IHS Markit published an interesting forecast on blockchain technologies in June this year. They predicted the blockchain market in 2030 will be set at $2 trillion. While this may seem rather bullish and bold, there is little doubt that the emerging fintech is reshaping banking, wealth management, insurance and capital markets.
EARLY FINTECH DISRUPTION
In the aftermath of the 2008 financial crisis, many startups found the restricted lending environment prohibitive to their needs. Blockchain technology turned out to be a solution for crowdfunding in this case, but it brought its own disadvantages with the abuse of the Initial Coin Offering (ICO) model, enabled by the lack of regulatory standards. Attempts to remedy this situation are underway in the form of Security Token Offerings (STO) – a promising endeavour in its infancy.
Blockchain entered the scene as a challenger of the traditional financial system, with many intermediaries and high cost to income ratios. The established players were forced to react by either investing in their own fintech departments or through acquisition and partnership deals.
THE BEST OF BOTH WORLDS IN FINANCE
While decentralized exchanges will likely remain a staple of the emerging digital landscape, blockchain technology itself will have to find some middle ground between complete decentralization and centralized control. This is especially true as services like asset management incorporate blockchain and AI into their models, as legal compliance needs to be clearly established.
The financial system of the future will benefit from leveraging blockchain technology in digital finance across many jurisdictions, which will lead to increased trading and tokenized asset mobility. Blockchain’s potential does not lie only in finance, but in all areas where information needs to be stored, verified and transferred. In an ever increasing digital world, this encompasses virtually every industry.
Such a network will find a use for a global settlement currency. It is not clear why a global network would use a stable token with a 1:1 peg to a fiat currency instead of the fiat currency itself, given that there exists a frictionless transition from crypto to fiat. It is more likely to expect the choice will be focused between fiat currencies and stable tokens with added value and scalability.
GLOBAL FINANCIAL INSTITUTIONS AND FINTECH REGULATION
Still, the changing attitude governments and global financial authorities display in regard to cryptocurrencies acts as a break on technological expansion. To build a global interconnected system, the current patchwork of regulations and directives must be replaced by more solid, universal guidelines with manageable variations within particular jurisdictions.
A recent OECD paper produced for the Anti-Corruption & Integrity Forum notes that the abuses that previously happened within the blockchain architecture were not due to any errors in technology, but were a result of human intention. Moreover, compliance officers are well aware of the measures that could be undertaken to increase security on crypto exchanges.
It comes as no surprise that decentralized exchanges are viewed in a less favourable light; the reason being that in this case, it is much harder to identify the players responsible for the implementation of security. The paper calls for innovative mechanisms to counter illicit activities on these types of exchanges.
According to the paper, regulators around the world agree about the need for a harmonized approach to crypto, and at the same time admit that currently no details of its implementation exist.
We are beyond the stage of when companies tried to benefit from the hype of disruption by merely announcing an incorporation of blockchain into their products to see their shares get an artificial boost in value. What still prevents the full impact of these new technologies to manifest is an absence of harmonized global standards, which would provide a regulatory foundation that can make multi-node connectivity a reality.