FINM4100 Analytics in Accounting, Finance and Economics Report 2 Sample

FINM4100 Analytics in Accounting, Finance and Economics Report 2

Your Task

• Create a report on Blockchain in the context of Fintech and RegTech.

• This task is to be done individually.

• Submit your report as a Word file using Turnitin on Monday 23:55 AEST

Assessment Description

Learning Outcomes: LO2, LO4 and LO5

Background: Blockchain is an emerging technology of great importance in Finance, Economics and Accounting. It impacts the way we deal with and monitor financial transactions, trade, identify ourselves, and is having an impact on auditing and regulation. You are a compliance manager in a financial institution. Your company wants to use blockchain for three purposes:

1. As a mechanism for secure digital transactions and smart contracts

2. As a way of managing digital identities

3. To offer clients the chance to invest in cryptocurrencies
However, the executive management team are not sure of all of the benefits of these applications or possible ethical, legal and privacy issues. You have been requested to prepare a report for management that will address the three key purposes above and to address the concerns raised by the executive. Your report should explain what blockchain is, explain these uses (applications) and how it will benefit yourself and the company auditors in a report, as outlined below.

Assessment Instructions

Do your initial research from the workshops then find relevant articles on the internet to support your statements.

You are to write a report as follows:

• Introduce the idea of blockchain and its applications in general. [400 words]

• Briefly explain the applications that we are focussing on here (1,2 & 3 above). [200 words]

• Describe in detail how and why blockchain can be applied in these three ways. [400 words]

• Describe the benefits blockchain can offer auditors and compliance officers and subsequent positive impact on the organisation. [300 words]

• Assess possible ethical and privacy implications of the applications at the financial institution at which you are imagining that you work. The impact could be on staff, customers or other stakeholders. [400 words]

• Use at least ten (10) relevant references and the Harvard referencing style. References must be relevant to what you are discussing in each paragraph.

• Take care with your report structure and written presentation. Remember, your audience for the report is the executive management team, so you should write appropriately for that audience.

Use of Generative AI (eg Chat GPT)

You may use generative AI to assist you in preparing your report. However, it is important to consider the following if using generative AI:

• The use of generative AI must be referenced accordingly

• The wording submitted must be your own – it cannot be simply a ‘cut & paste” from the generative AI tool

• If using generative AI, you must in addition to the above, include as part of your references a list of the prompts used in order to produce output from the generative AI tool.

Solution

Introduction to Blockchain and Its General Applications in FinTech

Blockchain technology projects a standard shift in how data can be stored in secure, transparent and completely stored. It is seen as a chain of blocks that encapsulates a batch of validated transactions, cryptographically sealed. Once the block is attached to the chain, altering the content becomes infeasible which is directly linked to the algorithms and cryptographic hashing (Garanina et al., 2022). According to the MBA Assignment Expert overview, This leads to an unprecedented level of data security and integrity. The initial application of blockchain was for the digital cryptocurrency, Bitcoin. Its creator, pseudonymously known as Satoshi Nakamoto, utilized blockchain to ensure that digital transactions could be verified and recorded without a central authority. This not only made peer-to-peer transactions possible without a middleman but also addressed issues of double-spending that plagued previous digital currencies. Furthermore, with the maturity of the technology, it becomes clear that the application stretched far more than the cryptocurrencies. The FinTech sector, in particular, stood out as a prime beneficiary of this revolution. FinTech, which essentially refers to the confluence of finance and technology, aims to make financial services more efficient, accessible, and customer-centric. Blockchain’s attributes align perfectly with these objectives.

1. Decentralization and Peer-to-Peer Transactions: Traditional financial system have a major reliance on intermediaries such as banks or payment processors for the validation and authorization of the transactions. With the help of blockchain, transactions can be verified directly by the network participants that leads to reduction of cost and increment in the speed (Wu 2023)

2. Transparency and Trust: Each transaction on the blockchain is transparent to every network participants (Garanina et al., 2022). This transparency ensures that every party can trust the system without trusting each other. In an industry where trust is major, this is a big landmark.

3. Smart Contracts: These self-executing contracts have the terms of the agreement directly written into code. In FinTech applications, smart contracts can automate complex financial transactions, ensuring that terms are met without the need for intermediaries.

4. Global and Inclusive: Blockchain can potentially provide financial services to billions without access to traditional banking. Its decentralized nature ensures that services are not bound by geopolitical constraints.

5. Asset Tokenization: Assets, be it real estate or art, can be represented as digital tokens on the blockchain. This could revolutionize how we think about ownership, trading, and liquidity (Li et al., 2023).

In summary, blockchain is not just a technology; it's a new way of thinking about trust, assets, and value exchange in the financial world. Its implications in the

FinTech sector are vast, and as the technology evolves, it promises to redefine the contours of the financial landscape.

Focus Applications of Blockchain in FinTech and RegTech

Blockchain, often lauded as the backbone of the digital economy, finds profound applications in FinTech and RegTech.

1. Customer Segmentation: Understanding the customer is of the utmost importance in the field of FinTech. Blockchain works with the making of an undeniable advanced impression for every client. Each exchange, cooperation, and inclination is logged transparently. Financial institutions are able to create individualized financial products or services based on such in-depth data (Lee et al., 2023). Moreover, in a world overflowing with information breaches, blockchain gives upgraded security, guaranteeing that clients' financial behaviors of behaving and preferences are safeguarded from malicious aim.

2. Risk Profiling: Compliance, monitoring, and risk management are the focuses of RegTech, the regulatory subset of FinTech. Blockchain, with its changeless ledger, guarantees that an entity's financial history is very easy to read. Such straightforwardness takes into consideration an extensive risk evaluation. Financial institutions can now settle on informed lending or investment choices, having a clear image of the risk related with an individual or element (Ruangkanjanases et al., 2023). This safeguard the establishment as well as cultivates a better financial environment.

3. Financial Transactions: The key part of FinTech is exchanges. Blockchain speeds up bond and stock transactions, making them secure and transparent. This implies diminished settlement times, limited counterparty risk, and, critically, lowered costs. Besides, the tokenization part of blockchain carries liquidity to generally illiquid resources, opening up a plenty of speculation opportunitiesIn essence, blockchain stands at the intersection of FinTech and RegTech, offering solutions that are not only innovative but also secure, transparent, and customer-centric.

Application of Blockchain in Segmentation, Risk Profiling, and Financial Transactions

1. Customer Segmentation: The dynamism of the financial landscape necessitates the customization of services. In a world dominated by data, financial institutions vie to understand and predict customer behavior for product development and strategic planning. Enter blockchain. With its decentralized, transparent, and immutable ledger system, blockchain enables an incorruptible record of each customer's transactions and behaviors. When paired with Artificial Intelligence (AI), this becomes a potent tool (Zhou et al., 2023). AI processes this vast amount of data, offering insights that might have previously gone unnoticed. FinTech firms, leveraging these insights, can craft financial products and solutions that align perfectly with individual customer needs, behavior, and preferences. For instance, a customer making frequent international transactions might be offered a specialized forex account with minimal charges. Such precise segmentation not only enhances customer experience but also maximizes business profitability.

2. Risk Profiling: Risk is an inherent element of the financial world. Every loan approved, every investment made, comes after a meticulous assessment of risk (Asma & Algarni 2023). With RegTech's focus on technology-driven compliance and regulation management, blockchain emerges as a stalwart ally. Every transaction recorded on the blockchain is time-stamped and immutable. This means financial institutions have access to an individual or entity's complete, unaltered financial history. Such depth of information facilitates a holistic risk assessment, enabling firms to make informed decisions, from loan approvals to investment advice. Moreover, blockchain's transparency acts as a deterrent for financial malfeasance, as every transaction is traceable, further aiding the risk profiling process. This not only fortifies the financial institution against potential bad debts but also ensures a more transparent and trustworthy financial ecosystem.

3. Financial Transactions: FinTech thrives on innovation in financial transactions. Blockchain, with its ability to tokenize assets, ushers in a new paradigm. Traditional assets like bonds and shares, when tokenized on blockchain platforms, gain unparalleled levels of transparency, efficiency, and security. Each transaction, being recorded on the blockchain, is resistant to fraud, ensuring the legitimacy of every trade. Moreover, blockchain's decentralized nature expedites trades by eliminating intermediaries, resulting in faster settlements. This heightened efficiency coupled with security ensures that financial processes are not only streamlined but also instill a greater degree of trust among customers (Zhou et al., 2023) .

In conclusion, blockchain's infusion into FinTech and RegTech promises an evolution - an evolution towards more transparent, secure, and personalized financial services, ensuring a robust and resilient financial future.

Benefits to Auditors and Compliance Officers in RegTech

RegTech, the branch of FinTech that leverages technology to address regulatory challenges in the financial sector, is undergoing a transformative shift thanks to blockchain technology. This decentralized digital ledger offers a myriad of benefits to auditors and compliance officers, ultimately streamlining their operations and enhancing the overall reliability of the financial ecosystem.

1. Enhanced Data Integrity: Auditors traditionally grapple with verifying the authenticity and integrity of financial records. With blockchain, every transaction is timestamped and added to a block which, once recorded, is virtually tamper-proof. This immutable nature ensures that the data auditors access is accurate, significantly reducing the chances of fraudulent activities or data manipulations. Instead of diving deep into piles of records, auditors can focus on more strategic, value-added tasks, assured of the data's authenticity (Adhikari & Ramkumar 2023).

2. Real-time Compliance Checks: Compliance officers, in the throes of an ever-evolving regulatory environment, find a reliable ally in blockchain. The transparent nature of blockchain, where each transaction is visible and traceable, facilitates real-time compliance checks. Instead of periodic reviews that might miss anomalies, blockchain allows for continuous oversight. This means that regulatory breaches can be detected and addressed almost immediately, ensuring the organization remains compliant at all times.

3. Streamlined Reporting: Blockchain can automate and streamline reporting processes. Since the data on the blockchain is consistent and up-to-date, compliance officers can generate real-time reports for regulatory bodies, reducing manual intervention and the potential for human errors (Adhikari & Ramkumar 2023).

4. Enhanced Trust and Transparency: In an industry where trust is paramount, blockchain positions organizations as transparent and reliable entities. Stakeholders, from investors to regulators, can access and verify transactions on the blockchain, fortifying trust (Tyagi et al., 2023). This level of transparency not only satisfies regulatory demands but also strengthens stakeholder relationships, a crucial aspect in the competitive FinTech world.

Ethical and Privacy Implications in FinTech

The dynamic evolution of FinTech, bolstered by the integration of blockchain, has revolutionized the financial landscape. However, this amalgamation brings forth various ethical and privacy implications, which need to be conscientiously addressed.

1. Job Displacement: The automation and efficiencies provided by blockchain could deliver specific manual jobs excess. For instance, those associated with data verification or exchange reconciliation could secure their positions in danger. An ethical dilemma emerges as a result: while firms can expand benefit and productivity, they likewise bear the ethical obligation of either retraining impacted staff or helping them in changing to new jobs.

2. Balancing Transparency with Privacy: One of blockchain's remarkable elements is straightforwardness, which, while significant, could likewise encroach on individual protection. Clients could track down their financial ways of behaving, when straightforwardly recorded on a public blockchain, presented to expected abuse. For example, a lending institution could bias against people in light of past financial slips up, prompting unfair lending or prejudicial treatment.

3. Irreversibility and its Implications: Blockchain transactions are immutable. While this ensures data integrity, it also means that inadvertent errors, once recorded, cannot be undone. This can undermine trust, especially if a mistake leads to financial repercussions for customers or stakeholders (Longstaff 2019). Financial institutions must develop mechanisms to address such scenarios, ensuring that errors, while indelible on the blockchain, can be rectified in practical terms.

4. Concerns of Centralization: While the essence of blockchain is decentralization, some FinTech firms might adopt private or consortium blockchains, which can inadvertently lead to data centralization. When a limited group governs access and validation, it might create vulnerabilities, as central points of control could be targets for hacks or malicious activities (Wu 2023). Additionally, it raises concerns about the equitable distribution of power and control over financial data and operations.

5. Cultivating Stakeholder Trust: As FinTech ventures deeper into cutting-edge technologies, it's paramount to ensure that stakeholders – from customers to investors – understand and trust the systems in place. The mysterious or complex nature of blockchain can be intimidating for many (Longstaff 2019). FinTech firms have an ethical duty to educate, assuage concerns, and ensure that the benefits of blockchain don't come at the cost of stakeholder trust and confidence.

In summary, while blockchain offers tantalizing prospects for FinTech, it also necessitates a measured approach. Balancing the promises of blockchain with the ethical and privacy implications is critical for sustainable, trustworthy, and equitable advancements in the financial domain.

References

Adhikari, N. & Ramkumar, M. 2023, ‘IoT and Blockchain Integration: Applications, Opportunities, and Challenges’, Network, vol. 3, no. 1, pp. 115.

Asma, M.A. & Algarni, A. 2023, ‘A Survey on Blockchain Technology Concepts, Applications and Security’, International Journal of Advanced Computer Science and Applications, vol. 14, no. 2.

Garanina, T., Ranta, M. & Dumay, J. 2022, ‘Blockchain in accounting research: current trends and emerging topics’, Accounting, Auditing & Accountability Journal, vol. 35, no. 7, pp. 1507-1533.

Lee, J., Kim, B. & Lee, A.R. 2023, ‘Priority evaluation factors for blockchain application services in public sectors’, PLoS One, vol. 18, no. 3.

Li, X., Jiao, H., Cheng, L., Yin, Y., Li, H., Mu, W. & Zhang, R. 2023, ‘A Quantitative and Qualitative Review of Blockchain Research from 2015 to 2021’, Sustainability, vol. 15, no. 6, pp. 5067.

Longstaff, S. 2019, Blockchain: Some ethical considerations, viewed 6 September 2023 Blockchain: Some ethical considerations - THE ETHICS CENTRE
Ruangkanjanases, A., Eissa Mohammed, A.Q., Alfawaz, K.M. & Hariguna, T. 2023, ‘Examining the Antecedents of Blockchain Usage Intention: An Integrated Research Framework’, Sustainability, vol. 15, no. 4, pp. 3500.

Tyagi, A.K., Dananjayan, S., Agarwal, D. & Hasmath Farhana, T.A. 2023, ‘Blockchain—Internet of Things Applications: Opportunities and Challenges for Industry 4.0 and Society 5.0’, Sensors, vol. 23, no. 2, pp. 947.

Wu, H. 2023, ‘Design and Optimization Method of Intelligent Interconnection Decision System Based on Blockchain Technology’, Wireless Communications & Mobile Computing (Online), vol. 2023.

Zhou, S., Li, K., Xiao, L., Cai, J., Liang, W. & Castiglione, A. 2023, ‘A Systematic Review of Consensus Mechanisms in Blockchain’, Mathematics, vol. 11, no. 10, pp. 2248.