By Micky P
By 2027, at least 10 percent of the GDP will be blockchain-related, according to the World Economic Forum.
Blockchain may have taken birth as a means to support cryptocurrency but the technology has its applications spread out far and wide today. The above statistics reflect that the technology has the potential to positively impact money transfers, financial exchanges, insurance, real estate, NFTs, logistics and supply chain, IoT, and lending. Talking about the latter, blockchain technology is reshaping the lending ecosystem by allowing the lender and borrower to establish a direct deal through decentralized financing. Other than smart contracts, blockchain allows financial transactions to be transparent and highly secure, which makes it the next big thing when it comes to the global financial system.
What are Smart Contracts?
Smart contracts are nothing but self-executing electric codes that come with their transaction rules such as the loan amount, interest rate, and contract’s expiry date. Once the conditions set for them are met, these rules execute themselves, thus, eliminating the requirement for a third party. Anyone is eligible to secure a loan in exchange for crypto assets on a decentralized finance platform and that makes the process highly inclusive other than already proving to be more efficient, offering higher execution speed and a lower cost of the transaction.
Blockchain’s enormous scope to cut down labour and other costs is resulting in some of the biggest financial institutions spending huge sums to explore the best way to implement the technology.
Traditional vs Modern lending
The traditional lending scenario involves an intermediary i.e. if a borrower wants money, he will approach a bank and receive a loan in exchange for jewellery or property, etc. On the other hand, a bank would earn interest. But over time, lending has undergone a sea change. With technological disruption across every sector, even the entire lending ecosystem has seen a facelift.
Blockchain has made financial management bankless with digital wallets, lending, and payments. Supported by blockchain, digital wallets are fully secure as they come integrated with private keys while their unique public address lets them make transactions efficient. While in a traditional scenario, banks have the responsibility of securing money, under blockchain technology, wallet holders with private keys are able to fully own, manage, and control their assets.
Preventing Risks and Frauds
In the last 24 months, 46% of surveyed organizations reported experiencing fraud, corruption, or other economic crimes, according to the PWC’s Global Economic Crime and Fraud Survey 2022.
Financial organizations usually save their data in a central database, making themselves extremely prone to cyberattacks. But blockchain being a decentralized ledger, allows real-time fraud analysis and prevention. This is because every block comes with a timestamp, securing blocks of distinct transactions while possessing a link to a previous block. This makes the system foolproof from cybercrime. Thus, the lending industry needs full implementation of blockchain technology to make it secure, efficient, and transparent.
Know Your Customer (KYC)
KYC is another very crucial aspect of the lending industry, which has to cross-check and authenticate the customer documents before beginning the loan process. Financial institutions can do this easily by saving a customer’s KYC documents on the blockchain. This allows other institutions to use the same KYC without having to go through the entire process again. And because the data on blockchain is tamperproof, the reliability is extremely high.
Time-saving, secure and cost-effective
People often wait for a long time for financial institutions to approve loans and transactions. Other than charging a huge fee for the same, institutions have the ultimate authority to approve or reject transactions between a sender and a receiver. However, with blockchain technology in place, the role of an intermediary is eliminated which makes the approval time reduced to less than a day. Therefore, the technology is economic, secure, and fast when compared to banks. Blockchain also reduces the dependency on physical documentation which can often invite fraudulent activities while smart contracts cut service and administration costs.
As we step into the future, there is a strong need to innovate and upgrade the centralized banking ecosystem and pave way for a futuristic, secure, reliable, transparent, and efficient way of taking and receiving credit. It is also time to upgrade the rules which are in tune with the current technology and trends and which have the potential to bring about a change in the current credit industry.
The author is co-founder and chief technology officer, The Fair Trust