The Role of Blockchain in Finance

Blockchain offers tremendous benefits for businesses. The question is whether they will use them to their advantage.

The rapidly progressing adoption of blockchain technology and cryptocurrencies are disrupting the financial industry.

According to CoinMarketCap, the crypto market – which now includes over 9,800 digital assets – has a combined capitalization of $1.25 trillion, outpacing Apple on the road to challenge gold’s leading position ($11.65 trillion).

At the same time, a recent report estimates the blockchain market to expand from 2019’s $2.01 billion to $69.04 billion by 2027 at a compound average growth rate (CAGR) of 56.1%.

By now, it has become clear that distributed ledger technology (DLT) is in high demand.

But how can blockchain and crypto help financial organizations in improving business efficiency?

Blockchain Is More Than Crypto

When most people hear the phrase “blockchain”, the first thing that comes to their minds is cryptocurrency.

Indeed so, blockchain is the underlying technology of crypto, which powers nearly all digital assets on the market while promoting transparency, high security, peer-to-peer (P2P) transactions, and decentralization.

That said, blockchain is not solely about cryptocurrency transactions. Instead, DLT can be used in almost any field related to data delivery and information processing.

For that reason, many companies are either considering or already adopted blockchain technology to enhance their business processes.

Despite that DLT is still in its very early form, there are many examples of large corporations utilizing the blockchain for real-world use-cases.

One is Walmart that has partnered with IBM and Unilever to leverage the Hyperledger Fabric blockchain for tracking product supply chains.

IBM also has its own blockchain, with the multinational tech firm becoming a leading B2B distributed ledger technology provider in recent years.

Real-world blockchain applications continue to proliferate, with an increasing number of companies integrating DLT-based solutions into their business processes to achieve higher efficiency.

Through transparency in a decentralized environment, businesses can promote trust as well as attract new customers and increase their existing clients’ loyalty, who can now track their products to assess their quality via the blockchain.

In China, the clothing-retail giant H&M partnered with the VeChain blockchain platform to implement a similar solution.

By leveraging DLT, the company’s customers can access detailed information about the production of branded clothing by simply scanning a QR code via their smartphones. Furthermore, shoppers can even watch videos of how the products in the stores were made in the factories.

The Power of Blockchain

As you can see, blockchain is a powerful tool for businesses.

And for an excellent reason, DLT offers both service providers and end-users tremendous benefits compared to traditional systems.

Due to its transparent nature, blockchain technology allows data to be tracked from start to finish, eliminating the need for blind trust from customers. At the same time, it offers an opportunity for businesses to attract more users.

Furthermore, blockchain transactions are peer-to-peer, which means there’s no need for intermediaries or other third parties. As a result, companies can significantly reduce their operational costs while improving business efficiency by accelerating and automatizing processes via smart contracts.

Despite the traceability and visibility of blockchain transactions, users do not know the real persons behind the transfers, which makes them more private than traditional solutions.

How Businesses Adopt Crypto

Blockchain and cryptocurrency often walk hand in hand.

For that reason, many businesses are increasingly exploring crypto as an asset class for investments.

Since 2020, we have seen that this has become a growing trend among not just private and digital asset businesses but also publicly traded companies.

For example, MicroStrategy, Tesla, and Square have invested $2.24 billion, $1.5 billion, and $220 million in BTC to date, respectively.

But what would happen if businesses decided to adopt cryptocurrencies for payments as well?

The thing is, many of them already did.

In addition to the travel industry where digital assets have demonstrated increased adoption for payments (e.g., Expedia, airBaltic, LOT Polish Airlines), large enterprises like Microsoft, Starbucks, AXA Insurance, etc. have integrated crypto as a payment method for their solutions.

Furthermore, while PayPal has already added support for crypto transactions, Visa and MasterCard are racing against each other to integrate digital asset settlement into their massive payment networks.

Cryptocurrency Promotes Financial Sovereignty

Compared to fiat currency, crypto has three major advantages: autonomy, convertibility, and decentralization.

Blockchain networks are highly resilient against network issues and do not require third-party intervention to operate.

For that reason, cryptocurrencies are virtually independent of government action, with the latter potentially causing severe failures in the monetary system that can often lead to economic collapses.

Furthermore, with the industry maturing, it has become much easier to exchange fiat currency to crypto with only a small commission.

Thereby, crypto can be effectively used for cross-border transactions, which usually feature much faster settlements and cost-efficient fees compared to traditional international transfer (especially for payment-optimized assets like XRP or XLM).

Businesses Must Adopt Blockchain to Become More Efficient

Blockchain is a technology that is still being studied.

Yet, despite its early development stage, DLT already has a lot to offer for the companies willing to adopt it.

Besides, as more of blockchain’s potential gets harnessed, we will undoubtedly see drastic changes in the financial industry and many other sectors as key players seek to achieve greater operational efficiency.

Petr Kozyakov, co-founder and CEO at the global payment network Mercuryo

Will CBDC be the Factor that Paves the Way Towards a New Economy?

How Will State-Backed Digital Currencies Shape the Global Economy?

With improved transparency, traceability, security, CBDCs help central banks in creating a more efficient economy.

As cryptocurrency adoption has significantly increased among retail investors, institutionals, and numerous traditional finance players, central banks have entered into a heated race to develop their own CBDCs.

According to a Bank of International Settlements (BIS) survey from last May, 65% of the polled central banks stated that they had actively researched CBDCs. And multiple governments are well beyond the decision-making and research stages.

While the Bahamas have launched the digital sand dollar last October as the world’s first CBDC, China has emerged to be a leader in this field among major economies, conducting extensive pilots and preparing a draft law for its digital yuan project.

Sweden’s Riksbank has also been actively testing its e-krona CBDC, with its central bank recently announcing a one-year extension for the project. The Scandinavian nation’s government has already started reviewing whether to implement the digital currency expecting to complete it by November 2022.

CBDCs have become a top priority for central banks that had been previously hesitant about digital currencies. While the US published a research paper on central bank digital currencies last month, the EU announced the end of its public consultation on CBDCs in January.

Why Are Governments So Interested in CBDCs?

It’s no surprise that there is such a high demand for CBDCs among governments.

CBDCs combine most of the benefits of existing cryptocurrencies – such as the lack of intermediaries, enhanced transparency and traceability, secure and continuously operating networks, as well as instantaneous and cost-efficient payments – with increased government control and oversight.

For that reason, CBDCs allow nations to transform their existing financial and payment infrastructures to create a new, more efficient economy while maintaining their control over money issuance.

As state-issued and controlled digital assets tied to the value of national currencies, CBDCs use permissioned blockchain networks or another form of distributed ledger technology (DLT).

This allows the government to have full control over the network and the state-backed digital currency powering it and a deeper insight into its citizens’ finances.

While the latter could hurt users’ privacy, a government-controlled digital currency allows the state to crack down on illicit activities more efficiently. Examples of such include terrorism financing, money-laundering, and payments-related fraud, all of which have been presenting major problems for most nations worldwide.

In addition to a better taxation system and real-time insight into the current macroeconomic situation, CBDCs can finally offer a proper solution to the unbanked.

And we shouldn’t forget about cross-border payments, which have been traditionally going through obsolete and inefficient networks. Instead of slow and expensive transfers, international CBDC transactions feature (near-)instant settlements with inexpensive fees due to the lack of intermediaries.

The Future of CBDCs and Their Impacts on the Market

In 2021 and beyond, I expect the central bank digital currency race to further intensify, with multiple governments launching their CBDCs in the next few years.

However, even with several CBDCs on the market, the demand for decentralized cryptocurrencies will significantly increase among both retail and institutional investors in the coming years.

In addition to hedging against general market risks and inflation, crypto will provide a more private, trustless, and democratic alternative to the centralized and government-controlled networks of CBDCs.

For these reasons, even before state-backed digital currencies are launched, regulators will take action to provide more clarity around crypto, especially if more high net worth players join the space and put pressure on governments to act.

On the other hand, banks that have been the primary beneficiaries of the current financial system will face significant losses of revenue after the appearance of CBDCs.

Since central bank digital currency networks will operate without intermediaries, banks will lose out on most of the fees they currently collect from customers.

For that reason, they will be forced to innovate to minimize their losses and maintain their growth and market positions.

Creating a New World Economy

CBDCs have the potential to significantly improve finance while providing multiple benefits to both individuals and governments, such as making cross-border transactions faster and cheaper, combatting payments-related crimes, and controlling money issuance more efficiently.

With that said, there is still a lot of work to be done in this field.

But if it all works out, CBDCs could become the rails by which the world will move into a new economy.

Petr Kozyakov, co-founder and CBDO of the global payment network Mercuryo