What Is Blockchain, and How Has It Shaken Up Financial Markets?

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A financial trader reads a cryptocurrency market graph on a computer.

When Bitcoin made its debut in 2009, it brought awareness to blockchain, the technology used to confirm cryptocurrency transactions. Fast forward to 2022: Blockchain technology is now a nearly five billion dollar market that has been disrupting industries around the world, including health care, technology and transportation.

The financial services market is no exception. Among other benefits, blockchain promises a secure method to safeguard financial markets from attacks both internal and external. Cybersecurity experts in the financial services industry need to understand blockchain and how it impacts the sector.

Advanced degree programs with coursework in blockchain are a great way to keep up with this new technology.

What Is Blockchain Technology?

Blockchain is a form of distributed ledger that is shared across a computer network. When a block of information is added to the ledger, it gets attached to the block before it and assigned a hash, or digital ID. Once a block is entered in the ledger, it can’t be edited, only recorded. Blockchain is used to validate and secure transactions across a distributed network, safeguarding sensitive data from being altered or stolen. The ledger becomes the final say on the data. Cryptocurrency relies on blockchain to ensure that e-coin transactions are accurate and legitimate.

Blockchain technology has many benefits. Advantages include:

Security

Blockchain is a highly secure method of safeguarding sensitive data. First, the data is encrypted using public key cryptography. Because the chain is distributed across a network rather than residing on a single server, the data can’t be lost to an electrical or mechanical failure or a physical attack. Because of the digital signatures of each block and the way the blocks are linked in a chain, data can’t be easily hacked. Hackers would have to compromise every block in the chain on every computer in the network.

Transparency

Although the data stored in a block is encrypted, each transaction in a blockchain can be viewed on publicly available search sites. Further, everyone in the network agrees that the transaction information is exactly what it’s supposed to be. This decentralized control means no single entity has the final say on the data. When recording cryptocurrency transactions, blockchain uses consensus mechanisms to confirm that a transaction is valid.

Efficiency

Blockchain is highly efficient at recording data transactions. Block time, as transaction time is called, can vary depending on the specific transaction. However, blockchain operates around the clock, and doesn’t stop based on local time or business hours. This makes blockchain an effective way to keep ahead of millions of transactions.

Auditability

A blockchain transaction is unchangeable. This means blockchain audits are much faster and easier to perform than standard audits, making blockchain an increasingly popular choice for financial transactions. According to accounting services giant Deloitte, auditors can view blockchain transactions on public ledgers without having to collect financial statements from clients. Since blockchain transactions can be validated quickly, they also eliminate the long wait for financial transactions to clear that can take several hours, days or even months.

How Is Blockchain Disrupting Financial Markets?

Due to the advantages of blockchain, the financial sector is investigating the ways in which it can be adopted. Lowering transaction costs, speeding up the time it takes for transactions to clear and, perhaps most importantly, safeguarding sensitive data are all potential game changers for the industry. Some of these applications include:

Banking

Cryptocurrency competes with fiat currency, or currency that is backed by a government. Central banks such as the Bank of England are investigating creating their own e-coin backed by blockchain to compete with other cryptocurrencies as well as with credit card networks. Other uses for blockchain in banking include:

  • Security. Safeguarding account-holder data can prevent fraud and keep credit cards from being compromised.
  • Remittances and international money transfers. Blockchain is faster and more efficient at recording transactions than standard banking technology and isn’t held up by cross-border transactions.
  • Asset accuracy. Blockchain can ensure the up-to-the-minute accuracy of a bank’s assets (its loans) and its liabilities (its account-holder deposits).

Stock Markets

The stock market is highly regulated, which slows down transactions and creates a barrier for buyers and sellers. Proponents of blockchain say that its distributed nature can speed up transactions while safeguarding data and eliminating the potential for fraud. Uses for blockchain in this industry include:

  • Preventing market manipulation. Nasdaq is providing blockchain trading technology to cryptocurrency exchanges that tamps down on market manipulation, which is commonly used to drive up prices.
  • Speeding up trade settlements. Settling a trade can take three or more days and up to a month for some transactions. Blockchain can reduce the process to hours.
  • Tokenization. Tracking assets such as stocks, real estate and gold can be cumbersome. Tokenization converts a stock share or other asset to a digital token that can be logged into a blockchain. Any transaction involving the token can take place on the network, without the need for a stockbroker’s commission.

Financial Services Technology

The financial sector that blockchain may adversely impact the most is the financial services industry. Financial advisory firms make money from fees. Blockchain bypasses the need to go through firms to make transactions, thus cutting off that source of fees. However, financial services companies that invest in blockchain technology can recoup some of that loss of income by using the technology to replace traditional financial processes.

Some of the ways that blockchain will revolutionize financial services are:

  • Bypassing banks. Investors can manage their digital assets outside of the banking system, eliminating the need for banks.
  • Know your customer (KYC) technology. A great deal of financial services technology, or fintech, is devoted to validating customers, investments and transactions. Blockchain’s cryptography and transparency attributes will replace KYC technology.
  • Streamlined payments and transfers. Cross-border banking is fraught with transaction fees. Blockchain bypasses the international banking system, so money can flow more easily.

Cybersecurity’s Role in Blockchain

The financial services industry is vulnerable to hacking and ransomware attacks, as some high-profile attacks have shown. According to a survey by the data security firm Sophos, 34% of respondents reported a ransomware attack in 2020, and, of those, just over half reported that hackers successfully encrypted their data.

Cybersecurity professionals who work in the financial services industry must stay current on the threats, industry regulations and technology they need to prevent attacks. Some of the benefits of blockchain for cybersecurity are:

  • Preventing malware infections. Blockchain can be used to verify software downloads and updates.
  • Protecting data transmission. Encryption protects transactions.
  • Cloud storage. Decentralized storage prevents attacks on physical servers.
  • Preventing distributed denial of service (DDoS) attacks. Blockchain-distributed architecture means that no single point of access is vulnerable to DDoS attacks.

However, blockchain isn’t meant to be “one and done.” Even with the safety features and transparency of a distributed network, malicious actors can still penetrate these defenses. And the structure of blockchain does have some disadvantages for the financial services industry.

  • Coordinated attacks. Since the cryptocurrency market was founded in 2009, there have been several thefts of Bitcoin and Ethereum. If a group of hackers gains 51% control of the peer-to-peer network, it can alter the digital ledger.
  • Scalability. Blockchain works around the clock, but large transactions can take a long time due to its distributed network architecture. It may not be able to scale up to handle the large volume of transactions that PayPal or other financial services firms deal with.
  • High operating costs. Blockchain is an energy-intensive process and can be costly compared to other technologies.
  • Private key vulnerability. Blockchain relies on private keys. If these keys are lost or stolen, data or assets can’t be recovered.
  • Government regulations. The financial services industry is highly regulated. Blockchain is not. Depending on the application, blockchain may not meet regulatory standards.

Be a Part of the Future, Today

What is blockchain, and how can cybersecurity experts use it to protect financial markets? The University of Nevada, Reno’s online Cybersecurity, Master of Science offers coursework in cryptography, blockchain and cybersecurity law to provide students with expertise in this emerging field. Learn more about how the program can prepare you for a rewarding career at the forefront of digital technology/

Recommended Reading:

How to Become an Information Security Analyst

How to Become a Cybersecurity Analyst

Why Is Cybersecurity Important?

Sources:

Deloitte, “Blockchain: A Game Changer for Audit Processes”

Finextra, “Accelerating the Fintech Revolution: How Blockchain Will Change Finance Technology Forever”

Forbes, “Trends in Blockchain: Why Big Banks Are Adopting This Technology”

GeeksforGeeks, “Role of Blockchain in Cybersecurity”

Grand View Research, “Blockchain Technology Market Size, Share & Trends Analysis Report by Type, by Component, by Application, by Enterprise Size, by End-Use, by Region, and Segment Forecasts, 2021-2028”

International Journal of Management, “Digital Stocks Using Blockchain Technology the Possible Future of Stocks?”

Investopedia, “Blockchain Explained”

Investopedia, “Blockchain Technology to Revolutionize Traditional Banking”

Investopedia, “Block Time”

Ledger Insights, “Nasdaq Wants to Be a Blockchain Tech Disruptor”

PWC, Blockchain in Financial Services

Sophos News, “The State of Ransomware in Financial Services 2021”

Statista, Blockchain Use in Banking and Financial Services Market Size Worldwide in 2018 and 2019 with a Forecast to 2026

Technological Forecasting and Social Change, “How Blockchain Can Impact Financial Services — The Overview, Challenges and Recommendations from Expert Interviewees”

U.S. News & World Report, “How Blockchain Can Transform the Financial Services Industry”

WNS, “How Will Blockchain Revolutionize the Global Financial System?”