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Crypto has been going downhill for quite some time. The crypto winter began after reaching record-breaking highs in the previous year, with global market capitalizations surpassing $2 trillion during that time. Current market valuations stand at $869 billion, a significant descent that has been reflected across digital asset valuations as well.
Further fallouts across stablecoins, DeFi, and the recent FTX crypto exchange have further depleted investor confidence, leading to analysts questioning whether the longstanding slump truly marks the end of cryptocurrencies as we know it. However, contrary to popular belief, the financial services industry is still investing heavily in blockchain, the technology underneath cryptocurrencies. This article will shed light on the multitude of reasons behind blockchain’s sustained popularity.
Blockchain first appeared as a decentralized ledger-sharing technology that facilitated access to an immutable database recording transactions of Bitcoin, the world’s first cryptocurrency. Subsequent developments led to the development of public and private blockchains- the latter of which is accessible only to permission node members within the network.
Despite crypto winter, market valuations and forecasts reflect the true potential of blockchain’s disruptive role in transforming existing operations. Research indicates the current $10.02 billion valuation will increase at an 85.9% CAGR to reach $1431.54 billion by 2030. Financial institutions and associated business enterprises have been the biggest adopters of blockchain, implementing the technology in money transfers, smart contract automation, and improved security in customer data storage and transactions.
Despite crypto winter, blockchain its underlying technology has several merits, including:
Blockchain improves the overall efficiency of payment clearance. Several blockchain protocols feature transactions that cost less than $0.01. This makes the technology an extremely viable option for both financial firms and their enlisted clients.
Blockchain does not require intermediaries to operate. The technology does not only streamline the entire transaction process but helps institutions save by a considerable margin, particularly in the case of international transactions. Projections suggest blockchain integration will help banks save over $27 billion in international settlements by 2030.
The distributed database of records facilitates trust and transparency, offering additional immutability and verification. Banks and financial institutions utilize blockchain for better recordkeeping, as well as sending reports to regulatory agencies.
Swift transaction settlements with the help of streamlining help financial institutions accelerate their service deliveries. Loan funds get credited quickly, vendors receive earlier payments, and insurance settlements may be regulated easier. Stock exchanges like Sensex have also incorporated blockchain to expedite secure transactions of securities in real-time.
A global heavyweight in payment processing, VISA was among the first finance enterprises to incorporate blockchain technology. It has been involved in several innovations, using the technology for cross-border business-to-business payments. VISA also launched crypto credit and debit cards, facilitating transaction settlements using digital assets.
One of the largest US payment card issuers, American Express is also one of the four biggest payment networks across the country. The company has started implementing blockchain across its Membership Rewards program. AmEx members can harness the benefits of the network’s in-house blockchain mechanism and smart contracts with an online loyalty-based rewards platform, Boxed.
The global bank has been heavily incorporating blockchain in finance, from using smart contracts to settling derivative transactions as well as cutting on the time taken for contract set-up. Barclays had filed a patent for blockchain-powered KYC streamlining as early as 2018.
Blockchain and associated DLT is making giant waves across the global banking and finance industry, estimated to have a valuation exceeding $7 trillion. Introducing the option to eliminate intermediaries from the process, the groundbreaking technology is making a key difference across multiple segments including:
Almost 90% of the European Payments Council members affirm that blockchain will fundamentally transform how the entire industry operates within 2025. Blockchain scores high on security and affordability, allowing the transfer of payments and eliminating 3rd party verification in between, resulting in faster processing times. It is interesting to note that cross-border C2B and B2B transactions netted $175 billion in 2020 as payment revenues. Banks are seeing high-profit opportunities leveraging public blockchain systems like Bitcoin.
DLT facilitates the direct settlement of transactions while keeping detailed tabs. This allows quicker cross-border transactions than the existing global standard for banking message services- SWIFT. In fact, SWIFT itself has been involved in blockchain research, contributing to the recent milestone demonstration of transferring CBDCs(Central Bank Digital Currencies) and other tokenized assets across existing financial infrastructure using blockchain. Moving funds across the globe is still a logistical nightmare for banks. Blockchain can make a key difference with the setup of an interbank database for publicly keeping track of all transactions.
Countless entrepreneurs around the world have already used ICOs(Initial Coin Offerings) to raise funds in the absence of a conventional investor or VC. The traditional process is painstaking, where they have to endure countless meeting sessions, negotiations for liquidity as well and valuations. Promising projects can raise funds by selling tokens. Recent times however have been hard, as the SEC and other regulatory agencies have come down on ICOs due to questionable investor credibility and immediate liquidity access. Therefore, which has been utilized by VC firms in the form of crypto hedge fund investments.
The removal of intermediaries through the blockchain process allows swift asset transfers at much lower exchange fees. Asset tokenization facilitates access to global markets thus eliminating regional instability concerns. Using blockchain to transfer securities could easily help save anywhere between $17 billion and $24 billion on an annual basis in trade processing expenses. Blockchain is increasingly being used for transferring real-world asset ownership of all kinds- from debts, stocks, and currencies to commodities, gold, and even real estate. Smart Contracts can enable tokenized securities to function as programmable equity, which will yield dividends or allow buybacks with just a few lines of code.
Blockchain-powered lending is a more secure loan disbursement process that could easily function across large customer pools. The process will also be more economical and efficient. Unlike conventional banking systems, decentralized technology facilitates P2P(peer-to-peer) loans. The lending databases are secured with cryptography, offering an innovative way of loan application built upon a global credit rating framework.
The technology stores information data across separate blocks, which fortifies security and prevents database attacks. An increasing number of banks and financial institutions are utilizing the technology to reduce costs to an annual total of $160 million. Know-Your-Customer(KYC) processes have been deemed mandatory for banks and financial institutions during the onboarding of new customers. The process involves ID verification and biometric authentication. Assimilation of the entire data in a conventional manner can take up to 3 months. Customer due diligence and KYC compliance cost banks up to $500 million annually. Therefore, an amount that blockchain reduces significantly by minimizing human involvement.
Global financial institutions have been quick to identify the immense disruptive potential of blockchain technology. Despite the crypto winter, the innovation has generated multiple opportunities for organizations. Moreover, they can deliver services swiftly and efficiently, enhance user experience, minimize business operational risks, and generate new revenues.