This article will explore the most valuable business use cases for blockchain technology in the financial services sector
Ever since Bitcoin came to the fore as a cryptocurrency providing an alternative to traditional finance, blockchain has been demonstrating its capabilities within financial services. In this article, we take a closer look at how blockchain technology is driving value for financial service organisations.
The value of DeFi
One key financial services use case for blockchain comes in the form of decentralised finance (DeFi) – global, autonomous capital markets that are powered by smart contracts that reside on the technology. Decentralised exchange platforms are allowing users to benefit from the interoperability, immutability and faster verification that traditional spheres sometimes lack.
Kapil Rathi, co-founder and CEO of Crosstower, explained: “Blockchain and its related technologies (digital assets, smart contracts, etc.) can bring significant improvements to the financial services market. By posting all transactions to a blockchain (public ledger), there can be certainty and transparency about the transactions occurring within a financial market.
“DeFi allows for the swapping of digital assets in a decentralised, non-custodial manner, thus reducing counterparty and custodial risk. Digital asset investors have traded hundreds of billions of dollars of trading volume on these blockchain-powered decentralised exchanges, highlighting their growing popularity and promise.
“Moreover, blockchain has also enabled money-market protocols to spring up, allowing users to obtain loans on their digital assets. Thanks to the blockchain, lenders can gain transparency into the health of these loans and the collateral they are backed by. There have already been tens of billions of dollars’ worth of digital asset loans originated through DeFi protocols.”
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DLT and tokenisation for payments
Distributed Ledger Technology (DLT), which allows for simultaneous and immutable access across multiple locations in a network, has proved useful in reducing payment and settlement complexity. This has been especially prominent as cross-border activity rises globally.
“In an age of digital transformation, the financial services sector is actively looking to the adoption of new technologies to enhance the effectiveness of payment and settlement systems. This is particularly true for large financial institutions managing large volumes of intraday liquidity,” said Rhomaios Ram, CEO of Fnality.
“As it stands, for payments to be made, especially on a cross-border basis, banks often need to communicate with many other intermediaries along the chain to effectuate the transfer and move the balance as required. This process is slow and often risky, made more complicated by the lack of transparency and clear communication lines. The demand for faster, secure, cross-border transactions is on the rise, and emerging technology is naturally positioned to address these concerns.
“Tokenisation and adoption of blockchain and Distributed Ledger Technology (DLT) is revolutionising the world of payments, removing the frictions associated with payments and settlement. By researching and testing the advantages on offer through decentralised financial market infrastructures, banks and financial institutions are able to carry out payment transfers instantaneously and securely, at a fraction of the cost.”
Use of blockchain networks
Decentralised financial operations have benefitted greatly from networks built on public blockchain. Hosting transaction data on these networks allow for transparency and visibility from all users involved.
Svensson explained: “We have seen financial institutions offer institutional cryptocurrency product to meet the demands of institutional investors. Whilst on the surface, this may not sound like a key value driver, other than providing additional revenue sources for the firms making such access possible, I believe it is a key step in facilitating mass adoption of some of the key innovations taking place on public blockchain networks such as Ethereum.
“With the innovations during the past two years in DeFi, investors are able to get yields that far surpass what is currently available in traditional bank savings accounts. The savvy users of DeFi, can see returns on crypto assets that are pegged to the US dollar achieve yields of 7%+ per annum, far exceeding what people can get in bank accounts. It is this type of innovation and infrastructure that is gradually being institutionalised, and as it does, we will start seeing new financial products and services being offered to consumers which offer them far more value than what is currently available.
“The crypto-onboarding by Fintechs was a key step towards this, however, what is also required is greater regulation to protect consumers (especially in the US), which I believe we will start to see in 2022. With this in place, we will start to see financial organisations driving more value both for themselves and their customers, providing access to DeFi in a more consumer friendly manner.”
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FS and Web 3.0
The concept of Web 3.0 — the decentralised web — is growing in prominence, in which blockchain technology is set to play a major role. An emerging idea for a more autonomous, intelligent internet powered by DLT and big data, among other capabilities, Web 3.0 is believed by some experts to be the transition that financial services need to successfully innovate in the coming years.
“Blockchain may be the foundation for Web 3.0 and the metaverse, but I believe that it’s also the key that will allow today’s financial institutions to continue to participate in tomorrow’s reality,” said Marten Nelson, CEO of M10 Networks.
“Yet with companies and investors scrambling to get in on the ground floor and participate in shaping this new iteration of the web, it’s worth exploring some of the unintended consequences of this mass move toward decentralisation and what role, if any, traditional financial institutions should play.
“As a customer, Web 3.0 has the potential to add a lot of friction to my life. Clearly, it would be much easier if I could earn and spend money without making multiple conversions or needing to maintain multiple wallets. I want less complexity, not more. We’re thirteen years into Bitcoin and it’s still far too complicated to use in a truly decentralised fashion.
“If financial institutions want to stay relevant in the era of Web 3.0, they must find ways to address these inefficiencies. Central bank digital currencies (CBDC) may play an important role, as could digital currencies issued by regulated financial institutions such as banks. However, for this to happen, financial regulators must come to terms with the fact that Web 3.0 is here and that if the players in our current two-tier monetary system want to continue to participate, it will require vast upgrades to today’s payment infrastructure. We must take steps to create an environment where transactions are global and where payments are expected to be instant, safe, and virtually free of charge.”