Blockchain Will Upend the Financial Sector, But Not In the Way You Think
We’ve seen countless applications of blockchain – many good, many bad, and mostly token-related – since its inception, as the world explores how best to leverage this powerful technology. The most headline-grabbing applications are typically cryptocurrencies and decentralized finance protocols – products born from a mistrust of the existing financial system and built in an effort to ease reliance on it. We’ve seen splashy op-eds about how blockchain will bring traditional finance crashing down, returning humanity to an era of self-managed finances, but these headlines don’t tell the whole story.
One of the most exciting applications of blockchain technology has yet to be realized. Ironically, the very institutions cryptocurrencies were designed to disrupt also stand to gain a great deal from their underlying technology. The decentralized and transparent nature of blockchain, when configured to conform to our existing financial communications standards, holds the potential to transform the financial sector and modernize its underlying technology, offering improved efficiency, security, transparency, and interoperability.
A Blockchain Calibrated for Enterprise
Blockchain, the underlying technology behind cryptocurrencies like Bitcoin and Ethereum, has garnered attention for its decentralized and tamper-resistant nature. It operates as a distributed ledger, recording transactions across a network of computers in a transparent manner, while leveraging cryptography to remain highly secure and immutable.
However, in order for enterprises and other institutions to leverage blockchain technology, we need a blockchain that is carefully calibrated to adhere to modern financial communication and reporting standards. Enter ISO 20022.
Developed by the International Organization for Standardization (ISO), ISO 20022 is a comprehensive messaging standard that facilitates communication and interoperability between financial institutions. It provides a common language for financial transactions, covering everything from payments and securities trading to reporting and analytics. After several years of development, ISO 20022 launched in March 2023 and has since been adopted globally, with major financial institutions recognizing its benefits in standardizing and streamlining communication.
A Powerful Synergy
The integration of ISO 20022 with blockchain technology creates a powerful synergy, addressing some of the longstanding challenges in the financial sector, including:
Interoperability and Standardization
ISO 20022 already serves as a global standard for financial messaging. By incorporating it into blockchain protocols, we can achieve a new level of interoperability, allowing different blockchain networks to seamlessly communicate and share data, while also effortlessly interacting with existing financial infrastructure. This interoperability is crucial in a financial landscape where multiple systems coexist, and will help reduce friction and facilitate more efficient transactions.
Blockchain's cryptographic security features complement ISO 20022's robust messaging standards. The decentralized nature of blockchain significantly reduces the risk of single points of failure and cyberattacks, and the traditionally insurmountable costs associated with compromising a blockchain network make such an attack unlikely in the first place. Each transaction is cryptographically linked to the previous one, creating an immutable chain that enhances the security and integrity of financial data.
Traditional financial systems often face delays in settlement due to reliance on intermediary institutions, but the combination of ISO 20022 and blockchain enables near-instantaneous settlement of transactions. Smart contracts, self-executing contracts with the terms of the agreement directly written into code, can automate the settlement process, reducing the time and cost associated with traditional clearing and settlement systems.
The automation and efficiency gained through the integration of ISO 20022 and blockchain can result in substantial cost savings for financial institutions. Smart contracts can automate routine tasks, reducing the need for manual intervention and minimizing errors while making compliance less burdensome. Additionally, the elimination of intermediaries in certain processes can lead to significant cost reductions.
Blockchain's transparent and decentralized nature enhances visibility into financial transactions. Each participant in the network has access to a synchronized and immutable ledger, promoting transparency and accountability. This can mitigate the risk of fraud and improve regulatory compliance.
The combination of ISO 20022 and blockchain can also contribute to greater financial inclusion. Through its automation and cost saving advantages, blockchain extends access to smaller financial institutions and emerging markets, and allows them to participate in the global economy. This can help reduce barriers to entry and foster economic development in underserved regions.
Upending the Financial Sector… For the Better
The financial sector’s daunting complexity makes it fertile ground for innovation, and by pairing blockchain’s innovative technology with existing financial communication standards, we can make the transition to new infrastructure seamless and impactful. Blockchain’s history may be dominated by attempts to upend or circumvent the financial sector, but its future lies in its ability to improve it.
About Bob Ras
Bob Ras, an investor and serial entrepreneur based in Dubai, is renowned for his influence in technology, blockchain and manufacturing. He is a co-founder and partner at CoreNest Capital, co-founder of Sologenic, and also co-founded Coreum, a Layer-1 blockchain. Previously, he founded various manufacturing plants, including Hardex. His strategic skills have led to multiple successful exits. A recognized voice in the tech space, Bob frequently has been featured in esteemed publications including Reuters, Nasdaq TV, Blockworks , and Benzinga.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.