How Blockchain and Cryptocurrencies Will Change the Financial System
Disruption happens when nobody is taking notice. In the 1990s, the Internet and the World Wide Web completely changed the way we exchanged information.
It made the flow of communication almost instantaneous and brought knowledge to our fingertips, and for the first few years the mainstream took no notice and businesses didn’t see the significance of it.
Nobody saw it coming, but once mainstream adoption of the Internet took force, disruption of many legacy industries was inevitable. Media, Shopping and how we consume entertainment have changed beyond our imagination.
One industry that was hardly disrupted by the WWW., however, was the financial system. Blockchain and cryptocurrencies will change that. The financial system knows this, and they know that they have to either embrace it or die like newspapers, shopping malls and Blockbuster did.
Blockchain - The World Wide Web of Today
Blockchain today is like the Internet of the 1990s. However, rather than transform the transaction of information, it is revolutionising the way we record and exchange value.
Sending transactions of any amount to anywhere in the world, securely and almost instantaneous and at a minimal cost is the backbone of blockchain technology. And the financial industry will adopt it, and in doing so, it will help create trillions of dollars to the world GDP.
But Cryptocurrencies Are Only Used for Nefarious Activities, Aren't they?
Banks are afraid of touching crypto at the moment. Unclear regulations scares banks into staying away from it. Many times we’ve heard of banks closing accounts of businesses that trade in cryptocurrencies.
This isn’t because they’re against crypto; it’s because they don’t understand it and they don’t need governments coming down on them for any financial irregularities, but the truth is Bitcoin and other cryptocurrencies are the perfect currencies to track criminal activity.
Most People Don't Realize The Potential of Blockchain
Many people don’t understand the potential of blockchain and are happy to let it go by, believing it will die off when the buzz has gone. People were saying the same thing about the Internet in the 1990s. I remember because I was one of them.
In its early days, many people didn’t see the significance of the Internet, either. In fact, most people didn’t even know about it until it started to take off in the late 1990s. And that’s when the early investors made fortunes.
If it weren’t for the Internet today, the small amount of people already invested in cryptocurrencies would be much less. Back in the 1990s we didn’t have widespread Internet to tell us about the Internet, so it caught most investors off guard.
Thankfully, today, most people have the Internet in their pockets, and information is much more accessible, and that’s why society knows about blockchain and cryptocurrencies.
Most legacy businesses didn’t see the potential of the Internet in the 1990s, either. As mentioned earlier, many huge monopolies have closed down because of the growth of startup Internet firms such as Amazon and Netflix.
The Financial Industry knows that with the inception of Blockchain and Cryptocurrencies, they now have to evolve or die off.
What is Blockchain?
Blockchain and cryptocurrencies are different. They were created for the people, and the real cryptocurrencies are not owned by any central entity. They’re not companies, they’re open-source networks which anybody can contribute to.
If you can code and have a great idea, you can build something that will run on the blockchain protocols, and if it is worthy, it will be picked up by the network and integrated into the system.
Hundreds of thousands of people are working on them and making amazing networks of decentralized, autonomous organizations. The technology and ideas that are blooming from the space is difficult to keep track of, but because of it’s decentralized nature, blockchain is making possible what the centralized Internet cannot.
Blockchains are a Decentralized Ledger Technology (DLT). And all transactions on the DLT are immutable and cryptographically secure.
It's how the Internet was supposed to be: A decentralized source of information that cannot be corrupted by any central authority.
That failed. The Internet of today is manipulated by the big companies (ironically, those early Internet startups) that feed our experience and they dictate our experience and feed us what they want us to absorb. This can’t be done with DLT.
Each public blockchain is run by thousands of different computers simultaneously working together, and they have to come to a consensus for any transaction to be verified. What’s more, by storing the data across its network of thousands of computers, it vastly eradicates the security risk that comes with centralized databases and servers.
How the Financial World Will Be Disrupted
Not only is it much safer to store your data/value on a blockchain, it is much faster and cheaper to send a transaction too.
If I want to send money to somebody half way around the world using a bank, I’ll be charged a hefty fee by banks on both sides of the equation. On top of that, the money will take a few days to arrive, and if it’s the weekend, the receiver will have to wait until Monday at the earliest to collect his money.
With cryptocurrencies, I can move any amount, at any time, for a fraction of the cost, in the matter of a few seconds, and nobody can stop it. That alone is so valuable to the financial industry.
Cryptocurrencies will eliminate the need for banking verification. As things are, we need bankers to verify transactions. However, in a system where trust is coded and cryptographically secured on a distributed network, the need for verification from third-party bankers will become unnecessary.
This will not only take a lot of banks’ profits, but conversely, save them a lot of money and time.
Actually, it’s possible that people might not need banks in the future. If you can store all your money in the safest of networks, why would you need to use a bank?
2 billion people around the world don’t even have access to a bank account. They only need access to a smartphone, and they can be onboarded to any cryptocurrency network.
We’re seeing it especially in developing countries, where people have been ostracised from the financial system. With a smartphone in hand, these people can now connect to a financial network, that will become much bigger than the system in place now. The banks know it and they have to work with it.
As I said earlier, transferring money will become much more fluid, cheaper and safer. To send money by a wire transfer, which is how the 2 billion unbanked transact today, is very expensive and slow.
Not cryptocurrencies. They’re much quicker, cheaper and safer, and companies like Western Union and MoneyGram will have to adapt or evaporate into oblivion.
Accountants will become unnecessary too. Blockchains automatically keep track of your transactions. They update in real time and they’re immutable.
Blockchains also introduce the idea of triple-entry accounting. This is a huge upgrade on today’s double-entry system. The introduction of DLT ensures that both parties of a transaction have proof of entry and this becomes their receipt. As with all cryptocurrency transactions, the third entry is immutable, cryptographically sealed and the need for a middleman is eradicated.
Raising capital will be a far cry from what it is today. In today’s legacy system, if you want to raise money for your startup, you need to acquire money from investment bankers and/or venture capitalists. If they don’t like your idea, however, you’re doomed.
Cryptocurrencies are already remodeling the capital raising market as we saw with the ICO boom of 2017. No doubt, the ICO model of today is flawed and there were many scams in 2017, but once it’s regulated, it will be back in some form or another, and the chance for the average person to invest will open up.
This will introduce much more investment into the startup world. No doubt, there’ll be more failures, but there’ll also be many more success stories, and with it, much more capital creation.
Society, especially western society, is difficult to disrupt and when people are comfortable, they don’t like or need change. But, most of the world does need change, and now they have something that will bring more liquidity into their lives and bring more prosperity.
For a complete overhaul of the financial system, it might take 10-20 years, but as we can see with partnerships the legacy institutions are positioning themselves. They’re getting ready, not because they want change, but because they know change is inevitable.
The financial industry has been pretty much untouched for 500 years or so. That’s coming to an end and smaller startups around the globe are going to help decentralize and disrupt the financial industry. The banks know it’s going to happen and they have to adopt it or be devoured. Either way, it won’t be subtle.
Contact the author: