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Fintech: A Blockchain Breakthrough

Financial Technology (Fintech) is a term to describe the optimisation of processes to improve performance in terms of efficiency, usability and security. The evolution of technology has dramatically influenced the financial world, originally restructuring and fast forwarding traditional back office practices. Continuous innovation has transformed consumer facing services by fundamentally changing the way consumers handle their finances. In harnessing the full potential of technology and exploiting its opportunities, Fintech develops short cuts accelerating the user experience. Some examples of Fintech evolving the Financial sector are utilising mobile payment apps or stock-trading apps, performing online transactions like transferring payments, managing online investments or utilising blockchain services and buying cryptocurrencies. The innovation in Fintech is influencing every sector that comes into contact with it and one of the main reasons is the technological breakthrough, Blockchain.

It is one of the most popular industry trends in recent times, a database named ‘Blockchain’ originally launched in 2008. The database is known as a distributed ledger: a synchronized, yet decentralized network of information which is dispersed across various separate geographical locations and entities. The development of Digital Ledger Technology (DLT) has transformed the process of transactions with the initial purpose of the technology housing the cryptocurrency Bitcoin, known as the first digital currency unsupported by the government, unpegged from fiat currencies, commodities and uninfluenced by inflation. It is a stark contradiction from the centralized structure that we know and that fiat currencies are reliant upon. The technology proposes unique, unprecedented characteristics such as enhanced security levels, higher transparency, efficiency and speed all whilst lowering costs.

The Blockchain database consists of a series of blocks storing information, to which the blocks link together forming a chain. The chain is kept on an irreversible timeline, which immutably stores the blocks and records the time they are entered on the chain. In this case, the information is stored forever and cannot be altered. The information secured on the block is protected by cryptography, a calculation named algorithm which is made up of three key elements a hash pointer, a timestamp and transaction data. The record of time and protection of cryptography makes the information extremely hard to access or change. The decentralized characteristic of the Blockchain is another key security element, it disperses control across the entire network and not with one single entity. The entities that make up the Blockchain network are labelled ‘nodes’ which are synchronized together. In the attempt to steal or modify information on the Blockchain, all of the nodes would have to be compromised demonstrating the difficulty in manipulating the network. In this case, it proves to be an attractive method to store information for many industries. The transparency of information between the nodes across the network is another key characteristic that secures the network, the synchronization between nodes, decentralized landscape and cryptographic protection are the key security measures which prevent harmful acts such as market abuse, fraudulent activity or cyber-attacks.

Blockchain is not only driving new developments in the Fintech sector but transforming older, traditional systems. The oligopoly banking market is slowly diminishing with banks and payment service providers desperately trying to diversify to keep up with newer Fintech applications. In utilising the Blockchain technology, companies can provide their consumers with further choice like alternative payment options such as crypto and benefit from the attractive characteristics the Blockchain offers. The Blockchain proposes exceptional key performance metrics across the entire financial sector and has been identified as transforming the banking industry in 2021. The features of the database are revolutionising financial services, reducing transaction times and costs by cutting out third parties is just one example. Intermediaries are deemed as unnecessary which poses a real threat to banks, investment companies and payment service providers that rely upon financial transactions. Blockchain will transform the process of international payments which will no longer be slowed down by stagnant infrastructure. The Digital Ledger technology in the Blockchain is based on real-time which means cross-border transactions will take days, rather than weeks. Payment Service Provider’s are utilising Blockchain through the cryptocurrency Bitcoin, in purchasing Bitcoin you can make peer to peer transactions which can be reimbursed back to fiat currencies taking advantage of the fast transaction speeds and lower costs.

Companies and consumers are not only benefiting from of its efficient peer-to-peer transactions, but utilising the blockchain technology in their long-term investment strategy. Initial Coin Offerings (ICO) provided an attractive opportunity to invest in projects and start-ups with tokens instead of taxable shares. Blockchain advanced the concept with Security Token Offering (STO) where consumers are still able to purchase tokens in a public offering like ICO but the tokens are supported by regulation unlike STOs. The regulation enhances security and creates a safer investment due the tokens being regarded as a financial security backed by non-tangible assets like stocks or tangible assets like property. The regulated tokens support investment in all securities approved by the government and are deemed as attractive option due to the cheaper costs than owning real shares. The financial security supporting the digital tokens provides companies and consumers with an alternative investment strategy which is recorded on Blockchain, taking advantage of its advanced security measures in the protection of information.

Blockchain is reinventing investing in more ways than one, an example is another cryptocurrency that holds dramatically opposing characteristics named NFTs. NFTs stand for Non-Fungible Tokens, which are the stark contrast to STOs and Bitcoin. Due to NFTs being non-fungible, each token is entirely unique and irreplaceable which places a high amount of value on a singular token. An example of NFTs reshaping investing is the digital artwork that sold for $69m by the artist, Beeple. The digital artwork was purchased with an NFT and is stored and recorded on the Blockchain network, never to be touched, forged or replicated. The NFT is represented as a certificate of ownership and the enhanced security measures of Blockchain protects it. In developments such as these, it is indicating how many ways industries like the luxury art market are utilising cryptocurrencies and the Blockchain database. Accenture have estimated that investment banks could save up to $10bn by utilising the Blockchain technology, targeted towards securities, trade settlements and clearing. Whilst some of these operations remain outdated, many corporations have embraced the Blockchain to reinvent their systems in doing this a tremendous amount of time can be saved, without having to wait on ‘middle-men’ like stockbrokers. An example, Paxos the first regulated Trust Company incorporating Blockchain into their practices, offering consumers real-time solutions where they can settle trades and transactions virtually immediately. Furthermore, the company has developed its own cryptocurrency named the PAX Stablecoin which has been referred to a liquid alternative to cash, offering consumers with an alternative payment method to utilise on the Blockchain.

The adoption of the Blockchain technology in these traditional institutions is driving further innovation and exploration in digital currencies. Blockchain is offering companies increased diversification through the thousands of cryptocurrencies available as payment options. Online trading applications are popping up with brand new services in cryptocurrency payment methods. An example is ShapeShift, a company that uses Blockchain to support the exchange between cryptocurrencies in real-time, offering consumers the flexibility to diversify their financial strategy in seamless transactions practically instantaneously. Coinbase, another cryptocurrency exchange which holds over 43 million users allows consumers to trade, invest and earn over 50 types of cryptocurrencies. Coinbase is representing the direction the finance industry is moving in and demonstrating that adopting the Blockchain technology results in capturing large market shares. Traditional financial institutions must harness innovative breakthroughs like Blockchain and crypto to stay up to speed with these industry advancements or else their market share will disappear along with their consumers who demand services that respond to market trends.

Another aspect of Blockchain that has revolutionised the Fintech sector is Smart Contracts. Smart Contracts offer a faster, more efficient solution through an entirely digitalized process which no longer requires paper and a signature. A smart contract is a self-executing program that acts as an agreement between two parties, the agreement is executed into lines of code which run on the distributed ledger in the Blockchain network. Once the coded conditions are met, the ledger will automatically respond and authorise the transaction between the parties delivering a secure payment. Smart contracts are independent from third parties and central authority, cutting out intermediaries which increases security, efficiency whilst lowering costs.

Industries across the world such as the Healthcare sector, Real Estate and Logistics are employing smart contracts to improve their operations and performance. In the Fintech sector Smart Contracts are reshaping the market landscape, traditionally a hard market to enter with high barriers of entry and venture capital, these decentralized finance (DeFi) programs have provided Fintech start-ups and SMEs with the opportunity to drive the market and revolutionise it with innovation in Blockchain. Smart contracts have been identified by detloitte as an all-purpose utility, such versatility can support multiple functions and a diverse range of business activities such as transactions, loans, payments, trade clearing and settlements, insurance and accounting. Smart contract characteristics correspond with the blockchain and offer higher advantages in security, speed, cost and usability.

Another way Blockchain can transform the Fintech Industry is in Digital Identification. By storing personal documents such as identification documents on the Blockchain, the protective measures that shield the network such as the decentralized nature and cryptographic keys demonstrate as an ideal environment to house sensitive or personal information. Financial corporations like banks, investment companies and corporate service providers must validate identity by gathering personal information known as conducting KYC ‘Know your Client’. The Blockchain technology could benefit both the consumer and corporation making these tedious security checks an efficient and adaptable process. Consumers creating a digital profile on the Blockchain can take control of their information deciding what information is stored and who they decide to share it with. Corporations that are on the Blockchain network can benefit from accessing a ready-made pool of clients with information accessible if authorised, this way information can be validated efficiently and within a secure environment.

The Blockchain database has demonstrated its versatility and adaptability across the entire Fintech sector. The technology has the power to revolutionise financial services, restructuring the way we store and share information. The advancement of Blockchain is transforming corporations which are open minded to change and hold an innovative approach. In order to improve operations and advance performance corporations and governmental bodies must recognise industry trends and developments, the direction of growth and the driver behind it. The landscape that corporations are in should foster an environment that harnesses innovation to develop economic activity, an example of this is a liberal government, like the Isle of Man that promotes a supportive stance to new initiatives that use the Blockchain.

The Isle of Man, known for its reputation as a digital offshore hub has created an ideal environment for Blockchain and Crypto to flourish. Apart from being recognised in the business world as a leading offshore financial centre of excellence, the Island is recognised as a first-class jurisdiction in the eGaming Industry and is at the forefront of the Fintech and Blockchain Sector. The Islands regulatory landscape and competitive fiscal regime is supported by a forward thinking, ambitious Government that holds a modern approach focused on harnessing technology and innovation. The Isle of Man Gambling Supervision Commission became the first jurisdiction in the world to issue a Blockchain gambling business with a gambling licence and the first jurisdiction to regulate token based software suppliers, such advancements validate the Isle of Man’s leading position in the market. The Isle of Man has demonstrated its support and commitment to developing the industry by establishing the Isle of Man Blockchain Office and the Isle of Man Sandbox. The government guide businesses through the regulatory landscape with expert advice, knowledge and opportunities to grow in Blockchain.

In summary, technological breakthroughs like Blockchain are fundamentally changing the future landscape for Fintech and many other sectors. The jurisdictions and corporations that are open-minded to change and willing to incorporate innovation to replace traditional practices will benefit from the vast opportunities that the Blockchain has to offer and will be leading the market in response the ever-changing and ever-growing consumer demands that are shaping the direction for the future.

If you feel that you have an existing structure or would like to set-up a new company on the Isle of Man to benefit from its leading position in the Fintech/Crypto space and supportive, forward-thinking Government, please email for more information, we have a wealth of experience in the sector and the professional expertise within a friendly team to guide you.