The remarkable surge in Bitcoin’s value has captivated the world, but many may not realize that behind this cryptocurrency lies a groundbreaking technology known as blockchain or distributed ledgers. Blockchain technology has revolutionized the way transactions are recorded and verified, making it highly valuable in the FinTech sector.
The Power of Blockchain Technology
Blockchain technology employs a digital distributed ledger, where every Bitcoin holder’s ownership is recorded. Miners, who are volunteers or paid individuals, add entries to the ledger to document transactions. Each transaction is verified using digital signatures for authenticity. Miners then collect these entries and create a “block,” with only one miner able to add it to the blockchain through complex calculations known as proof of work.
The combination of digital signatures and proof of work ensures the utmost security in the system. Moreover, since there is no central authority, users have complete control over their transactions, ensuring privacy and confidentiality.
How Blockchain Technology Revolutionizes Invoice-Backed Financing
Blockchain’s distributed ledger system, residing in multiple processing nodes, makes it nearly impossible to manipulate the technology for fraudulent purposes. To create a bogus entry, a person would need to deceive all the miners involved.
Many countries are adopting standardized electronic invoicing, but they still lack the infrastructure for automated and streamlined invoice-backed financing, particularly for cross-border operations. This is where distributed ledgers play a crucial role.
One of the most significant risks in invoice financing is fraud. Concerns over invoice legitimacy, transaction execution, and impersonation often plague buyers. Blockchain technology can put an end to these worries. However, the current version of blockchain, referred to as 1.0, is not yet equipped to address these issues. Version 2.0, represented by distributed ledgers, offers the necessary capabilities to implement identity verification, public/private transaction distinction, and automated contract execution, meeting the requirements set by regulated financial institutions.
Once the parties agree to the transaction terms, their identities are verified, and the transaction is included in a digital ledger accessible to all involved parties, including overseers, sellers, buyers, financiers, and insurance companies. This secure agreement is difficult to dispute and significantly expedites the debtor confirmation process.
Distributed ledger technology also paves the way for smart contracts. These programmable contracts operate on distributed ledgers and execute specific actions when predefined conditions are met. Smart contracts eliminate the need for notifying the parties about changes in bank details and other related hassles.
Embracing Change in the World of Invoice Financing
Early adopters have successfully developed blockchain applications for invoice financing, offering end-to-end processes for invoice sending and receiving, authenticity verification, payment, and receipt acknowledgment. However, these pioneers are still working on creating scalable solutions. The current proof of work mechanism, which ensures blockchain security, also incurs significant transactional costs in real-world operations. To address these challenges, version 2.0 ledgers, like the R3 Consortium Corda ledger, present more comprehensive solutions.
Though still in its early stages, distributed ledger technology, particularly Corda, establishes trust and certainty among all stakeholders involved in transactions. This technology guarantees clear and secure identity verification aligned with AML practices, supports multiple schemas of ledger distribution, and provides a time-stamped record of raised invoices and debtors’ receipt confirmation.
As this technology evolves, blockchain can expedite transaction processing, eliminate fraud, and remove intermediaries involved in holding funds during contract execution. In the rapidly growing global factoring industry, valued at around $3 trillion annually with an estimated growth of 10% per year, businesses that embrace the full potential of blockchain gain a significant competitive edge.
To learn more about Prove’s identity solutions and discover how to boost revenue while mitigating fraud, schedule a demo today.