The Importance of Blockchain in Fintech: Key Uses and Benefits

Blockchain technology has become increasingly popular with the advent of cryptocurrencies after the Great Recession of 2008. This technology is the backbone of cryptocurrencies, allowing them to function over a peer-to-peer, decentralized network. 

But the industry is constantly making advancements, and beyond crypto, innovators have found new uses for blockchain technology. Banks, financial institutions, and financial service providers are exploring ways to implement blockchain solutions into their internal systems. 

What Is Blockchain in Fintech?

Blockchain is an advanced database that permits transparent information sharing within a network. In the crypto realm, blockchain is the network that validates purchases and produces a distributed ledger that accounts for all processed transactions. 

Blockchain technology promotes transparency and security for digital payment structures. In the financial technology (fintech) sector, blockchain technology can reduce costs, eliminate intermediaries, and boost the efficiency of financial services. 

For example, banks can rely on blockchain networks to allow their customers peer-to-peer (P2P) lending. Through a smart contract, the blockchain can automatically enact and enforce loan agreements between two parties. Financial institutions can even create a proprietary blockchain network to streamline data verification, disbursement, and claims processing. 

Use Cases of Blockchain Technology in Fintech

Blockchain technology has a wide range of use cases in fintech. Here are some of the most common ways financial service providers utilize blockchain technology. 

Cross-Border Payments

Blockchain platforms enhance cross-border payments in fintech, which helps reduce costs, increase efficiency, and improve financial security. Specifically, financial institutions can use blockchain technology to efficiently process remittances between two countries. 

For example, El Salvador received over $6.9 billion in remittances from the United States in 2022. In order to improve transaction speed and cut down on costs, El Salvador created their own Bitcoin wallet. 

All El Salvadorans now have access to a Chivo Wallet, which increases the accessibility of international money transfers. 

Cryptocurrency

Blockchain is the technology that allows cryptocurrencies to exist. For example, if a person uses Bitcoin (BTC) to buy a cup of coffee, the moment they authorize the payment, a public blockchain network will process the transaction. 

Anonymous entities across the network, called miners, verify the transaction in exchange for payment in Bitcoin. The blockchain itself, a decentralized and immutable ledger, records and securely stores all transaction records. 

This reinforces financial transparency and security for everyone who uses cryptocurrencies. Blockchain also plays a part in enabling micro-payments. Anyone wanting to pay regularly for online content, such as articles, videos, music, and games, can do so efficiently and economically.

Tokenization

Tokenization refers to the process of assigning a digital representation for an asset over a blockchain network. In other words, it’s the activity of providing tokens for a digital asset.

Blockchain provides distributed ledger technology (DLT) to build a tokenization system from the ground up. It’s especially useful in the world of fractional ownership and digital asset management.

For example, organizations can use blockchain technology to assign non-fungible tokens (NFTs) for real-world assets (RWA), like auctioned artwork. By creating a decentralized ledger, shareholders can prove their ownership and maintain their equity shares.

Digital Identity Verification (KYC and AML)

Financial service providers that deal in crypto usually employ two verification methods: Know Your Customer and Anti-Money Laundering security protocols. Both serve to verify the identity of a customer and ensure they aren’t funding any international criminal schemes. 

Blockchain technology makes all recorded information auditable, traceable, and verifiable within seconds. What’s more, individuals can create profiles that show their transaction history and integrate with financial partners. 

If a customer wants to take out a loan at a bank, for example, the financial institution can verify their profile instantly. 

Improved Regulation and Auditing

Countries across the world are closely monitoring and regulating digital assets. Financial institutions have to abide by domestic and international crypto regulations to avoid global scrutiny and strict penalties. 

With blockchain-based technology, banks and financial institutions can automatically keep records of all crypto transactions within specific time frames. This provides peace of mind to financial organizations navigating government audits and regulatory reporting.

Decentralized Finance (DeFi)

Since the Great Recession, many in the general public have become suspicious of banks, fiat currencies, and world governments. This has led to an innovative phenomenon called decentralized finance or DeFi.

Blockchain is the driving force behind the innovation and disruption of DeFi platforms throughout the world. It makes DeFi possible by providing an unchangeable ledger and miner network to process peer-to-peer payments. 

No single entity or person manages decentralized crypto exchanges. Instead, they allow people to buy and sell cryptocurrencies like Bitcoin and Ethereum (ETH) across a peer-to-peer network. 

Non-Fungible Tokens (NFTs)

NFTs allow for fractional ownership of artwork and other digital assets, something that wasn’t possible before. When established on a blockchain network, NFTs can represent a wide range of unique assets, such as art, digital content, or media.

You can think of an NFT as a digital certificate of ownership. No external force can revoke or alter it — in fact, most NFTs are part of the Ethereum blockchain network. 

Supply Chain Management

By design, blockchain is tamper-proof and provides a secure and reliable way for organizations to automatically record data. As such, blockchain technology has become highly valuable in supply chain management. 

Local and global supply chains can be complex and often involve participants who don’t inherently trust each other. With blockchain technology, fintech companies operating within a supply chain can maintain access to an immutable ledger to view and validate financial transactions in real time.

The Benefits of Blockchain Technology in Fintech

As you can see, many banks and financial institutions rely on blockchain technology to improve their operations. Here are some of the benefits they hope to realize in doing so.

Improved Security and Fraud Prevention

Due to the technology’s decentralized and immutable nature, it’s virtually impossible to tamper with blockchain records. With increased regulation and enhanced security protocols in the blockchain industry, it may one day be difficult for criminal and terrorist organizations to launder money. As a result, financial institutions can use private blockchain networks to promote transparency within their organizations. 

Enhanced Transparency

Since blockchain contains an immutable ledger, it could be helpful in reinforcing transparency in the financial sector. 

Better security promotes more trust in banking systems, which creates a better customer experience. When financial institutions hold themselves accountable for their activities, more people are likely to do business with them. 

The Federal Deposit Insurance Corporation (FDIC) even says they are committed to transparency because “it helps maintain trust in the safety and soundness of the banking system. It increases participation among the public, it leads to more stable economic growth, and it reduces conflict.”

As the crypto industry continues to grow, many governments are enacting strict regulations to improve consumer confidence and reduce fraud. As such, transparency is a vital aspect of operations for crypto exchanges and other crypto-related businesses.

Fortunately, blockchain provides these businesses with a way to automatically record financial transactions to maintain compliance. 

Increased Efficiency and Automation

Blockchain networks usually operate on smart contracts. These are programs stored on blockchain networks that are designed to carry out specific functions. Smart contracts run complex algorithms automatically when a condition is met. 

Because blockchain applications are automated and entirely digital, there is no paperwork involved. This cuts down on logistical and transaction costs while also decreasing the risk of costly errors.

Financial Inclusion

Blockchain technology fosters financial inclusion, particularly by providing access to financial services for the unbanked and underbanked populations. Since blockchain is the backbone of cryptocurrencies, it’s essential to provide all kinds of people with access to digital currency. 

Anyone, including those who may not qualify for a traditional bank account, can access cryptocurrencies and digital assets backed by blockchain technology.

What Is the Future of Blockchain and Fintech?

Blockchain is a versatile technology that has applications across any traditional and modern banking infrastructure. In the future, it’s possible that this technology will fuel the development of central bank digital currencies in the financial industry. 

Financial institutions may also turn to blockchain to run their loyalty programs. With an immutable ledger on hand, companies and startups can reduce operational expenses (OpEx) and manage more efficient loyalty programs in comparison to traditional methods. 

Embrace the Future of Blockchain in Fintech With AlphaPoint

The fintech industry is using blockchain technology more than ever to leverage cryptocurrencies, digital assets, and banking systems. 

A blockchain can serve as a private or public network executed by smart contracts, meaning you can set up and configure your own blockchain network for your organization. You can use this network to create your own digital tokens or start a loyalty program for your customers. 

If you plan on offering crypto services, you will benefit from investing in white-label software. This is where AlphaPoint comes in with solutions you can start implementing right away. 

To learn more about AlphaPoint’s white-label solutions, request a demo today.