The Future Of Financial Services: Virtual Currencies, Distributed Ledgers, And Blockchain

Virtual currencies should be distinguished from the underlying distributed ledger technologies. To ensure investor protection, Bitcoin and other cryptocurrencies must be subject to strict financial regulation and supervision. Simultaneously, distributed ledger technologies will shape the future of financial services in a variety of ways.

The financial services industry’s digitisation is transforming the supply chain of banks, insurance companies, and other financial service providers. As a result, established players must reinvent themselves by redesigning product offerings, modernising IT infrastructure, and restructuring the value chain.

Bitcoin, Blockchain And Distributed Ledgers

Blockchain technology was initially created as a platform for virtual currencies. Bitcoin and other cryptocurrencies are not money in the traditional sense. Rather, they are units of the account used as a means of exchange in multilateral private networks where users agree on the mutual acceptance of such virtual currencies. Financial supervision authorities are generally not required to approve their introduction and use as long as their use is limited to private agreements and no additional services, such as the operation of exchange platforms or brokerage services, are introduced.

Cryptocurrencies enable the initiation and execution of direct payments of virtual currency units from senders to receivers almost in real-time and without financial intermediation. These web-based payment systems use cryptographic methods to conduct payments securely, quickly, and affordably over a peer-to-peer computer network.

Bitcoin is the first and most widely used cryptocurrency. All bitcoin transactions are recorded in a distributed ledger, summarised in transaction blocks, and interconnected in such a way that a complete and tamper-proof chain of exchanges and the respective blocks (blockchains) is generated. At any point in time, any network user can view and validate any transaction in the blockchain. However, the owner of the bitcoins’ personal identity remains unknown.

Distributed Ledgers And Financial Services

The potential for disruption is less related to the virtual currencies themselves and more to the underlying blockchain technology, which has applications far beyond bitcoins. It should be noted that blockchain is only one type of distributed ledger technology. Distributed ledgers are ledgers that share, replicate, and synchronise digital data across multiple locations.

When transactions are grouped into blocks and linked together to form an irreversible history of transactions and a linear chain of blocks, the distributed ledger is referred to as a blockchain. Virtual currencies rely on so-called public distributed ledgers, which can be accessed by anyone with the necessary client software. New transactions that cause database changes are validated decentrally in a peer-to-peer network before being grouped into new blocks and ultimately added to the blockchain.

The design of public blockchain distributed ledgers must address individual user privacy and data security on the one hand, as well as access rights assignment, transparency, and system integrity monitoring on the other. Nonetheless, certain surveillance functions must be performed in private distributed ledgers. Therefore, participants in closed distributed ledgers rely on a specific type of centralised institution or intermediary rather than on the operation of a decentralised system in and of itself, as in open networks.

Virtual currencies, such as Bitcoin, are distinguished by a lack of transparency, high price volatility, and low entry barriers. A proper regulatory framework and market supervision are urgently required to ensure integrity, transparency, and thus investor protection. However, the underlying distributed ledger technologies provide numerous opportunities to execute financial market transactions at lower costs while improving the reliability, integrity, and speed of the settlement processes. Virtual accounts for crypto businesses with OpenPayd can transform how your customers send and receive money, from wherever they are in the world.