By now, you probably understand what blockchain is and the role of bitcoin, the cryptocurrency that initiated it all. However, you might not be fully aware of how this new technology has made a tangible impact on the world of finance, beyond just speculative investments. Traditional banking is starting to take notice of this new player that has entered the financial arena uninvited.
In this article, we will explore various topics such as:
Applications of blockchain to finance
While cryptocurrencies are under scrutiny from countries like China that are restricting mining and trading activities, the foundational blockchain technology is reshaping financial markets. Surprisingly, some of the most significant beneficiaries are less developed economies.
Here are some examples of the emerging impacts on traditional banks:
- Free, instant, and borderless payments
- Financial services for unbanked individuals
- Secure transactions and payments
- Verification of digital identities in financial dealings
- Letters of credit and bills of lading for freight traffic
Blockchain and fintech: a paradigm shift
The rise of blockchain technology has coincided with the growth of the fintech industry, which is providing innovative solutions outside the traditional banking systems.
As their title suggests, fintech companies merge financial services and new technologies. An example of this is Stripe’s upcoming IPO, an online payment platform that may revolutionize bank transfers. It is currently valued at nearly 100 billion dollars.
Another financial sector undergoing this transformation is microcredit, which enables deferred payments on small purchases without interest, commonly referred to as BNPL (buy now, pay later).
Furthermore, beyond e-commerce, fintech is also influencing the microcredit sector in developing economies. With blockchain’s authentication capabilities and the removal of intermediaries in transactions, it serves as a natural ally in the fintech revolution.
The case of the Marshall Islands
This small archipelago in the Pacific announced on February 26, 2018, that it would adopt blockchain technology for its sovereign currency, replacing the US dollar.
Naming it SOV, the country aims to be a pioneer in digital currencies. The initial project plans to launch 24 million SOVs, with a 4% annual increase in reserves through mining.
To implement this initiative, they’ve partnered with Silvio Micali, a professor at MIT, whose startup is developing the architecture of the coin, which has yet to be launched.
The leaders of the Republic of Marshall Islands believe this strategy will allow them to participate in the international financial circuit, even with a population of less than sixty thousand. You can watch the presentation video here:
The SOV Foundation website outlines the advantages of this sovereign currency:
- Simple to use for daily purchases
- Banking with transparent regulations
- Rapid, affordable, and secure transactions
- Stable value over time
However, the initiative from this small Pacific republic has faced challenges. In March 2021, Yong Sarah Zhou, a representative of the International Monetary Fund, expressed her concerns regarding SOV. According to Zhou, SOV could lead to macroeconomic risks and financial stability issues. This aligns with the IMF’s initial stance, which had advised against implementing SOV.
Despite such criticism, other nations like El Salvador have begun to embrace cryptocurrencies as legal tender. Only time will reveal the extent to which blockchain will reshape the financial landscape, but its effects are already being felt across various sectors. Smart contracts, insurance, art certificates (the so-called NFTs), and voting are among the diverse applications of blockchain. Furthermore, blockchain could serve as a tool to foster sustainability, as it is being utilized within renewable energy sectors.
