Blockchain technology is carving out a niche space in the world of finance and Ripple, in particular, has been moving into this space at a rapid pace.
Trillions of dollars are moved across the global financial system every day and impacts several billion people. But, the existing system has several weaknesses adding to delays as well cost in terms of fees paving way to friction through onerous and redundant paperwork, apart from creating opportunities for crime and fraud. Every year, nearly half of the financial intermediaries like stock exchanges, payment networks and money transfer services are hit by economic crime and that translates to 37% of the global economy while it is 27% and 20% for the technology and professional services sectors. The regulatory cost keeps climbing and has been a significant concern for bankers. Thus, the systemic inefficiency is also adding to the cost which is finally transferred to the consumers.
The question that arises therefore is what contributes to the inefficiency of the global financial system. In the first place, the system is significantly antiquated and rides on assortment of paper based process and industrial technologies with a digital wrapper. Secondly, the system is centralized making it change resistant and vulnerable to attacks and systemic failures. Another reason for the inefficiency of the current system is its exclusionary character that denies several billion people access to the basic tools employed by the financial industry. Bankers have, to a large extent, dodged the kind of creative destruction that is essential for economic progress and vitality. But, this innovation logjam is slated to end soon and it is blockchain technology that is set to change the financial world for the better.
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Originally blockchain technology was developed as a tool to run cryptocurrencies such as Bitcoin. Blockchain technology represents a vast distributed ledger among millions of computers across the globe. Blockchain technology can record anything that has a value, equities, money, titles, contracts, deeds, bonds, and virtually every other type of asset that can be securely stored and moved privately, and on peer to peer basis. Trust is a key factor in blockchain technology and intermediaries such as governments or banks do not play a role in establishing trust. Blockchain technology relies on cryptography, clever code, consensus, and collaboration. For the first time in the history of the universe, two or more entities, be they individuals or businesses who may be absolute strangers to each other can get into an agreement, enter into transactions and create value without the involvement of intermediaries like rating agencies, banks, and government to verify identities, establish trust, or carry out critical business logic such as clearing, settling, contracting, and record-keeping that form the basics of every commercial transaction.
Blockchain technology brings along the promise as well as peril as a disruptive force and many leading segments o the financial industry such as banks, insurers, professional and audit service firms have taken note of the importance of investing in solutions offered by blockchain technology.
What drives the deluge of interest and money into the Blockchain Technology?
Most of the entities that have evinced an interest in blockchain technology cite opportunities in reducing costs as well as friction as the major driver. Let us also not forget that most of the financial intermediaries are themselves dependent on a complex and expensive array of intermediaries to run their operations. A European bank, Santander puts the potential saving from embracing the blockchain technology at $20 billion every year. Capgemini, another consultancy firm estimates a saving of $16 billion for consumers from insurance and banking fees every year by adopting applications based on blockchain technology.
For sure, blockchain technology will enable giants in the financial industry such as the Citigroup, JP Morgan Chase, and Credit Suisse to get the best out of the technology and at significantly lesser cost while streamlining their businesses and in the process, reducing risk. But, though an opportunistic viewpoint is often necessary and advantageous, it is rarely adequate. Seldom has technology thrown open the opportunity to cut cost in a market or business whose structure has undergone fundamental changes. In this context, blockchain technology comes in as a game changer. Blockchain technology supports the peer-to-peer model of mass collaboration that has the potential to render most of the current organizational forms redundant.
Blockchain technology brings new methods of raising capital
In the traditional world new businesses had to target angel investors for funding necessary in the early days of setting up a new business. With venture capitalists coming in the funding pattern changed and then came the IPOs or initial public offering via a stock exchange that is still the more advantageous route for businesses that have established themselves. Many intermediaries are involved in nearly all these forms of fund raising and include exchange operators, investment bankers, lawyers, auditors, crowd-funding platforms like Indiegogo and Kickstarter etc. Blockchain technology is changing all these equations by enabling businesses irrespective of size to raise funds on a peer-to-peer platform through share offerings distributed globally. This new funding mechanism is already transforming the entire blockchain industry. Some $400 million was raised by blockchain companies in 2016 from traditional venture capital investors and about $200 million through what is known as ICOs or initial coin offerings.
ICOs raised as much as $5.6 billion in 2017
In 2017, ICOs raised an astounding $5.6 billion in 2017 and the performance in the first quarter of 2018 has been even more encouraging. But, with the stupendous growth in the number of cryptocurrencies, some bad elements have found this to be a get-rich-quick route. Thankfully, there has been a plethora of resources in the digital world to help potential investors from falling a prey to these greedy elements.
Inherent risks with ICOs
ICOs do come with certain inherent risks just like any other business model that is radically new. There is very little or no oversight or regulatory control, although in certain parts of the globe that scenario is changing fast. Disclosures and due diligence is often scant and some of the entities that issued an ICO are no more in existence. The watch word therefore is ‘caveat emptor’ and many of those who back an ICO in its early days are punters than investors. Thus, we can compare the ICOs to the genie that has just been released from the bottle. When handled right, it can significantly improve the efficiency of finding money for new businesses at lower costs for investors as well as entrepreneurs, apart from democratizing the participation in capital markets around the globe.
When blockchain technology is embraced in the right way, banking around the world could experience a paradigm shift – for the better at lower costs. But, like in a sea of other instances like paypal, Skype, or Twitter, new technologies need a competent leader to take the plunge. In the end, blockchain technology can create winners, but there are also bound to be losers. On a personal note, we would expect the inevitable collision to usher in a new order to the outdated money machine and install a prosperity platform that benefits all stake holders.