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How can Blockchain be used?

Jim Sinegal  |  07 Jun 2018Text size  Decrease  Increase  |  
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Bitcoin and Blockchain

Morningstar analysts believe that blockchain technology has the power to transform a wide range of business services, including financial transactions, data management, and marketplace activities.

Financial transactions involve trust, recordkeeping, and the transfer of information and value. Data management often requires trustworthy, permanent – or at least long-lasting – storage of information. Marketplaces co-ordinate trust, transactions, and information transfer between unrelated parties.

In financial services, payment transactions were the first application for blockchain technology. We’ve been bearish on bitcoin as a method for consumer-to-business payments, but other types of payment transactions are proving more amenable to blockchain processing. Traditional cross-border payments, for example, are often accompanied by high fees and long settlement times.

The current financial ecosystem often involves slow transactions, costly and time-consuming recordkeeping activities by multiple parties, and limited transparency. Settlement activities often take days, with information and funds passing through multiple parties as they travel between buyers and sellers.

Blockchain-based clearing and settlement solutions are already being explored by exchanges. These solutions promise to speed up transactions and eliminate the need for costly, duplicative recordkeeping and reconciliation.

Sharing Data Securely

A blockchain is a distributed database, so it’s logical that the technology can be useful in various data management applications. The technology provides a way to secure data, permit ownership, and share that data when desired. Companies in a wide variety of industries could move data onto decentralised databases, improving access, security, and transparency in fields from healthcare to transportation.

Healthcare records require high levels of security, but this is usually offset by inferior portability as fragments of data are kept at a variety of individual providers over time. As privacy concerns continue to grow and hacking becomes more damaging, consumers may wish to retake control of their own data from the corporations that have been controlling and monetising it. Decentralised control of identity has the potential to give individuals the right to share only the aspects of themselves they choose to release.

Sharing Economy Reduces Costs

Marketplaces rely on trusted middlemen to broker transactions of all kinds. Blockchains, in contrast, provide the ability to construct decentralised marketplaces. One such example, OpenBazaar, is a decentralised e-commerce market along the lines of eBay (EBAY) or Amazon (AMZN). In contrast to its centralised competitors, OpenBazaar charges no platform fees and has few to no restrictions. Most sectors have companies that engage in marketplace activity, matching buyers and sellers and brokering transactions of all kinds.

The growth of the sharing economy has created new such marketplaces. Companies such as Uber and Airbnb are increasingly serving as markets for unused resources. Over time, more and more economic activity could be organised and transacted using blockchains. Taking this to the extreme, one can easily envision a futuristic scenario in which all capital and labour transactions are decentralised using blockchain. If suppliers, customers, and employees can all arrange transactions via blockchain, the need for costly intermediaries could decline rapidly.

Despite the hype, major issues remain. Centralised control has its disadvantages, but the ability to quickly and efficiently resolve disputes is a major advantage over decentralisation. Privacy and security concerns still exist in the blockchain world. While the system itself can be quite secure, individual accounts can be far more difficult to maintain. And potential bugs in the code can cause problems for users and reduce trust in the technology.

 

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Jim Sinegal is the associate director of the financial team at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

Jim Sinegal is the associate director of the financial team at Morningstar.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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