Almost every decade a revolutionary technology disrupts the world as we know it and it is first welcomed with disbelief, mistrust, and even rejection. Once people start seeing the advantages, it becomes mainstream, and then it is hard to imagine the world without it. Just think about the electric lighting, the telephone, the movies, television, the Internet, cell-phones, social media and now, the blockchain.
This technology first introduced with the creation of the Bitcoin, almost 10 years ago, is, in fact, a digital ledger consisting of all the transactions that occurred in the respective network since the beginning. Each block comprises information and digital signatures that confirm the authenticity, together with some metadata. Whenever a new record is added, it is at the end of the blockchain and linked to the previous block.
The novelty of the blockchain in comparison with an ordinary database is that it is impossible to modify previous entries. Updated copies of the blockchain are kept in a distributed and decentralized manner that prevents malicious entities from changing existing blocks without alerting the entire network.
Record Keeping in Debt Management
Accuracy is the top priority in the finance sector, yet a study shows that between 20-30% of credit score records contain errors. This is because most of the underwriting process is done manually and there are few verification protocols in place. Designing an automatic way of keeping and checking records could save thousands of hours of work and thousands of dollars annually.
The blockchain technology offers companies the opportunity to create digital records of their transactions and trace every dollar’s path back to the initial entry point in the system. Since the blockchain technology is distributed, this eliminated the problem of lost, corrupted or damaged records.
The technology could help even other actors in the debt management environment by creating logs of client’s payments that could be used in the negotiation process, showing the goodwill of the client and their dedication to get out of debt. Currently, the alternative is to re-negotiate your indebtedness or contact one of the many professional companies after careful reviews of the debt relief company.
Paperwork has been for decades at the core of financial operation, but the losses are considerable when it goes missing like in the case of private loans from National Collegiate. The umbrella company has more than $5 billion default debt due to missing documents.
If the debt were recorded in a blockchain log, the whole row of court hearings would be rendered unnecessary by a simple search and trace for each address associated with an account. The blockchain helps the borrower have a digital identity that shows their track record and acts in a much more accurate way than the current measure, the FICO score.
A digital wallet could show all the payments made, missed dates and remaining payments to be made, and all that was necessary instead of complicated forms and error-prone files would be a digital signature, unique to the account holder.
The UK government has already foreseen the potential of blockchain technology and is looking at ways it could implement it for student loans management, while the US private lenders are not far behind.
The attributes of the blockchain such as transparency, efficiency, decentralization, and permanent records make this technology the best option to exert control and monitor loan repayment.
The only thing missing from applying this on a large scale is the legal framework making the use of the blockchain regulated and accepted. In general, the financial sector is a laggard in adopting new technologies due to strict compliance regulations. Yet, when the technological advances promise to make a huge difference in security and efficiency, they shouldn’t be ignored.