It’s a fact that there are new technological trends that are currently revolutionising the financial markets. The term Blockchain has become an everyday word in practically everyone’s vocabulary, as it refers to the technology being used by the banking sector to reinvent itself.
The emergence of cryptocurrencies has been one of the principal driving forces behind the increasing popularity of such profound concepts as Distributed Ledger Technology (DLT).
A common misconception is that DLT and Blockchain are one and the same. In spite of being created under the same concept, they are different technologies with very particular characteristics. Understanding them is simpler than you would think.
Distributed ledger technology is defined as a database that is present, or as its name suggests, distributed over several locations or among various participants. Some authors consider DLT to be any system in which information travelling over the network is shared and consumed by all participating members. This technology, which is considered decentralised, offers the capacity to connect computers located anywhere in the world, forming a shared network of data managed by the participants, without the need for third-party management.
On the other hand, Blockchain is a non-relational shared database where the inputs must be validated and encrypted. It represents an accounting ledger where all the transactions are recorded using asymmetric cryptography or hash functions. The information that travels through this structure is grouped into blocks; each one contains information on the other blocks in the chain, in such a way that when the data in one of these blocks is changed, it alters the information in the rest of the chain’s blocks. Thus, the immutability of the data is guaranteed, forming a distributed and decentralised network.
As mentioned above, there are notable similarities between both concepts. So what is the difference between these two technologies then? It’s very simple: Blockchain is just a specific form of DLT. However, not all DLTs are Blockchain, as there are other technologies based on distributed accounting.
A more notable difference is the level of decentralisation of Blockchain. This technology does not implement any figure to act as an intermediary for the transactions, rather it is the actual members of the network that decide on them. On the other hand, although the activity of a DLT is independent, its structure requires a necessary figure to determine the conditions governing it, therefore some authors consider it to be pseudo-decentralised. Moreover, the grouping of information in a chain is very characteristic of Blockchain.
Undoubtedly, both technologies have features that make them innovative and appealing on the current market, each one offering possibilities to be applied in diverse sectors.
What do these technologies offer the banking sector?
In the case of banking, the use of these technologies is highly attractive as they offer the capacity to authenticate, distribute, track and protect data more efficiently. In fact, the use of DLT in banking entities has enabled international transfers to be carried out in real time, as well as a greater cohesion between providers and customers. But the benefits are even greater.
There are increasingly more financed projects based on Blockchain in the banking sector, and because it is a system that isn’t based on centralisation and doesn’t have any authority that acts as an arbitrator, its functioning has an increased transparency, therefore any type of fraud is made more difficult. Hence the reason that they are capable of improving efficiency and changing the way activities in this sector are developed.
Therefore, these technologies have provided very clear advantages in sending times, paper and cost conciliation saving; improving the efficiency of the systems, permitting the automation of record maintenance, simplifying processes that with other technologies could be much more complex and making them a lot less vulnerable to human error.
In fact, the development of Blockchain based systems has permitted finding solutions that weren’t possible with the use of conventional practices. As is the case with billing as a method of inter-banking fraud prevention, presently allowing any user to access a data history and check if they have been modified, thus increasing process security.
They even enhance the processes of commercial financing, identity verification and loan management, and, as they are not controlled by international legal systems, they have revolutionised the banking industry and established new, more innovative business models.
But that’s not all. Convinced that digital money is the key to the future, banking institutions have also ventured into the creation of virtual currencies backed by real currencies constructed as tokens, with the aim of converting them into digital liquidation assets.
In fact, there are already entities working to make sure these digital currencies comply with all central banking regulations, in such a way that they have strong support to ensure their value does not depend on the use that users themselves give them, but on the support given by these central banking institutions.
This is why more and more financial entities are foraying into this world and using these tools, with the intention that it will foster their operations and lower their costs, acquiring greater agility and accuracy in their processes and increasing their security.
Despite the fact that these technologies and their applications are still in their initial phase in the banking sector, they have permitted the realisation of operations that were previously inconceivable, and have enabled the financial market to reinvent itself every day to meet users’ current needs. They are, without a doubt, technologies that we should keep in our sight, given that their future looks very bright.