How Blockchain Technology Is Impacting Financial Planning
Blockchain technology, the technology that keeps cryptocurrency secure, has come a long way since its inception. Today, the technology doesn’t just power popular cryptos like bitcoin and ethereum — it is also the vehicle for storing and trading non-fungible tokens (NFTs) and supporting the tokenization of real estate and fine art.
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Blockchain is faster and more secure than traditional transactional methods and is playing a tremendous role in financial planning and wealth transfer, which only promises to grow with time. For instance, the market for tokenized assets could reach $2 trillion to $4 trillion by 2030, according to a recent McKinsey & Company report. This is a far cry from numbers of $10 trillion previously projected by Boston Consulting Group. McKinsey reported that we may see the most growth in assets like mutual funds, bonds, ETFs and loans.
“Blockchain technology is still in early days and requires a material amount of integration with existing processes and standards,” Anthony Moro, CEO of Provenance Blockchain Labs, told CoinDesk. “Most institutions recognize tokenization needs to be a large part of their business moving forward, but technical integration is where the rubber meets the road.”
Here’s a look at the role blockchain might play in key areas of financial planning.
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What Is Blockchain Technology?
First, let’s back up for a quick review of exactly what blockchain is and how it works.
Blockchain is, essentially, a permanent, shared record book in digital form, or a decentralized ledger of transactions conducted over peer-to-peer networks. The ledger tracks transactions and also aims to build a consensus about whether the transaction data is valid. With blockchain technology, users can confirm transactions without requiring a central clearing authority.
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Why Is Blockchain Important?
Blockchain aims to deliver stored information immediately and transparently on a ledger that can be accessed only by network members. Members share a single view of orders, payments, accounts and other information, which helps build trust, efficiency and financial opportunities.
Blockchain eliminates the need for central recordkeeping, and because the ledger is made public, everyone involved can easily gain access. This transparency helps accelerate the verification process, reduce the need for back-office functions, and promote security.
How Does Blockchain Work?
One key element of blockchain is that every transaction requires a security measure to protect the identities of transacting parties. To secure transactions of bitcoin and other cryptocurrencies, two keys are required — a private and a public key.
The public key is shared permanently in the log. It can be used to sign and encrypt a message. The private key is only known to users and acts as a pin code. A recipient uses this key to decrypt a transaction. The technology introduces speed, efficiency, security and reduced costs, albeit at the expense of tremendous environmental impact.
Processing transactions on the blockchain requires sophisticated computers that tend to be energy hogs. If this drawback can be addressed, we will undoubtedly see blockchain play an even larger role in financial planning. Here are a few ways it’s being used today.
Tokenization of Real Estate, Commodities, Fine Art and Illiquid Assets
Investors in fine art, commodities and real estate face several challenges. When you invest in art, you need a place to store and preserve the pieces, as well as insurance to protect it. By creating NFTs of artwork, these assets can be easily tradeable. They can even be duplicated, although this will diminish their ultimate value.
Tokenizing real estate via blockchain technology enables investors to deal in fractional shares, making investing in high-rise apartments or other commercial real estate more accessible to retail investors.
Streamlining Loan Funding and Dividend Payments
Smart contracts operate on the blockchain, with the terms of the agreement written into the code. Smart contracts eliminate the need for intermediaries for loan issuance or dividend payments. Blockchain can facilitate faster loan funding, as well as automatic dividend payments at faster speeds and lower costs.
Facilitating Faster Cross-Border Transactions
Because blockchain transactions are deregulated — without a central government authority behind them — cross-border transactions can take place quickly and seamlessly, with lower fees, according to a LinkedIn Pulse article by Charles Lau of Digital Perpetual.
P2P Lending Platforms and Crowdfunding
Likewise, blockchain is playing a role in facilitating peer-to-peer lending and crowdfunding transactions. Its security, transparency and speed can facilitate transactions at faster speeds and lower costs, with a smaller risk of fraud.
Whether you’re launching a business or seeking to invest in start-ups, blockchain can make it easier and more accessible.
Final Note
As much as blockchain has evolved this century, the technology is still in its relative infancy. As younger generations explore the possibilities, cryptocurrency, NFTs and other tokenized assets could play a large role in the transfer of generational wealth.
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This article originally appeared on GOBankingRates.com: How Blockchain Technology Is Impacting Financial Planning