The most interesting trend going on is how blockchain opportunities are starting to materialize for fintech, writes Niels Pedersen.
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There is a lot of buzz surrounding the price of Bitcoin, which has more than doubled since early December before dropping this week. While Bitcoin may have more to do either way, the most exciting part of blockchain history is that fintechs can play a key role in decentralizing finance.
Bitcoin’s last spike came in December 2017 amid extreme hype about the potential of blockchain to transform the financial system. Unfortunately, those expectations were ahead of their time. This resulted in a bearish cryptocurrency market which saw Bitcoin collapse by over 80%.
Considering the surge in Bitcoin’s price, it looks like another round of hype is well underway. However, this time around, fintechs are developing solutions to help consumers participate in the blockchain revolution. For example, payments start-up Wirex recently announced a multi-currency card that allows users to make purchases with both fiat currencies and cryptocurrencies.
In addition, fintech investors are rallying. In December, the blockchain infrastructure platform Paxos raised $ 142 million. More recently, the Augmentum Fintech investment trust took its first step in decentralized finance through an investment and partnership with ParaFi Capital, focused on blockchain.
More broadly, institutional investors are becoming aware of the disruptive potential of blockchain technology. To understand this disruption, one must appreciate a surprising and often overlooked fact about Bitcoin and other cryptocurrency tokens: they don’t exist.
What does exist, however, is a record of information flow between users. Just like your email account holds messages, sent and received, a cryptocurrency balance is the net result of a user’s transactions on a blockchain network.
In addition, both technologies use similar security protocols: just like you need a password to send messages from your email account, you need a private key to “ send ” tokens. of cryptocurrency on a blockchain.
When someone performs a blockchain transaction, their private key is transformed into a digital signature, which is then used to authenticate transactions. It’s like the imprint of a rubber stamp, in that you can see where it came from without looking at the stamp itself. As a result, the digital signature can be shared without revealing the underlying private key, just as we can share email addresses without disclosing our passwords.
This allows the network to publish everyone’s transactions without compromising its security. As a result, no one can falsely claim to have been or not a party to a transaction. However, the transparency doesn’t stop there: many blockchain networks make their source code available for free. Can you imagine a bank publishing all of its policies, procedures and controls?
Additionally, blockchain networks are decentralized, which makes them extraordinarily robust. As their transactions are stored in many different places, they are almost immune to attack or corruption. Like peer-to-peer file-sharing networks, blockchains are virtually impossible to remove.
The inherent robustness and transparency of blockchain systems ensure their integrity, allowing network participants to rely on observable rules – as opposed to financial intermediaries – to manage user interactions. This lack of intermediation reduces transaction costs in the system.
In this way, blockchain technology can help make financial services more efficient. For example, the Saldo app allows Mexicans in the United States to pay the electricity bills of loved ones at home. Saldo runs on Stellar, an open-source blockchain that allows users to affix fiat currencies to the network’s token, the Lumen. This allows them to make international payments for a fraction of the normal cost.
However, not all blockchain transactions require a token. Since these are all information transfers, blockchain networks can be used to streamline workflows that involve approvals and verification checks.
This was the case when HSBC recently used a blockchain-based application to facilitate a letter of credit for an international oil shipment. In these transactions, banks guarantee payment to exporters on behalf of importers. Therefore, these involve multiple verifications and approvals along the way. By using a blockchain, HSBC has reduced transaction time by over 60%.
Although HSBC and Saldo focus on different areas, their blockchain solutions both contain a graphical user interface. This saves users from having to directly engage with the underlying blockchain networks, which can be difficult.
Additionally, both solutions rely on the security and openness of blockchain-based authentication mechanisms to reduce behind-the-scenes administration costs. In this way, the blockchain has applications in areas where transparency is generally an issue, such as reinsurance, auditing, and loan syndication – to name a few.
By reducing paperwork and increasing accountability across a multitude of sub-sectors, blockchain can help make financial services cheaper and more accessible. In this context, fintechs can become intermediaries between conventional finance and the most promising blockchain networks. This part of the blockchain history is more important than the price of Bitcoin.
Niels Pedersen is Senior Lecturer at Manchester Metropolitan University and author of Financial Technology: Case Studies in Fintech Innovation. The views and opinions expressed are not necessarily those of AltFi.