Invented in 2008 by the mysterious Satoshi Nakamoto, even suspected to represent a larger group of people, the Blockchain, or distributed ledger, presents the underlying technology enabling a range of new digital currencies – as a peer-to-peer e-currency system – of which Bitcoin is the most known.
For some, the innovative technology of blockchain i.e. the distributed ledger is not quite clear, which is completely understandable, and that is why describing how blockchain works is best in pictures:
Blockchain was specifically designed to enable trustless electronic transactions between two parties, without relying on a central authority for verification. The technology uses strong cryptography, a distributed network architecture, and a concept called “proof of work” to authenticate transactions almost instantaneously. The technology promises low-cost financial transactions and near real-time settlement.
While the interest in blockchain technology has been unprecedented, it is not likely to have a meaningful role in payments ecosystem in Europe in the near future.
However, many experts emphasize the strength of this and similar new technologies that realistically have the potential to reshape the banking industry and payment ecosystem. Distributed ledger technology (DLT), artificial intelligence (AI), extended reality (XR) and quantum computing—or “DARQ”, as called by Accenture, are even individually powerful weapons in the fight for competitive advantage, but it is their combined effect that could be truly revolutionary.
Benefits of blockchain payments
Most of the benefits offered, or claimed, by the underlying blockchain technology, are, however, not applicable in some regions or environments. The technology is still not trusted by many mostly because of the regulation inconsistencies. Nevertheless, benefits do exist and it is a question of time when will the big players start using them. Two of the current biggest and most researched are:
- Anti-money laundering (AML) – Annually, money laundering makes up 2 to 5% of the global GDP—about $2 trillion (idmerit). This shows the real implications of money laundering for the global economy. Blockchain is being explored as a fraud and risk compliance solution that addresses some of the most critical problems with current AML procedures. Built on the blockchain, the new solution could leverage the inherent qualities of the blockchain in order to identify and prevent unauthorized transactions. And if combined with artificial intelligence, it could effectively run through strings of data to determine if money laundering activity is occurring. AI would be able to detect patterns in large volumes of data while adapting to changes in criminal activity over time with its machine learning capabilities.
- Cross-border payments – Every step along the path of a cross-border transaction requires time and money, with the average cost of remittances sitting at 7%, according to a 2018 World Bank report. The industry has reacted through the creation of new faster payment initiatives, aimed at reducing delays in payments and standardising intermediary fees. Others have turned to distributed ledger technology (DLT) and blockchain.
When it comes to cross-border, IBM has already ventured into the field:
IBM has created a real-time, global payments network to support cross-border transactions and foreign exchange in more than 50 countries using cryptocurrencies or “stable coins.” US bank JP Morgan followed, unveiling its Interbank Information Network powered by Quorum, a permissioned blockchain based on ethereum and developed in-house. (Paymentcardsandmobile)
Blockchain brings cost-efficiency, fast settlement, security and transparency into the payment game because of its decentralized, secure and immutable nature. It will also create better financial products, which will create more competition and inherently innovation.
Cryptocurrency vs blockchain
Part of the confusion about the difference between the two is due to the fact that the terms have been used interchangeably.
Bitcoin was the first cryptocurrency made on blockchain, but as the technology matured and many new cryptocurrencies were created, the underlying blockchain technology stood out as decentralized and very useful.