Keeping financial records is a messy, complicated, and expensive nightmare. However, it is essential to keep these financial records in order for a global economy to function as they explain the value and success of the business.
The bulk of financial records are, nevertheless, redundant but still require onerous paperwork. Not only is this tedious, but it is also expensive human labor, and those costs often end up being the customer’s responsibility.
Blockchain technology is offering solutions to many of these problems. The technology that was originally designed for Bitcoin is now being put into use in the traditional financial world.
Inefficiencies Inherent in Financial Systems
The central problems that traditional financial systems face, which are problems that blockchain technology is able to fix are as follows:
- Antiquated: Financial records are still primarily physical paper. One reason is the current laws regarding confidentiality. However, this is a cumbersome and expensive process.
- Solution: Blockchain is an encrypted public ledger that keeps track of all changes made to contracts and transactions.
- Centralized: Financial systems are primarily centralized, as they are large banks and government factions. The reason for this is because when it comes to making deals and lending money, we rely on trusted third-party intermediaries. The problem is that centralized systems are insular, which means transparency is low, and these groups are slow to change.
- Solution: Blockchains are built on decentralized or partially decentralized networks of computers.
- Blockchains are also built to store any kind of document. That means records are public and encrypted, so they cannot be surreptitiously changed. All changes are recorded on the blockchain.
- Moreover, because blockchain uses consensus mechanisms and encryption, peer-to-peer operations are now safe.
- Exclusionary: Banks and governments are exclusionary, in fact, there are billions of unbanked people in the world. The reasons for this vary, but for many, it is an issue of wealth and physical access. If you do not have enough money some banks will not let you open an account. Or if you are too far from the physical bank, you may not be able to access it at all.
- Solution: Blockchain technology has seen the invention of many cryptocurrencies and micro-loans, primarily in the developing world. With only a cell-phone individuals are able to safely open bank accounts and make peer-to-peer digital transactions.
In order for global commerce to take place, companies and entrepreneurs need to be able to prove that they are fiscally viable and responsible entities. To do so, we require financial institutions and government policies to set the standards of success and responsibility and to maintain and enforce them.
Whether a company (or an individual) is starting up or expanding, banks need adequate reliable data to demonstrate that this is a good investment. This requires intelligent estimates which are based on data; such as the company’s cash-flow and stock value or price.
Moreover, valuations are based on comparisons between different companies. Although this seems like a reasonable process, it is important to recognize that this is a classic case of comparing apples and oranges. Different companies do not necessarily use the same metrics for accounting. This creates a problem, as it may mean that comparing two different companies is meaningless, as the values are subject to different standards.
People and Paperwork
Yet another problem with gathering all of the necessary financial data, is that it is based on paperwork kept by the company and banks. And this paperwork is far from perfect.
Corporate financial statements should read like a clear ledger of numbers and transactions. However, they are often based on estimates and personal judgments that may be very inaccurate. That is, not only does each individual company decide how to keep its own records, they can decide to “cook the books”; as it is commonly referred to. This is a real-life problem, as managers receive incentives that have been known to interfere with accurate record keeping.
Business with Blockchain
Blockchain platforms are proving ideal for: making and keeping contracts, storing records of transactions, and peer-to-peer trustless transactions.
Because blockchain uses ‘smart-contracts’, contracts are fulfilled with a unique code. The transactions are encrypted and so made securely. Smart-contracts are electronic contracts; that meant they are only fulfilled once all of the conditions of the contract are confirmed. If the code is incomplete or unsatisfied, the transaction is unfulfilled.
Encrypted transactions are the bread and butter of blockchain technology. Because with blockchain private information can be stored safely on an immutable public record. This makes blockchain ideal for storing records, and countries like Estonia have already moved to a fully digital bureaucracy.
That means that blockchain is ideal for storing money, equity, bonds, titles, deeds, contracts, and essentially anything of value. And because the information is encrypted and stored on multiple networks, theft of property and fraud are much less likely. This is especially good news for consumers, as the cost of economic and identity crimes typically end-up the burden of the consumer, rather than that of the company.
How Does Automation Help?
- Machines can work much faster than any human. This means algorithmic trading and machine learning are far better at making rapid decisions. Automation also reduces manual errors. Finally, algorithmic trading also takes into account news, social media, weather, and anything else that may affect the value of an asset.
- Machine learning means that computers are able to learn from successes and errors and improve on their own. This increases the potential for accuracy, as it once again removes human errors as well as specific biases.
- The more data that machines have the better they are able to perform. This includes stock market trades, which rely on accurate financial records.
A New Age of Interoperability
With the interoperability problem becoming less and less of an issue with the cross-chain communication that is now available the parts of blockchain that work well within a private blockchain network will be even better once scaled. When multiple chains can talk to one another the data involved becomes a powerful source with multiple outcomes.