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Introduction
Blockchain technology serves as a protective measure in a digital transaction. Blockchain is a secure list of transactions or ledger that provides many benefits in a financial organization such as improved security, transparency, operation audit, speed of transaction, and cost-beneficial (How the Blockchain, 2018). Two key elements in a blockchain that help reduce risk in financial transactions are (Pritchard, 2019):
- Distributed – A new block is added to the chain of transaction record in chronological order after every transaction to the peer to peer blockchain system. This prevents a single group controlling the system.
- Immutable – The blockchain ensures that the history of transaction data is accurate by employing cryptographic hash and digital signature technology, which keeps the integrity of transaction data.
Analysis
Benefits of blockchain technologies in reducing risk
With two key features of blockchain, it can help detect money laundering and other crime-related financial transactions. Bitcoin and other cryptocurrencies are used for illegal purposes, but Bitcoin has been widely used for money laundering because a large amount of money can be transferred without regulatory surveillance (Pritchard, 2019). Because blockchain keeps transaction data that has strong integrity and its linked to its owner, the financial organization can use this to identify illegal transactions.
Transparency feature in blockchain helps reduce risk in financial organization by improving regulatory reporting and monitoring. It also reduces error handling and reconciliation because blockchain is immutable. Furthermore, it can instantly make a settlement which removes all human errors that could happen in between the middle office and back-office staff at the financial organization (Rijmenam, 2019).
Recommendations
The company deals with cryptocurrency, and without blockchain, it is difficult to verify the source of transactions being made. Also, there is a possibility of transaction data being destroyed or modified employing a central authority instead of the blockchain. Therefore, Blockchain technology is recommended to be implemented in the company as a risk modification to reduce or mitigate money laundering and other illegal transactions. To implement blockchain, the company has to simply install blockchain platform Geth or Go-ethereum on a workstation and employ a smart contract which directly controls the digital transactions (Pribanic, 2018).
Summary
Blockchain provides security in the digital transaction by ensuring the integrity of data and real-time track of transaction data that contains the origin and destination addresses and amount. It is easy to implement using a smart contract, and it helps reduce risks such as money laundry, trust between two parties, and the possibility of transaction data being destroyed or modified. However, blockchain technology is an emerging technology and has a vulnerability. When employing this technology, it is best to use the Blockchain Preparation Audit Program written by ISACA to mitigate risk using blockchain.
Resources:
How the Blockchain Will Impact the Financial Sector. (2018, November). Retrieved March 23, 2020, from https://knowledge.wharton.upenn.edu/article/blockc…
Pribanic. (2018, September 18). How to Implement Blockchain in Financial Services by TechFunnel. Retrieved from https://www.techfunnel.com/fintech/how-to-implemen…
Pritchard, J. (2019, December 2). Here’s How Blockchain Will Transform Banking and Financial Services. Retrieved March 23, 2020, from https://www.thebalance.com/how-blockchain-is-changing-banking-and-financial-services-4174354
Rijmenam, M. (2019, December 13). Blockchain – 7 Benefits for the Financial Industry – Mark van Rijmenam. Retrieved March 23, 2020, from https://londonspeakerbureau.com/blockchain-7-benef…
