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How Blockchain Solves Fraud in Financial Transactions
Fraud is among the topmost threats of the global economic world, with a PWC report showing that 47% of companies globally reported fraud in 24 months. Every solution aimed at ending fraud in financial transactions has proven futile. The designation of artificial intelligence, for instance, is to reduce direct human involvement in transactions, thus reducing fraud; however, fraud is still surging every year.
A new financial technology, blockchain, which is just over a decade old, is the ultimate fraud solution. Blockchains are cryptocurrency hubs, and as such, they are the lifeblood for flawless digital economies. A bitdegree.org report states that there exist 861 blockchains, all characterized by immutability, decentralization, and transparency.
The first thing that drives the surge in fraud in financial transactions globally is the lack of proper data storage systems that ensure every user is fully accountable. For instance, the current financial system allows accountants and other transaction parties to erase or change data after transactions are over. Dishonest persons may choose to take advantage and erase data or change the values, thus giving themselves an unfair advantage in transactions. Others may choose to shred the papers and receipts for some transactions, hardening up on any transactions.
Blockchain’s foremost attribute helps protect financial transactions from menacing fraud, its immutability, and permanence. Blockchains do not allow users to change or erase any details of already completed transactions. Foremost, some parties validate transactions, also known as miners in mining and staking. A released block is unchangeable and unerasable.
If an accountant or another party commits a serious mistake that requires changing, they cannot erase the entire transaction history. Rather they can create a new transaction to change the state of the assets. Both the new and the original transactions will remain accessible in the chain; thus, the accounting officer will still explain their mistake.
Another advantage of immutable transactions is the traceability of digital assets to their account of origin and recipient.
Transparency and Decentralization of Blockchains
Transparency is another attribute lacking in the fiat world’s transactions—many company personnel complete payments in closed doors, denying authorized employees or persons from seeing the details. Moreover, many developing countries have seen a surge in corruption cases because of lacking transparency in transactions. Dishonest government and company employees may take advantage of the missing transparency and work to benefit themselves. The blockchain is the ultimate solution to transparency in all government and company-related deals.
Blockchain is also a decentralized, transparent networks that publicly display all transaction details. The decentralization of blockchains ensures that there is no central authority governing the services provided on the blockchain. Rather, transactions go through a distributed network, and every individual has the freedom to view the ongoing transactions and past transactions.
Transparency eases the tasks of auditing the records of the companies using blockchains. Rather than the auditor receiving dishonest information from the company or government insiders, they can choose to view the blockchain’s details, thus getting better results.
A transparent network can also help fight the war on counterfeiting goods. The manufacturer will state details about the goods they make, and as such, any buyer can access the information and compare it with the products on the market. If the details don’t match with that public in the blockchain, then there is a large chance that the goods are counterfeits. Moreover, the supply chains are often not transparent, but with blockchains immutable transparency, suppliers will need to prove blockchain.
Although transparency is necessary for financial transactions, some transaction details are just better kept private. For instance, some top government secrets have to remain far from public reach. Other companies may choose to keep private some details about a new product launch to avoid copyright issues.
Transparent networks can not work best in such situations, and as such, there is another blockchain trend called permissioned blockchains. These blockchains introduce another security layer in transactions that restrict access to details for unauthorized persons. The flow of information in permissioned blockchains is only limited to a certain group of persons with a certain digital clearance card. Since information is not public, company information flow will be clear, limiting other fraud types that could affect the company.
Moreover, in permissioned blockchains, auditors, company lawyers, and other government officials can get permission to access a certain company record in the blockchain for a certain fraud investigation.
Although the financial world is currently full of fraud, adopting blockchain can end global fraud surging numbers. Foremost, blockchains have the immutability attribute ensuring that no one can alter transaction values after block release. The government, small and large companies can benefit from this immutability since company details will remain there for eternity.
Another blockchain attribute is the decentralization of authority, thus curbing the chances of single high authority fraud. Moreover, the blockchain’s transparency denies dishonest employees and government officials from completing high profile transactions in private. Rather every member of the public can view and question some details.
The permissioned blockchain trend allows only a small circle of authorized personnel to view some vital details. Although it’s not widely adopted, blockchain is the long-awaited ultimate solution to the surging corruption globally.