On the back of substantial recent growth, the cryptocurrency market is now worth trillions of dollars. Much of that success comes from all the potential uses for its underlying blockchain technology. Because blockchains were first introduced with digital currencies, it makes sense that blockchain applications in finance are some of its most promising uses.
A simple explanation of blockchain is that it's a decentralized ledger that records transactions. For financial service companies, this technology could be a path to faster and cheaper transactions, automated contracts, and greater security. Although blockchain technology still has a long way to go for widespread adoption, it's already being used by quite a few financial institutions.
Uses for blockchain in financial services
Uses for blockchain in the financial services industry
Here are a few of the many uses for blockchain in the finance industry:
- Money transfers
- Added transaction security
- Automation through smart contracts
- Customer data storage
Let's take a closer look at how financial companies could implement blockchains for the uses above -- and why they'd want to.
Money transfers: From the beginning with Bitcoin (CRYPTO:BTC), blockchain technology was designed to move funds from point A to point B without a central governing body. As blockchains have evolved, they've been able to achieve much faster and cheaper transactions.
A prominent example is Ripple, the company behind XRP (CRYPTO:XRP), one of the largest cryptocurrencies in the world. It uses blockchain technology for RippleNet, a global payments network. RippleNet transactions process within five seconds and cost just a fraction of a cent.
Financial institutions that use blockchain technology could offer more efficient money transfers. International money transfers that can sometimes take hours or days could happen in a matter of seconds -- and without expensive fees.
Added transaction security: Financial companies are always targets for fraud. Digital payments, in particular, carry the risk of information being stolen during the transaction process when they pass through payment processors and banks.
Blockchains use cryptographic algorithms to process and record transaction blocks. This cryptography could be a way for financial companies to reduce the level of risk when processing transactions.
Automation through smart contracts: The launch of Ethereum (CRYPTO:ETH) in 2015 was a major step forward for blockchain technology. It was the first blockchain to have smart contracts, which are contracts that automatically execute when the conditions are met.
Contracts are a huge part of the financial services industry, and companies spend considerable time on them. A self-executing contract could make this process much more efficient.
Smart Contracts
For example, an insurance company could use smart contracts to speed up the claims process. When a client files a claim, it would be reviewed automatically by the codes programmed into the blockchain. If it's valid, the smart contract would execute and pay the client.
Customer data storage: Most financial companies need to go through an identity verification process with their clients to prevent fraud and money laundering. This takes time and money, but it's the cost of doing business.
An alternative would be to store customer data on a blockchain that various financial companies can access. After a company has gone through the know-your-customer (KYC) process with a new client, it would add that client's data to the blockchain.
Other companies could then use that KYC data instead of going through the process on their own. This would also save time for the client, who wouldn't need to go through the KYC process for every new financial account.
Impacts
Impact of blockchain on the financial services industry
With the advantages it offers, blockchain could have a massive impact on the financial services industry. Here are the main benefits of blockchain in finance:
- It can make the payment process more efficient. Many blockchains are capable of settling transactions in seconds at costs of $0.01 or less, saving money for both the financial companies and the customers involved.
- It can help financial institutions save on international transactions. Digital assets and decentralized finance (DeFi) systems built on blockchain technology could decrease cross-border transaction cost by as much as 80%, according to research by Boston Consulting Group.
- Since blockchains provide a distributed, inalterable record of transactions, financial institutions can use them for recordkeeping and reporting to regulatory agencies.
- The faster transaction settlements offered by blockchain technology can improve various types of financial services. Lenders will be able to fund loans more quickly, vendors will receive payments earlier, and stock exchanges can settle securities purchases and sales almost immediately.
Companies promoting the use of blockchain
Financial companies that promote the use of blockchain
Blockchain technology has been rapidly gaining acceptance in the finance industry. There are dozens of financial companies -- from smaller companies to the biggest names in the industry -- that invest in blockchain stocks and/or promote the use of blockchains.
Visa (V -0.08%) is one of the largest payment processors in the world, and it was also one of the first major financial companies to embrace blockchain technology. Here's how Visa has used and developed it:
- In 2015, Visa was part of a $30 million investment in Chain.com, a blockchain developer.
- In 2017, it launched Visa B2B Connect, which uses blockchain for international business-to-business payments.
- It has worked with cryptocurrency exchanges and platforms to launch cryptocurrency debit and credit cards.
- Visa became the first major payments network to settle transactions with cryptocurrencies in March 2020.
- It launched the Visa Tokenized Asset Platform (VTAP), which helps banks issue fiat-backed crypto tokens, in 2024.
JPMorgan Chase (JPM -0.47%), the largest bank in the United States, has researched and used blockchain technology to modernize its financial services. One of its most notable developments is Kinexys Digital Payments (previously known as Onyx), a blockchain financial infrastructure. It uses blockchain solutions to automate complex financial operations, and it has more than $2 billion in daily transaction volume.
Barclays PLC (BCS 1.12%) is a multinational bank that has done extensive research into blockchain technology in finance. It has tested the use of smart contracts to trade derivatives such as futures and options. If stock exchanges began using smart contracts for derivatives, it could cut down on the time it takes to set up these contracts. The bank also filed a patent application in 2018 to use blockchain in streamlining the KYC process.
Along with other big banks, Barclays is an investor in Fnality, a project to create digital currency versions of the U.S. dollar and several other major currencies. Its goal is to leverage blockchain technology for faster and cheaper transactions.
American Express (AXP -0.94%) is both a payment network and a financial institution offering credit and charge cards, banking, and loans. In recent years, it has worked on integrating blockchain into its popular Membership Rewards program.
American Express is a member of the Linux Foundation (LF) Decentralized Trust, a nonprofit organization that promotes open-source development for decentralized technology systems. It has also made investments into several crypto companies, including crypto trading startup FalconX in 2020 and web3 loyalty firm Superlogic (through Amex Ventures) in 2024.
Challenges
Challenges of implementing blockchain for financial companies
We've looked at the uses and advantages of blockchain in the finance industry, but there are also several challenges to implementing blockchain:
- For the best results, blockchains need widespread adoption. That's especially true in the financial services industry, where so many companies work with each other and need a method they can all use to handle transactions. To give a straightforward example, for banks to transfer funds using blockchain, each bank involved in the transfer needs to have adopted it.
- Adding to the previous challenge is a lack of interoperability between different blockchains, leaving them unable to communicate with each other. To solve this issue, several blockchain networks that focus on interoperability solutions are in development, including Polkadot (DOT -3.2%) and Cosmos (ATOM -4.12%).
- It can be expensive and time-consuming to switch to blockchain technology, especially since skilled blockchain developers are in short supply. Some finance companies, particularly smaller ones, may be reluctant to commit to overhauling systems already in place.
- Blockchain data can't be altered. Although this is a benefit of using blockchain, it also has drawbacks for financial companies that often need to modify stored data. To implement blockchain, these companies would need to adjust their methodology.
- Since blockchain technology is relatively new and developing so quickly, there's an ever-shifting regulatory landscape -- and regulators haven't caught up yet. Governments will continue to implement new policies affecting blockchain and the companies using it.
The future of blockchain in finance
While blockchain technology has been around for well over a decade, we're still in the early stages of its uses in the financial services industry. For investors, there are a few points of emphasis to monitor.
Transaction processing will play a significant role in how widely used blockchains are. Earlier blockchains have been limited in this regard. Bitcoin only processes about three to seven transactions per second (TPS), and Ethereum processes about 12 to 15. That's not nearly enough to compete with major payment processors like Visa, which can handle about 1,700 TPS.
More recent blockchains have prioritized scalability with faster transactions. The most notable cryptocurrency project in this regard is Solana (CRYPTO:SOL), which regularly handles over 4,000 TPS and can potentially process 65,000.
Another interesting development is a shift toward interoperability. Most early blockchains were self-contained projects. Multiple projects have since emerged with the goal of facilitating communication between those various blockchains.
The combination of artificial intelligence (AI) and blockchain technology is also a promising potential development. Both types of technology can work well together, and financial companies that effectively leverage the two could stay a step ahead of their competitors.
Blockchains won't completely replace existing financial systems anytime soon. Implementing blockchain technology also comes with its difficulties. Despite the challenges, hundreds of financial companies have started using it, and blockchain stocks have become popular investment opportunities. It's clear that the industry understands the potential advantages and that blockchain will be a growing part of financial services going forward.
