With 10 per cent of global GDP likely to be stored on blockchain platforms by 2027, according to The World Economic Forum, it is not surprising that businesses are looking to incorporate this new technology into their current strategy. Up until now, transaction costs have been very high. This is primarily because legal documents need to be drawn up for each transaction individually, which is not only costly but also time-consuming.
This means that those who would like to make a small investment cannot enter the market, because after paying the intermediary and legal advisers, the investment no longer makes sense. However, new technology developments like blockchain have been created to change this imbalance in the financial market: the cost per transaction will dramatically decrease and as a result, the real estate investment market in particular will become a more balanced environment for investors.
According to Accenture, blockchain has the potential to become a general-purpose technology that changes how society and the economy work – a breakthrough, like the steam engine, electricity or the Internet. This digital age brings a more transparent, efficient medium with higher returns for investors in both financial and real estate spaces. Here are some ways in which blockchain can and will change the financial market forever.
Will blockchain technology bring permanent change to the financial market?
The decentralised payment system (blockchain) and the digital currency (Bitcoin) are capable of turning the entire financial system upside down as transactions can now be made in a transparent and secure manner between two parties. However, this cheaper, faster and more transparent way of exchanging money is not the only advantage that blockchain will bring to the table. Aside from monetary transactions for shares, contracts and ownership, it also displays information about individual events in real-time. This means that all relevant actions and contracts in the blockchain are counterfeit-proof documents so effectively, the creation of an online register makes the complex, expensive work of notaries and trustees completely obsolete.
This method is also safer than some of the more traditional methods because if the technology detects any kind of discrepancy, double shares for example, the transaction is automatically disabled. Blockchain is also able to keep secure records of these transactions without the involvement of any authorities and enforces accountability and transparency making tampering with the records difficult. Since there is no one entity which controls blockchain, every party can verify the transactions and you are not forced to rely on one entity to keep track of balances. That being said, blockchain technology has clearly put an irrevocable change in motion. The traditional way in which transactions are executed, is to be replaced due the superior capabilities that blockchain technology has to offer: lower costs, better security and more transparency.
No more middlemen
Blockchain has some quite significant advantages and thus an attractive offering for investors. But what does this mean for the traditional investment market? The conventional offline process is notorious for being tedious and costly with the extra charges by trustees. As such, investors have become tired and impatient, and will ultimately turn to alternatives like blockchain technology which will side-line the traditional process since a physical copy of contracts or a transaction is no longer needed.
Whilst the middleman era has not ended completely, it is becoming more and more apparent that those who have not yet invested in blockchain technology or acknowledged the benefits it has to offer, will inevitably fall behind. A lot of banks have recognised the advantages of blockchain and thus adopted this technology to stay ahead of the curve. The technology gives these firms a huge competitive advantage as they are able to work faster and more economically. In fact, amongst many large corporations, such as Philips, Intel, and Bank of America, have already invested in blockchain technology.
Does blockchain technology affect the investment itself?
In light of recent developments, blockchain technology has been labelled as a ‘game changer’ within the investment market. So far, blockchain technology has succeeded to make the online investment market more fluid, offer an alternative to traditional investment processes and enable investors to make smaller investments and trade volumes. These smaller types of investments were non-existent before since middlemen would swallow the cost. For instance, an investment of £6,000 would not make sense because the trustee would take a £2,000 cut of that investment. Blockchain technology in particular makes sense for secondary markets such as real estate investments and equity crowdfunding. This is because previously these investments would not be viable due to the high transaction costs.
In addition to the economic advantages, blockchain technology makes the transaction process more investor-friendly. All processes are run automatically and the investor doesn’t have to deal with middlemen who wastes time and money. This is particularly the case for transnational investments as they want to avoid unnecessary involvement of third parties.
As such, blockchain provides a strategy to eliminate the traditional intermediary and offers the idea of a digital intermediary which will transform the financial industry. Much like Amazon in the retail sector, which has played a significant role in reshaping industry structures, blockchain has the capacity to make a similar mark in the financial space. In fact, blockchain will alter traditional values which will force several stakeholders across all industries to rethink their roles in the near future.
Thomas Schneider, chief investment officer at BrickVest
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