« August 2019 | Main | October 2019 »

2 posts from September 2019

24 September 2019

Blockchain in the Payments Industry: Digital vs Fiat Currency Part 2

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

Blockchain’s foundational technology: A revolution

Following on from our first blog, could blockchain – the technology that underpins all of the fantastic use cases previously discussed – really disrupt today’s global financial and payments systems? And, if so, what are the implications for governments, businesses and individuals?

By its very nature, blockchain offers the potential for quicker, more customisable, more transparent and less costly payments systems, which can act in isolation or part of an integrated network of other business functions. In these systems digitalised assets and currencies can function either as a replacement for, or a complement to, fiat money.

PwC has led from the front in this space, collaborating with the South African Reserve Bank (SARB) to investigate a digital representation of the Rand for interbank wholesale settlement, producing an award-winning proof of concept. The results showed that the typical daily volume of the South African payment systems could be processed in less than two hours with full confidentiality of transactions and settlement finality.

Since this work, the market has seen the development of a new type of currency - Libra- which is centrally governed by a committee and based on a reserve of global low risk assets, with a decentralised functionality that allows for enhanced cross border payments and encourages financial inclusion.

Greater financial inclusion with blockchain

Decentralised or centralised, public or private - blockchain systems address key issues such as lack of transparency, costly infrastructures, time-consuming third-parties and low-dimensional platforms - the result is added traceability, auditability, and operability.

The cost saving feature is perhaps most prominent though. Until now, the costs of remittance were approximately 5%. With blockchain this reduces to less than 1%, whilst providing guaranteed, real-time transactions across borders, reducing the risk of loss due to currency fluctuations.

With global remittances valued at $689 billion in 2018, the savings potential is obvious and significant.

The impact of this is perhaps to be most felt by the unbanked and low income countries - remittance providers in Africa charge fees of 10-20% – a considerable expense for those with limited means. The global remittance market is projected to grow to $1.413 trillion by 2025, with the greatest growth rates in Sub-Saharan Africa; removing steep remittance fees could mean more disposable income for those who need it most, helping to alleviate poverty and reduce income disparity.

This is just one example of the real-life human benefits blockchain could deliver.

Blockchain technology could also bring disruptive change to key industries. Imagine, for example, the potential for multi-dimensional political, social and economic systems all based on a single network. Or envision a world where education records, insurance claims, movement of assets and citizen identification systems all work off a blockchain infrastructure. PwC explored such future scenarios in detail in our joint report with the Federation of Indian Chambers of Commerce & Industry (FICCI) on smart cities in India.

Stay tuned for our final blog in this series which discusses how Blockchain can optimise key industries.

Related links

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

17 September 2019

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

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

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.

Related links

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