cryptocurrency system after Bitcoin and Ether. Through the open source internet cryptographic protocol and distributed bookkeeping mechanism, financial institutions can make fast and secure payments through Ripple. Several major banks have purchased licenses for the Ripple protocol, which plays a huge role in exchanging and sending money.