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Blockchain technology, the technology that ensures the security of cryptocurrencies, has come a long way since its inception. Today, the technology not only powers popular cryptos like Bitcoin and Ethereum, it is also the means to store and exchange non-fungible tokens (NFTs) and support the tokenization of real estate and fine arts.
Blockchain is faster and more secure than traditional transactional methods and plays a huge role in financial planning and wealth transfer, which will only grow over time. For example, the market for tokenized assets could reach $2-4 trillion by 2030, according to a recent report from McKinsey & Company. That’s a far cry from the $10 trillion figure previously projected by the Boston Consulting Group. McKinsey reported that assets such as mutual funds, bonds, ETFs and loans could see the greatest growth.
“Blockchain technology is still in its early stages and requires significant integration with existing processes and standards,” Anthony Moro, CEO of Provenance Blockchain Labs, told CoinDesk. “Most institutions recognize that tokenization must be a large part of their business in the future, but technical integration is where the rubber meets the road.”
Here’s a look at the role blockchain could play in key areas of financial planning.
What is Blockchain technology?
First, let’s back up for a quick overview of what exactly blockchain is and how it works.
Blockchain is essentially a permanent, shared ledger in digital form, or a decentralized ledger of transactions carried out over peer-to-peer networks. The ledger tracks transactions and also aims to establish consensus on the validity of transaction data. Using blockchain technology, users can confirm transactions without relying on a central clearing authority.
Why is blockchain important?
Blockchain aims to provide stored information immediately and transparently on a ledger accessible only to members of the network. Members share a single view of orders, payments, accounts and other information, helping to build trust, efficiency and financial opportunities.
Blockchain eliminates the need for centralized record keeping, and because the ledger is made public, everyone involved can easily access it. This transparency helps speed up the verification process, reduce the need for back-office functions and promote security.
How does blockchain work?
A key element of blockchain is that every transaction requires a security measure to protect the identity of the parties to the transaction. To secure transactions of Bitcoin and other cryptocurrencies, two keys are needed: a private key and a public key.
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The public key is permanently shared 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. Technology brings speed, efficiency, security and cost reduction, but at the cost of considerable environmental impact.
Processing transactions on the blockchain requires sophisticated computers that tend to be power hungry. If this drawback can be resolved, we will undoubtedly see blockchain play an even greater role in financial planning. Here are some ways it is used today.
Tokenization of real estate, commodities, fine arts and illiquid assets
Investors in fine arts, commodities and real estate face several challenges. When you invest in art, you need a place to store and preserve the works, as well as insurance to protect them. By creating artwork NFTs, these assets can be easily tradable. They can even be duplicated, although this will decrease their ultimate value.
Tokenizing real estate through blockchain technology allows investors to trade fractional shares, making investing in high-rise buildings or other commercial real estate more accessible to retail investors.
Streamlining loan financing and dividend payments
Smart contracts run on the blockchain, with the terms of the agreement written in the code. Smart contracts eliminate the need for intermediaries for issuing loans or paying dividends. Blockchain can facilitate faster loan funding, as well as faster and lower cost automatic dividend payments.
Facilitating faster cross-border transactions
Because blockchain transactions are deregulated – without the backing of a central government authority – cross-border transactions can take place quickly and transparently, with lower fees, according to a LinkedIn Pulse article by Charles Lau of Digital Perpetual .
P2P lending platforms and crowdfunding
Similarly, blockchain plays 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 lower risk of fraud.
Whether you’re starting a business or looking to invest in start-ups, blockchain can make things easier and more accessible.
Final score
Even though blockchain has evolved over this century, the technology is still in its infancy. As younger generations explore possibilities, cryptocurrencies, NFTs and other symbolic assets could play an important role in generational wealth transfer.
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