Review of Literature on Blockchain Technology in the Financial Sector

The technology of distributed registries, whose popularity has increased in the past two decades, has created a wide array of hopes for a global economy pressed by numerous problems. A rather complex algorithm developed to manage distributed ledgers is a vital component of this innovation. Since a person identified as Satoshi Nakamoto published a white paper outlining a new protocol for a peer-to-peer e-cash system using Bitcoin, the finance community acknowledged that it faced the challenge of understanding and utilizing this breakthrough technology. Interest in cryptocurrency is driven by critical qualities of the "classic" notebook system: anonymity of an encrypted party to the operations or transactions, multiple and independent verification of operations, and the inaccessibility to the control center, as well as the issuance of novel currency units. The widespread acceptability and growth of cryptocurrency have attracted the interest of the financial sector (FS), which seeks to solve its major issues through its acclaimed benefits: more effectiveness, transparency, and cheapness. However, most players in a strictly regulated financial sector have yet to include cryptocurrencies in their operations. What prevents the FS from using cryptocurrencies remains a lingering question.

Points of Agreement

A key point that the sources agree on is that the traditional system in the FS is plagued with problems, making service and trade enterprises view blockchain technology as an appropriate solution. Knezevic (2018) and Mishra and Kaushik (2021) state that the traditional system used to drive operations in the FS experiences prominent issues such as being cumbersome, costly, error-prone, unsafe, and slow. Polyviou, Velanas, and Soldatos (2019) point out, “One of the most notable problems associated to bank credit, is lack of information on credit scoring,” causing small and medium-sized enterprises to struggle obtaining loans from financial institutions. Similarly, Petrov (2019) highlights that preexisting conditions, which occur in the form of problems such as cumbersome procedures, heavy procedures, inefficient and slow reporting, and high servicing costs, must be present for the application of blockchain.

Another point of agreement among sources is the potential of blockchain to revolutionize transactions in the financial sector. Decentralization, trustworthiness for transactions carried out in blockchain networks, transparency, and increased privacy are some of the benefits highlighted by Knezevic (2018), Polyviou, Velanas, and Soldatos, and Mishra and Kaushik (2018) and Petrov (2019). In other words, the sources agree that blockchain technology is a promising innovation that could influence the survival game within the FS, depending on the reasons for adoption and the success of the implementation process. Kruglova and Dolbezhkin (2018), on the other hand, note that the directed acyclic graph (DAG), a data structuring or modeling tool usually used in cryptocurrency, has “two main advantages over the classic block chain,” increased performance and reliability. Benefits of the HashGraph, an algorithm derived from DAG, include simple cryptographic protection, open-centralized management, and a limited set of authorized blockchain nodes.

Points of Disagreement

The main point of dispute is on the issue of security. Several sources, such as Petrov (2019), Mishra and Kaushik (2021), and Polyviou, Velanas, and Soldatos (2019), emphasized the need for financial institutions to adopt blockchain technology in their operations to exploit the security advantage associated with this breakthrough innovation. The hash function, the process of encryption and authorization, and the ability of financial organizations to share critical information, such as physical security and cybersecurity data, represent some of the elements credited to the increased security associated with technology. However, Knezevic (2018) approaches this topic from a pessimistic perspective, stating that the large amount of money involved will always motivate hackers. Due to this topic, the author questions whether it is really the prime time for the FT to use cryptocurrencies. Also, cyber-defense and security problems with blockchain are one of the main reasons limiting the euphoria of information technology specialists (Kruglova & Dolbezhkin, 2018). Blockchain could be insufficiently mature from a security aspect.

Outliers

Kruglova and Dolbezhkin (2018) is the only source that appears to be an outlier. The article is full of skepticism regarding introducing blockchain in the FS due to various objective hindrances to the technology’s implementation. Kruglova and Dolbezhkin (2018) outline several of these barriers: failure to follow innovation requirements by market participants, lack of scalability, performance, and reliability. The authors come short of saying that due to these objective barriers, the blockchain is not ripe for the FS, as relevant institutions continue to wait for the “best solution.”

How Thinking About the Topic Has Changed Over Time

According to Knezevic (2018), the acceptability of blockchain concepts in the financial sector has grown over the years. The resource points out that in the early 1990s, the market rejected an eCash system that allowed people to send electronic money anonymously and safely. In addition, Knezevic (2018) notes that online shoppers did not care about security and privacy during this time. However, Bitcoin, which is enabled by blockchain technology, became popular in most sectors when users realized its advantages over the previous electronic cash systems, particularly its lack of failure at any point and the capability of engaging in direct financial transactions without mediation from third parties. Blockchain also gained popularity after the 2008 financial crisis, when it emerged as a promising catalyst (Mishra & Kaushik, 2021). Currently, blockchain technology is viewed as a game-changer in the FS.

In conclusion, blockchain technology has the potential to revolutionize the FS. The innovation has various benefits that can address the problems associated with traditional systems. However, the FS is yet to adopt blockchain due to objective barriers to the technology’s implementation. Nevertheless, there is hope that a joint effort of consumers and developers will overcome these barriers.