Blockchain in the Payments Industry: Digital vs Fiat Currency Part 1

17 September 2019

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by Aaron Greatbanks Senior Associate, Investment Actuary and UK Blockchain Community Lead

Email +44 (0)7841 071989

How can blockchain revolutionise payments and remittances for businesses, governments and individuals?

Blockchain technology could dramatically transform today’s payment infrastructures. And that could revolutionise key industries, enabling major improvements for businesses, governments and individuals alike. Among its many benefits, blockchain has the potential to cut costs, speed up transactions and promote greater financial inclusion by removing remittance barriers.

This series of blogs explores blockchain’s potential benefits and envisions what a future built on blockchain-based payments might look like.

The transition from cryptocurrency euphoria to regulated, global digital currency ambitions

In late 2017, cryptocurrencies were exploding in value. By Christmas, Bitcoin had hit an all-time high, and the wider cryptocurrency market reached a market capitalisation of over $835 billion. Everyone from amateur investors to huge financial institutions was paying attention, and investment and commercial banks were now publicly discussing offering their clients access to this market. This was a remarkable, and ironic, development considering cryptocurrencies were born in response to the 2008 financial crisis and the lack of trust ignited by it.

Now, over halfway through 2019, the market has slowed following what was called the ‘crypto-winter’, largely because of scepticism from Initial Coin Offering (ICO) scams, regulatory uncertainty and a market retrace.

However, while the market has cooled, it’s clear digital currencies have entered into the mainstream and the consciousness of decision makers at central banks, regulators, and other financial institutions.

We have witnessed some fundamental developments. Societe Generale’s (SG) issuance of EUR100m of covered bonds as a security token, and Facebook’s announcement for ‘Libra’, which aims to be a simple global cryptocurrency, smart contract platform and financial infrastructure that empowers billions of people with the backing of huge players like Coinbase, Mastercard and Uber.

These two developments set the stage for a sea change in payments. They are foundational, because they both embrace a permission-less public mechanism to support exchange of monetary value – a real break from how traditional financial systems are organised. Societe Generale’s covered bond was issued on Ethereum. And while Libra is initially permissioned, the stated ambition is “for the Libra Network to become permission-less”.

Compared to traditional remittances, blockchain based transactions are on average 388 times faster and 127 times cheaper. So it comes as no shock that around 15 central banks are looking into their own digital currencies, JPMorgan have created their own fiat-backed digital coin and the regulation of cryptocurrencies was a topic at the G20 summit.

In one recent publication, the International Monetary Fund (IMF) describes the potential significant cost savings for banks as one of the main drivers, and one prominent development from this exploratory phase comes from Sweden, which is looking into a fiat-backed ‘E-krona’ as they consider a cashless system.

There is also the potential to remove cost barriers and enhance financial inclusion, reaching hundreds of millions of people who do not have a bank account nor access to modern financial services, something that Libra is actively trying to achieve.

Our next blog explores this in more detail.

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by Aaron Greatbanks Senior Associate, Investment Actuary and UK Blockchain Community Lead

Email +44 (0)7841 071989