By contemporary standards, conventional finance has primarily grown into a multi-trillion-dollar thriving industry by functioning as an inefficient middleman. This role has contributed significantly to the industry’s expansion. The emergence of blockchains has provided a solution to conventional forms of finance, which has the potential to produce a financial environment that is more just.
Since the beginning of structured e-business, centrally controlled monetary institutions have dominated the marketplace. These systems typically operate incognito in the sight of their consumers, making it difficult for them to understand how they work. In addition to there being a complete absence of accountability, they have operated their business in an exploitative way, constructing kingdoms along the way by merely acting in the capacity of a middleman.
On the other hand, as the following version of the web continues to unfold, these traditional financial and economic structures are now being recreated in a way that has never been done before. Blockchain technology, cryptocurrencies, and decentralized economies are making significant inroads into the traditional business world thanks to the third generation of the web, which is identified as Web3.
This shift in thinking heralds the arrival of a new commercial realm that has the potential to profoundly reshape our world economic structure as we recognize it today, transforming it into a position that is both more open to participation and safer for conducting business transactions. The following are illustrations of how blockchain technology has the potential to enhance and eventually substitute heritage banking institutions, which are something that we as a culture have become extremely dependent upon.
Trade finance is a fundamental component of the worldwide financial system, serving to reduce risk exposure, expand access to credit, and guarantee the viability of international commerce for both importers and exporters. Trade finance, much like the majority of other industry sectors, is plagued by logistical constraints caused by laborious paperwork processes that are outdated and cumbersome. To guarantee that a payment will be made, for instance, tangible credit letters are frequently still released and passed between the numerous middlemen.
Because of its adaptable nature, blockchain technology has the potential to provide exceptional assistance for global trade operations that, in the absence of this assistance, would be significantly expensive due to the trade and paperwork procedures. Businesses can digitally verify transaction data such as country of origin and merchandise data in a manner that is dependable and uses fewer resources than traditional methods by putting away and protecting these procedures on-chain (on the blockchain).
Because of the extraordinary credibility and safety of the information, this would significantly boost the level of trust that exists in the industry between the various traders who export and import goods. In addition, this has the potential to reduce the most substantial threats that are currently faced by the parties involved in the trade. These risks include inconsistencies in the paperwork and oversight encompassing the movement of goods, as well as a variety of other unknowns.
The process of sending money across borders in this day and age is an organizational disaster. A straightforward wire transfer from one country to another must first go through a complicated chain of middlemen before it can finally arrive at its final destination. These middlemen can range from custodial services to financial institutions. Each middleman adds their costs to the total, which not only makes the handling time longer but also introduces additional safety risks. In addition to this, the 2 financial statements along a complicated and disjointed monetary system need to be merged.
On the other hand, banks could make use of blockchain technology to create decentralized balances that could safely record and monitor all transfers. This separate source of information could virtually remove the system of middlemen that are currently used nowadays by enabling the settlement of money transfers immediately on-chain, which would be an upgrade that is 10 times more significant than SWIFT.
Additionally, this could make it possible for “atomic” exchanges to take place, which clear and settle instantly with verified payment. This would result in the elimination of the multi-day transit time that is levied on international payments and the 24-hour transmission time that is placed on domestic transfers by financial institutions.
The annual percentage yield (APY) that banks currently provide on savings accounts for clients is a relatively insignificant 0.21%. In the meantime, behind the scenes, banks are earning a substantial amount more interest off of the funds that their clients deposit, maintaining the elephant’s portion of the profits garnered.
On the contrary, blockchain is based on the concept of developing a market that prioritizes the consumer. When users rather invest their savings in blockchain apps like Aave or Compound, they have the potential to earn an annual percentage yield (APY) of 8-15% or even higher in some instances.
To date, among the principal motivations behind individuals buying cryptocurrency is to act as a hedge against the rising inflation that the majority of nations are experiencing. The current annualized rate of inflation across the globe is an astounding 8.8%, and it will most definitely continue to rise. Because the rate of inflation is significantly higher than the annual percentage yield (APY) offered by banks, individuals have almost no option but to seek out viable solutions or observe the purchasing power of their money diminish.
The wider populace will probably shift more of their investments into crypto over the long term due to both of these purposes, which will result in a decrease in the amount of savings that are saved in banking institutions and, as a result, a decrease in the revenues generated by TradFi.
TradFi establishments such as Mastercard, JP Morgan, and Blackrock deal with vast quantities of confidential economic information on a routine basis. This information must be transferred, evaluated, and scrutinized. In today’s world, it is both challenging and costly to sustain and reconcile account balances safely while also having absolute conviction.
Rather, establishments can publish this information to a blockchain system, which would profoundly enhance internal procedures by enabling the data to stream in a sequential, unchanging, and consistent way. This would result in essentially more efficient use of resources. Because the blockchain has a track and trace functionality that can assist in the detection of fraudulent activity and the development of a reliable audit trail, this might significantly optimize the level of safety.
Many people believe that blockchain will completely supplant the Trade and Finance industry. Some people believe that blockchain technology will merely act as an additional layer of facilities for the already established TradFi structures. To summarize, it is still unclear exactly how and to what degree those working in the financial sector will adopt blockchain technology. One thing, nevertheless, can be said with absolute certainty: the introduction of blockchain technology will usher in a brand-new era of openness, equity, and security in the financial sector.