Finance Professionals Can Build on Blockchain for Success

May 1, 2019

By Rick Burke


When blockchain was introduced in 2008, it sounded more like something from science fiction than a practical application. More than a decade later, companies are testing blockchain-use cases and ubiquitous adoption across financial networks in the near future seems more probable. Although some organizations have been early adopters of distributed ledger technologies including blockchain, there is still disagreement – and confusion – about the best use cases for this technology. The terminology alone can be confusing. While all blockchains qualify as a distributed ledger technology, not every distributed ledger is a blockchain.  

This ambiguity surfaced in a survey conducted by TD Bank at the most recent Association for Financial Professionals Conference. The survey results showed that treasury and finance professionals are nearly evenly split on the top impacts of blockchain, although an overwhelming majority (90%) believes this technology will have some type of positive effect on the payments industry. When it comes to the technology’s specific capabilities and implications, finance professionals are divided: Blockchain will create stronger audit trails (29%), speed up payment processes (22%), improve efficiency of cross-border payments (21%) and reduce payments fraud (18%). 

Blockchain has several applications in the corporate world, from communicating with financial institutions to negotiating contracts with vendors or customers. Today, these operations are done in a manual and time-consuming way that means parties have to sign paperwork, send it back and forth between parties and, ultimately, have that contract recorded by all involved parties. This process leaves room for lost or deleted files and copies along with delays from slow mail delivery or scheduling in-person meetings for signatures. Because blockchains adds new data as blocks that are secured by cryptography, each entry or change during a contract negotiation done via blockchain would leave a “breadcrumb” of information that must be validated by all parties. This process creates a visible and chronological record of activities and adds process efficiency because participants in the blockchain can work on the contract simultaneously.

Reducing Risks, Faster Transactions

TD’s survey also revealed a conundrum in the treasury world: Faster and real-time payments are coming soon, but organizations still have obstacles to implement them. One is not having the technology resources to support these transactions or capital to spend on applications. While changes in the payments landscape present challenges for treasury practitioners, concerns about payments fraud/cybercrime tops that. In fact, 44% of corporate finance professionals named fraud as their top operational challenge, a 14% year-over-year increase.

As more companies increasingly rely on electronic financial records and transactions, it is no surprise that fraud and cybercrime are growing concerns. Organizations need to remain vigilant and “own” cybersecurity along with their financial institutions. Preventing fraud is an area where distributed ledger technologies and blockchain could benefit treasury and commercial finance. While no financial transaction (paper or electronic) is ironclad, blockchain leverages cryptography and requires many parties to agree to something before it occurs – say, moving money out of a bank account to pay a vendor or to fund foreign trade transaction. The requirement for multiple approvers and the cryptographically secured result can make it more difficult for “bad actors” to socially engineer fraud because they would need to impersonate several parties, while the technology itself can limit the ability of hackers. 

Cryptocurrency 

Cryptocurrencies have been viewed with some suspicion  by corporate practitioners because they do not have a set value backed by a legal tender. Their inherent volatility makes it difficult to use for large-dollar payments between trading partners. The recently launched bank-specific coin forces a “dollar-for-dollar” value that alleviates some of that concern, although the coin does not have value outside of that particular institution. As a result, corporate treasury professionals, who already typically use multiple types of payment methods for vendors and customers, are unlikely to rush to use two, three or more bank-specific cryptocurrencies. In all likelihood, these bank-specific options will help finance professionals understand the value of employing blockchain or other distributed ledgers, but likely won’t influence mass distribution.

Over time, central governments may develop “fiat cryptocurrencies,” meaning they would be government-backed. This is a bit of an oxymoron for many as the idea of a cryptocurrency is that the network provides the trust between parties instead of a central player. The pro of a fiat currency is strength of the backing entity, but the downside is that the cryptocurrency may be limited by the central agency’s jurisdictional authority, limiting it to domestic transactions. Once this oversight is in place, sending currency via blockchain could create operating efficiencies for corporate and speed up the transfer of funds. 

Technology undeniably is influencing the way treasury departments operate and move money; and, whether used for data collection and distribution, tracking contracts or sending payments, blockchain’s biggest benefit is that it provides a single source of truth. With more time and a deeper knowledge base, finance professionals could find that this “techie” concept offers a tangible benefit to business.  TSL


About the Author

Rick Burke is head of Corporate Products & Services, TD Bank.