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A Review on Blockchain Technology and the Impact on Finance Sector by

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Abstract – In the modern world blockchain technology has been a major topic which has
been able to attract so much attention specially in the tech and the finance world. Blockchain
technology is known as a public ledger where it allows transactions to take place in a
decentralized manner while displaying it to the outer world. Various applications are being
built using this blockchain technology. Also, many industries like finance, IOT and medicine
are investing and allocating their resources on various research on this technology to
improve the efficiency as well as the quality of their industry. This paper presents a study on
Blockchain Technology and how it is being used in the banking and finance sector.
Furthermore, it demonstrates about the challenges which are faced by using this technology.

I. Introduction
Many sectors like finance, manufacturing, cryptography and distributed consensus
medicine and education have begun using algorithms[1].
blockchain applications because of the
When we are carrying out a transaction by
uniqueness of this technology. The main
using crypto coins it does not require any
characteristics of this technology are
bank to do the transaction. In other words, it
decentralization, immutability and
does not require any intermediary third party
transparency.
to involve in the transaction. Because of this,
Mainly in the modern world topic blockchain technology could be used for
cryptocurrency has been uprising among the various financial services such as digital
earth’s citizens. For an example Bitcoin is assets, remittance and online payment. Apart
one of the most successful most successful from that it can be applied in the fields such
cryptocurrencies followed by coins like as smart contracts, public services and
Ethereum, Solana, Cardano etc. Without any internet of things (IoT), reputation systems
third-party involvement, by using a last but not the least security services[2].
specifically designed data storage structure,
One of the main advantages of using
transactions can be carried out with the
blockchain is it is immutable. Which means
cryptocurrencies. This technology was first
once the transaction is packed into the
proposed in 2008 and was implemented in
blockchain it cannot be altered or tempered.
2009. Blockchain technology is being
This a great advantage for businesses and
designed a public ledger and all the
banking sector to attract more customers
committed transactions are stored in a listed
towards them by building upon the trust.
block. For the user’s security purposes this
They can come up with attractive business
technology is using asymmetric
models and incentives targeting the users by Even though this technology is great in many
adopting this technology[3]. several areas since it is new to the world it is
currently facing some technical challenges.
Even there are chances of hijacking a entire therefore anyone. So, it is decentralized.
blockchain. Although users are using their When it comes to private blockchain, the
private and public keys, it says still there is a blockchain belongs to a specific
chance of privacy leakage. When it comes to organization. So, it is a centralized network.
bitcoin block size, it is limited to 1MB where In a consortium network the network is
a single fresh block is mined every 10 partially decentralized. Last but not the least
minutes. Also, bitcoin is not capable of in a hybrid network the blockchain is a
dealing with high volume rate of transactions combination of private and public networks.
at a given time because it only accepts 7 It allows to have private permission-based
transactions per second. Therefore, there is a system as well as a public permission-less
fair risk that this technology might also get system for the users[3].
centralized. Therefore, the block size and the
security is currently a tough challenge to be
solved. The next challenge is anyone can
mine coins, as a result miners may hold a
larger revenue than their fair share. Also, they
can hide their mined block fir their future too.
Other than that, to mine and do transactions a
gas fee is being charged which means some
blockchains require so much energy to mine Fig. 1: A blockchain which contains
and carry out transactions. continuous sequence of blocks.
In this paper it explains on the following Blockchain is a sequence of blocks, consists
sections. They are, Section II Architecture of of a complete list of transaction records
the Blockchain, Section III Blockchain in the similar to a public ledger.
financial industry, Section IV Blockchain
technology and banks, Section V Challenges The previous block hash contains in the block
implementing blockchain technology in header, where a block has only one parent
banking industry and last but not least block.
Section VI Overall challenges in blockchain The first block of a blockchain is identified as
technology. the genesis block which has no parent block.
II. Architecture of Blockchain
In current blockchain technology there are
roughly four types [1]. Public blockchain,
private blockchain, consortium blockchain
and hybrid blockchain. Out of those four,
public and private blockchains are the main
blockchains. In public blockchains all the
ledger records are visible to everyone,
What is a Block key. Private key is confidential, and it has to
be kept only by the user. Usually, digital
signature is involved with two phases. They
are signing phase and the verification phase.
In the signing phase the sender encrypts
his/her data and sends it. Then in the
verification phase receiver will be validating
the value using the public key.
Characteristics of Blockchain
• Decentralization: Consensus algorithms in
Fig.2: Block Structure blockchain are used to maintain data
consistency in distributed network.
As shown in Figure 2 a block consists of the • Persistency: Transactions are validated
block header as well as the block body which quickly while invalid transactions will be
includes the transaction counter. avoided. Blocks that contain invalid
transactions will be discovered
The block header includes:
immediately.
(i) Block version: Defines which set of block
validation rules to be followed. • Anonymity: By using a generated address
(ii) Merkle tree root hash: The hash value of each user can interact with the blockchain.
the transaction. This won’t reveal the real identity of the
(iii)Time stamp: current time as seconds in user.
universal time since 1st January 1970. • Audibility: Any transaction should be able
(iv) nBits: target threshold of a valid block to refer or check some previous unspent
hash. transactions. Once the current or the most
(v) Parent Block hash: a 256- bit hash value recent transaction is recorder into the
that points to the previous block. blockchain, the state of those referred
unspent transactions switch from unspent
The block body consists with a transaction to spent. Therefore, it is able to verify and
counter as well as transactions. The track the transactions easily.
maximum number of transactions will be
determined by the block size and the size of III. Blockchain in the financial industry
each transaction. The most important non-technical limitation
adopting blockchain technology in the
Blockchain is using an asymmetric financial sector is that the lack of legal
cryptography in order to validate as well as recognition and user recognition. But the
authenticate the transactions. Additionally main advantage is that it has the decentralized
for untrustworthy situation(s) Digital architecture. [4]
Signature will be used. It is also designed
using asymmetric cryptography. Since this technology is still in the
development stage and still immature
Digital Signature compared to other technologies, large
When it comes to Digital Signatures each international banks have invested
user owns a pair of private as well as a public
considerable amount of money on research blockchain where it consists of both
and experiments. centralized and the decentralized
distributions. However, the choice should be
Many research papers and projects on
made and concluded by the relevant
blockchain are mainly focusing on bitcoin.
organization itself based on their
But bitcoin is just one part of the blockchain
requirements and goals.
technology. End of the day bitcoin is a
cryptocurrency. Nowadays there are so many Additional advantage for the banks by
crypto currency projects coming up with adopting blockchain technology will be that
some attractive smart contracts like they can cut of the middleman by utilizing the
Ethereum, Solana and Cardano. Therefore, blockchain security, immutability,
blockchain technology can be blended with transparency of the blockchain.
the other technologies in order to make a
Apart from that blockchain can also bring
significant impact on the finance industry[5].
threats to the industry as well. Under the
For example, since the transactions in the current circumstances and the advancements
blockchain is public, the transaction of the blockchain technology, there is still a
information can be integrated with the big higher possibility of hijacking a blockchain
data analytics and analyze. However, we can algorithm. That is why it might take much
see that there is many software coming up more time for this technology to establish in
using big data analytics related to blockchain. the industry.
By using those software people can make
IV. Blockchain Technology and Banks
trading decisions easily[6].
As we all know banks run the world. Banking
With the extraordinary capabilities in the industry is the main sector which controls the
blockchain technology it might world economy. When a country’s bank fall
fundamentally change the existing finance apart the entire economy of the country will
and the FinTech industry due to attractive get collapsed. [8]
methods of storing and transmitting data. It
Blockchain technology has caused major
has been analyzed and estimated that this
transformations in the banking industry.
blockchain technology has the potential of
Experts say that the blockchain industry may
optimizing the global financial infrastructure
systematically solve the problems involved in
or else transfer assets more effectively than
the banking industry. This technology can be
the existing financial system. Also the
applied to different aspects of the banking
researches have shown that this technology
industry[9]. Bill settlements and supply chain
may minimize the cost and bring changes to
finance are two of the major concerns. Its aim
the field of finance in the long run[7].
is to understand customers and potential anti-
Commercial banks in the world have begun money laundering risk management areas
to apply blockchain technology to improve better.
the existing centralized banking system. It
Then this technology can be used to change
could be done adopting a private blockchain
the current transaction process and increase
to the relevant organization where the
the efficiency. By constructing or introducing
blockchain will become more into centralized
better smart contracts by banks they will be
distribution. Or else they can adopt a hybrid
able to save labor review and billing costs. As V. Challenges Implementing Blockchain
a result, manual work and knowledge-based technology in the banking industry
work will be automated[10]. Apart from that First main problem is that there is still not
blockchain can identify the inefficiencies, enough legal background for blockchain
frauds, high costs and various operational technology in the world. It is true that there
risks. are many cryptocurrencies such as Bitcoin
As I have mentioned above, during past few and Ethereum where they are decentralized,
years many banks in America has invested where anyone can mine coins and add it to the
considerable amount of money on exploring blockchain. But in real world scenarios such
and experimenting the blockchain as banking sector, it should be safeguarded.
technology and how they can adopt this Therefore, in those such sectors rather than
technology on their businesses. As a result going with decentralized blockchain it is
Bank of America has drafted 35 patents safer to go with a private or a centralized
related to blockchain. Apart from that other blockchain[12].
banks like Barclays, Citigroup, Goldman Considerable number of banks have come
Sachs and UBS have formed consortium call together to construct the world's largest
R3 CEV to explore the Blockchain’s blockchain consortium, R3 which is to be a
potential on reducing the banking incurred multi-centralized consortium blockchain. It is
costs. told to be the most promising model in the
The real motivation for the banks to adopt banking industry[13].
this technology is because it reduces cost and Even though it is mentioned so many
the value of transfers. Traditional advantages of using blockchain over current
commercial banks need to invest a lot of banking system, blockchain technology is
money in a centralized database, because the still too young to replace the current banking
purchase and the maintenance costs are high. system. It should be done first as a pilot
Other than that, they have to pay the labor project running parallel to the existing
costs in order to maintain their books. By banking system and identify loopholes of the
adopting blockchain technology on their system and gradually develop it and then
banks they can build a banking model that replace the current finance banking
costs low and transparent[11]. system[14].
Furthermore, this technology can identify the When it comes to the efficiency of the
risks and control them. Current model of transaction, it depends on technology being
monitoring the loan schemes are not very used and the degree of the centralization. As
much effective and efficient. Since the transaction and the clearing process occur
blockchain technology consists of its very simultaneously, each transaction is needed to
own method of treating each user as a node in be verified by all the nodes in the entire
the blockchain, it allows borrowers and blockchain network which will affect the
lenders to conduct direct peer-to-peer speed[15]. Simply when the number of nodes
transactions. These advantages of using are getting increased the speed will be
blockchain will eventually increase their decreased which has a inversely proportional
profit margins. relationship. But on the other hand, when the
 speed is decreasing the security of the especially on finance/ banking industry. It
network is increasing. Even though there are further demonstrates about what are the
these kinds of both pros and cons, looking at challenges faced by the finance/ banking
the bigger picture blockchain technology sector when they are going to adopt this
gives undeniable improvements to efficiency technology to their commercial businesses.
of the transactions. Additionally, I have pointed out that what are
the overall challenges/ disadvantages in the
VI. Overall Challenges in Blockchain blockchain technology.
technology
(i) Scalability Since this blockchain technology is still in the
Due to increasing number of transactions unmature state, it is crystal clear that, more
happening daily the size of the development should be done in-order to solve
blockchain network becomes larger. the above-mentioned problems. Therefore, it
These will result in decreasing efficiency is pretty sure that with development and
of the network since there are too many advancement of this technology other
nodes to be validated in the network [16]. industries will also adopt this technology to
(ii) Privacy leakage grow their businesses by assuring security as
Full privacy cannot be achieved since the well as delivering a better experience to the
public ledger fuels the system. Because of customers. Therefore, I plan to carryout
that problem this technology is yet not another deep investigation/ research in the
suitable to work on the sensitive projects future especially on the areas related to
[17]. finance sector and the money markets.
(iii)High energy consumption
To keep the system alive, it requires References
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