What is a blockchain?
Blockchain is the chain of blocks which contains information. This technique was originally described in 1991 by group of researchers then it went unused until it was adapted by “Satoshi Nakamoto” in 2009 to create a digital cryptocurrency called “Bitcoin”. A blockchain is a distributed ledger which is completely open to anyone, they have some interesting property once the data has been recorded inside a blockchain then it becomes very difficult to change it or to tamper with it.
How does blockchain work?
Each block in the blockchain contains mainly three components- the data, hash and hash of previous block. The data in the block depends on the type of the blockchain, for example: In Bitcoin blockchain, stores the details of the transactions in here such as sender, receiver and amount of coins.
A block also has hash. We can compare a hash to a fingerprint because it is as unique, it identifies block and all of its contents. Once a block is created its hash is calculated, change in something inside a block will change in hash. And when hash changes it no longer remains the same block. The third element inside the block is the hash of the previous block. This creates a chain of block and this is the main reason which makes a block so secured. The data in the previous hash of the next chained block will have the data in the hash of the previous hash and goes on as leads to the original block which has no previous hash, and is called the genesis block. When we tamper with any of the blocks, the following blocks will become invalid. To mitigate this blockchain has something which is called the “proof of work”. It’s a mechanism that slows down the creation of new blocks, if we take an example of Bitcoin it takes 10 minutes to calculate the proof of work and add a new block in the chain. Ann again if you tamper with one block, you have to calculate the proof of work for all the following blocks. So, we can say that the security for blockchain comes from hashing and its proof of work mechanism.
One of the other methods is that it uses P2P (peer-to-peer) network in which everyone is allowed to join. When someone joins this network, he gets a full copy of the blockchain. The node is used to verify that everything is still in order. When someone creates a new block that block is sent to everyone on that network and each node is verified. Blocks that has been tampered with will be rejected by other nodes in the network. And this how we can say that blockchain is very secure. Computer programs are used to automatically execute a contract between buyers and sellers and this contract is called “Smart Contract”. Hence no need to any kind of central authority to manage the blockchain.
The impact of blockchain technology on regulatory enforcement in finance sector
Blockchain: As a verification tool
Blockchain technology not only offers the ability to preserve historical transactions and records but can also be used in plentiful applications in other areas too like trade reporting, confirmation, clearing, record keeping, financial records auditing, due diligence, contracting and supply chain management. Blockchain makes it easy and time saving for an individual or a company to preserve records be it personal or financial. This preserved information can easily be downloaded by interested parties and a smart contract can be made if interested when specific terms or products deliveries are met. With the help of this technology due diligence in connection with mergers, acquisition and third party business arrangements can be facilitated. By lowering cost and accelerating the time that regulators or law enforcement authorities invest in ensuring legal compliance, blockchain technology has the potential to greatly improve regulatory efficiency.
Blockchain: As a vehicle for cryptocurrencies
Cryptocurrencies have no physical form in contrast to fiat currencies, so all the transactions are recorded in the blockchain. We already know that they not backed by any government or central bank. These application makes blockchain technology, the vehicle for all cryptocurrencies. For Example: Bitcoin, Litecoin and Etherium etc. The holder of cryptocurrencies maintain their anonymity through the blockchain network and secure their cryptocurrency “wallet” through a private “key”. ICO (Initial Coin Offerings) is the extension of the cryptocurrency exchange which deals with the sale of digital “tokens” or coins which take place in blockchain network.
ICOs provide services like it permits companies to raise funds through the sale of tokens that can be redeemed for goods or services that can be resold for profit on a token exchange.
Roadblocks to Blockchain technology
The hurdles in adapting blockchain technology is not only technical but also political, regulatory approval, and thousands of hours of custom software design and both front and back end programming to link up the current business networks with blockchain ledgers. As security has always been a concern several central banks including Federal Reserve, The bank of Canada and the Bank of England have launched investigation into digital currencies. They would research that the distributed ledger technology should not compromise the security system against systemic attack. And there some questions which arises and needs to be answered like who will be responsible for maintaining and managing the blockchain? Who will make sure the entrance of new participants to the blockchain? Who will validate the transactions? Etc. another roadblock which is there is as there is anonymity in cryptocurrency users’ it heightens the risk of fraudulent transactions and complicates the role of regulators. As identities are hidden, digital currency exchange cannot comply with KYC (know your customer) and AML (Anti-money laundering).
Conclusion
Blockchain technology has the potential to reduce the cost and time associated with regulatory compliance and enforcement when employed as a mechanism for verification and record keeping. This technology is fully secured as it is difficult to tamper with it. The counterfeiting is avoidable with the help of this technology. With Distributed ledger technology, there is less errors and the eliminations of repetitive confirmation steps. As we there is great transparency and ease of auditing leads to saving in anti-money laundering regulatory compliance costs too. There is need to give any brokerage to any of the dealers or brokers, hence we save a lot of capital as well. With these merits there are demerits also which has been discussed earlier. Having all those in mind the demand for blockchain-services is on the rise. The technology is not even maturing but also advancing at a rapid pace. Several of the applications are still on the roll, most of them are either on the developing stage or in beta testing. If more money would be poured in the blockchain-based startups, then we could expect the DLT services becoming more mainstream in the near future.
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