The financial industry continues to lead in blockchain adoption by making significant investments in the technology and expanding its use of it.
A 2022 study from FTI Consulting, "The State of Blockchain Technology and Digital Assets in Financial Services," spoke to that point. It found that the majority of leaders in financial services organizations consider investment in blockchain technologies a high priority for their business in the next 12 months and that 85% have a positive overall outlook on the future impact of these technologies.
Meanwhile, Global Industry Analysts, in its 2023 "FinTech Blockchain: Global Strategic Business Report," estimated that the global market will grow from $1.4 billion in 2022 to $43.1 billion by 2030.
That explosive growth comes as companies in the financial sector find more ways to use blockchain to support existing products and services as well as enable new ones. Here's a look at 10 blockchain use cases in the financial industry that showcase the promise and potential of the technology.
1. Faster, cheaper, and more secure financial services – and at larger scale
Because blockchain enables immutable transactions effectively in real time, experts credit it with offering a faster, more secure and highly scalable way to handle nearly all the traditional services offered in banking and financial services, such as money transfers, peer-to-peer payments and trade finance.
Moreover, because blockchain reduces the need for intermediaries, such as transfer agents, and is nearly 100% tamper proof, experts say it can handle financial services at dramatically lower costs while nearly eliminating fraud.
Blockchain also provides more transparency, which can heighten trust and security while reducing friction in transactions.
Furthermore, blockchain supports the creation and use of digital identities, which can add even more trust and security to financial transactions by ensuring the validity of participating parties.
Contrast that with conventional processes in the financial sector. Financial institutions traditionally work as intermediaries to move payments between different entities, which involves complex and time-consuming processes that add friction to transactions.
Blockchain can streamline these processes -- notably reconciliation as well as clearing and settlement -- by removing the friction, thereby reducing the time and cost that financial institutions incur.
Similarly, the financial industry can use blockchain to eliminate the manual processes required to collect and share the documents often required for transactions, such as custom forms and insurance policies.
2. Collateral management
Blockchain has proved useful for collateral management as well as commodity tracking and tracing.
For example, a lending company processing a large loan for a corporate client with multiple assets could more easily collect and manage the assets being used as collateral and do so in real time, explained Ronak Doshi, a partner at Everest Group, a research firm.
In other cases, companies could use blockchain to track and even trade commodities as they move through a supply chain. They also could trace the chain of custody for insured commodities -- a particularly useful capability in insurance claims for gaining visibility into when and where losses occurred.
The issuance of stablecoins is another area of interest among financial institutions. Stablecoin is a type of cryptocurrency, a class of encrypted digital currencies such as Bitcoin.
Unlike other cryptocurrencies, the value of a stablecoin is tied to another currency, commodity or financial instrument.
The goal is to provide a more stable valuation to investors than is provided by other types of cryptocurrencies, which historically have been volatile.
"Stablecoin is incredibly efficient, liquid and completely digital," said Paul Brody, a partner at professional services firm EY and its global blockchain leader.
4. Tokenization of real-world assets
Blockchain also enables real-world assets to be tokenized, which in turn enables fractionalized ownership.
"You can tokenize anything of real-world value, from real estate to private equity," said Lata Varghese, managing director of digital assets and blockchain solutions at the consulting firm Protiviti.
Tokenization helps owners more easily sell or trade their fractionalized assets or use them as collateral on loans.
In May, Bank of America reported that it sees the tokenization of real-world assets as a key driver of digital asset adoption.
5. Virtual world transactions and reward tokens
Many expect blockchain to be an essential component of the virtual world of the metaverse, as it can enable the digital financial transactions that are expected to take place there.
Doshi said blockchain also enables the use of participation and reward tokens on metaverse and metaverse-like platforms, whereby companies could award tokens to visitors to their virtual locations for participating in events or as rewards that could then be redeemed, like the cash-back rewards of retail loyalty programs and credit cards.
6. Crypto staking
Another emerging blockchain-created financial tool is crypto staking, in which owners of crypto assets agree to lock their assets for a set amount of time, which then supports the operations of a blockchain. They can then stake part of their assets for the opportunity to validate new transactions on the blockchain and add new blocks. When they validate legitimate transactions, they earn more crypto assets in return; if they validate fraudulent transactions, they lose some or all of what they stake.
However, Brody said securities-related legal and regulatory questions have come into play, making the future of crypto staking uncertain.
7. Invoice factoring
Another financial service enabled by blockchain is invoice factoring.
Factoring lets companies borrow against accounts that are due and is often used when organizations need to raise money quickly, Brody explained.
Companies can borrow against accounts receivable -- such as unpaid customer invoices -- through conventional channels. However, the effort associated with these transactions can be costly and time consuming, with much of the work focused on ensuring the accounts receivable are legitimate and calculating the value of each transaction.
Blockchain proponents say it can reduce costs and the potential for fraud, thereby potentially making this financing option more favorable for the parties involved.
8. Supporting new types of B2B networks
Because blockchain establishes trust between multiple parties, it can be used to extend ERP functions, such as inventory tracking and financial settlement, beyond the walls of individual organizations in a new type of business network called network resource planners. Everest Group described NRPs as a "blockchain-based software system that helps manage data and processes across multiple stakeholders in a business network" and enables organizations to deliver a more cohesive customer experience.
"We're seeing that there is a way for enterprises to come together to solve customer issues and create a better customer experience," Doshi said. "The only way to bring them all together is with a foundational infrastructure. Blockchain fits beautifully in this."
9. Facilitate and track data flow in a financial institution
Although blockchain is often championed for enabling trust between different organizations, financial institutions are beginning to use it to create trust between internal departments. Blockchain leaders said they have seen increased internal use of blockchain because it offers firms value for moving intracompany data as well as for protecting customer data and complying with regulatory requirements.
For example, some organizations are using blockchain to facilitate intracompany payments where financial information flows from one ledger to the next, with the technology creating more transparency into capital and liquidity.
Additionally, some organizations are considering blockchain for know-your-customer activities to ensure customer data is consistent and current throughout the organization, which is particularly critical when financial institutions use customer data to decide which risks to assume.
Large banks, for instance, often have multiple systems for customer records -- two dozen or more, in some cases. Having customer information spread among systems increases the chances of unintentional data discrepancies and intentional misrepresentations, both of which could negatively impact business.
Blockchain can counter such issues by ensuring data is current on every system and creating an audit trail of changes made to customer data.
Similarly, financial institutions can use blockchain for data lineage to assure for themselves and regulators that there's an auditable trail from the data's point of origin to its end state.
10. Paper currency replacement
If the world wants to move away from physical currency -- paper bills and metal coins -- and the problems and inefficiencies associated with it, it will likely need a distributed network like blockchain to make that happen.
According to experts, financial institutions have expressed a high degree of interest in this blockchain use case. Financial leaders believe such a move will further reduce friction and create more transparency, which will then speed transactions, generate further cost savings, increase security and reduce financial crimes.
They noted the work already happening with blockchain in the financial industry is moving the global economy in that direction. While it's unknown when the world will abandon physical currency for digital assets, many leaders believe it isn't far off.
Consider, for example, findings from Deloitte's 2022 "Merchant Adoption of Digital Currency Payments Survey," in which 85% of surveyed organizations said digital currency payments will be ubiquitous in their industry in five years, with the same percentage expecting their suppliers to accept stablecoins and cryptocurrencies.
Additionally, 64% said they see significant customer interest in digital currency, with another 32% seeing moderate customer interest.
According to the survey report, "Although digital currency payments may not yet be an everyday occurrence for the average customer, overall interest in digitally native solutions is significant, especially among younger generations."