Blockchain Technology and Cryptocurrency in Finance

Ever since the mid-2010s, when Bitcoin emerged in the landscape of financial technology (fintech), cryptocurrency has become a viable method of investing and funding. Cryptocurrency refers to digital currencies you can use to make purchases or investments using encryption algorithms.¹ You manage your cryptocurrency in a blockchain, which is a digital ledger that uses blocks of data and time stamps to create a digital transaction record. Blockchain in finance allows for faster transfers and more accurate accounting records.²

Blockchain technologies have multiple implications for the finance sector. If you are in the industry and interested in an MS degree to further your career, or if you are planning on entering the world of finance, you need an in-depth understanding of cryptocurrency and blockchain technology in order to make informed assessments and recommendations.

Keep reading to learn the fundamentals of blockchain technology and cryptocurrency and how to use them in the finance industry.

Like a traditional digital spreadsheet, a blockchain contains a log of transactions. However, a blockchain uses a distributed structure in which data is stored on multiple machines, and all copies need to match before a transaction is considered valid.³

Blockchains use a shared ledger across one network, so financial professionals only have to enter a transaction once for it to be captured across the ledger. You can set permissions to prevent unauthorized access.

Whenever you make a blockchain entry, such as a transfer of cryptocurrency, all parties have to agree to it, and it must then be verified within the network through a consensus mechanism such as proof of work (requiring the computer's processor to complete tasks in order to validate the transaction). Once you’ve made an entry on the blockchain, you can’t change it, which makes it more accurate—and less susceptible to fraud—than traditional accounting systems.

Along with managing cryptocurrency transactions, blockchain technology can be used to manage supply chains, serve as digital identification, secure data sharing, and more.

Cryptocurrency, or crypto, refers to a form of digital currency you can use for online transactions and limited physical purchases.⁴ Unlike physical currency, cryptocurrency is not controlled by a central bank or government and is made by multiple companies. The most well-known types include Bitcoin and Etherium. Once you have purchased cryptocurrency, you store it in a digital wallet. You can use crypto to make payments to anyone with a compatible wallet.

Companies have various ways of developing and launching cryptocurrency in financial markets, and making it available to cryptocurrency investors. For example, Bitcoin mining involves using a combination of hardware and software to (essentially) guess the solution to a cryptographic number set by Bitcoin. Whichever miner solves the problem first gets the bitcoins.⁵

Staking is a method by which crypto owners can earn passive income on their currency without selling it. If you own crypto, you would lock your financial assets to support a blockchain’s operation, and receive a reward for staking.⁶ This is risky, however, as you’re not guaranteed to get your money back.

Because cryptocurrency is more secure than debit and credit cards, many online businesses are accepting it as payment.⁷ It’s also easier to use cryptocurrency to pay for goods and services across international borders because you don’t have to calculate an exchange rate. Crypto transactions are also faster than traditional digital payments.

Smart contracts are automated digital agreements, stored on a blockchain, that are executed when certain terms and conditions are met.⁸ These contracts are encrypted, which makes them secure. They are also accurate and easy to execute.

Smart contracts are becoming popular for multiple uses. They help speed up clinical trials because patients can quickly sign and execute a contract and share data using the blockchain. Emerging artists in the music industry who make money primarily through streaming use these contracts to solidify their royalty payments.⁹

The use of blockchain can connect suppliers at all stages of the supply chain, so everyone has access to the latest records in the database.¹⁰ This helps to identify and mitigate risks before they hold up the whole supply chain. A blockchain also helps government agencies and other interested parties monitor emissions, safety, and other regulatory elements in the supply chain.

In the United States, financial transactions conducted by centralized institutions such as banks and brokerages are regulated by the Securities and Exchanges Commission. Decentralized finance, made possible by blockchain transactions, allows individuals to conduct transactions with one another directly.¹¹

DeFi makes financial products and services more accessible, since anyone with access to the internet can make transactions. However, this industry is still unregulated, which means that it’s risky and vulnerable to scams.

Because of the way a blockchain is structured, financial accounts and transactions are more secure when made using cryptocurrency. This financial model is more transparent—and allows finance analytics using blockchain to be carried out easily—because once a transaction is complete, nobody can change it. Since blockchain technology is decentralized, there is no singular party responsible for sharing data, which can foster trust between parties who might not normally have it.

Market volatility is one of the biggest risks of cryptocurrency and blockchain. Crypto asset analysis can be difficult because the currency valuations fluctuate and change dramatically even over short periods of time.¹² Additionally, transactions are irreversible. This means once you’ve paid with crypto, you can’t get your money back unless the seller sends it back.

As a new industry, crypto and blockchain are not regulated, so you don’t have as many legal protections as you would when using traditional payment methods. Even though blockchains are more secure than using a debit or credit card, you still run a risk of being hacked and losing your cryptocurrency wallet.

Although some people and businesses are hesitant to adopt blockchain and cryptocurrency, others are using it successfully for business operations and other needs. The insurance company Lemonade, for example, uses blockchain for smart contracts and to raise capital to pay out insurance claims.¹³

In 2021, Lemonade started the Lemonade Crypto Climate Coalition, a decentralized organization that collects and distributes insurance funds using proof of stake blockchain. The index uses data to create yield targets for African farms, and if the farms fail to hit a target, all the farms in a broad zone receive a crop insurance payout. This innovation helps farmers get payments faster without having to submit lengthy paperwork or talk to multiple people to file claims.

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