Blockchain Payment Technology and Economic Recovery Post Covid-19 Pandemic

2020 has shown the world that there is still many aspects of our everyday lives need to be transformed or enhanced using digital transformation. It is shocking that in 2021, we still rely heavily on credit cards, which were introduced in the 1950s. At the same point in time the world was introduced to colour TVs. And now TVs have evolved towards being portable and digital. Whereas, the credit card has been the same for the past 70 years, with major issues not being addressed. This argument can be extended to the transfer of funds witnessed today, costing individuals and businesses a significant amount of both money and time.

Financial institutions adopting digital transformation will create an environment whereby consumers and business can enjoy faster and cheaper funds transfer than what conventional banks offer. According to Goldman Sachs, the adoption of blockchain can save the financial institutions $11-$12 billion per year, by transforming the clearing and settlement system. Accenture outlines that implementing blockchain technology could provide up to 50% cost saving for businesses in the form of trade support, clearing and settlement that is robust and digitally transparent. The other significant benefit other than cost saving is lowering the settlement duration from 1-3 working days to around 10 minutes by using blockchain technology. The application of this technology has erupted a battle, with one side consisting of Swift international bank settlement system that was founded in 1973 used by financial institutions to this day, overseeing the transfer of $5 trillion dollars on an average day. On the other side are increasing number of organisations that are harnessing the power of blockchain technology to become efficient in both cost and time.

To better recognise the technological benefit from a payment perspective through the use of blockchain technology, it is vital to understand how the present banking system operates. A standard bank transfer whereby the receiving bank does not possess a reciprocal account, will need to use an intermediary to complete the transfer. The intermediary bank or clearing house will levy fees and delay the transaction for a few days to finalise the transaction.    

Figure 1: Standard bank transfer going through a clearing house or intermediary

 However, by adopting a distributed ledger protocol, financial institutions can establish a private blockchain that will allow every financial institution partaking in it to execute transactions within the network. With every bank acting as a validator node, which will approve the transactions and authenticate them. Therefore, diminishing the need for an intermediary and the fees associated to them.

Figure 2: Private blockchain structure between banks

The more investment in the blockchain technology, the faster the transfers, removing counterparty risk as the settlement time will fall to become instantaneous. Also, the blockchain payment system integrates currency exchange capability in which currency exchange is made without a currency exchange fee. This technology has an added advantage of being more transparent, allowing auditors and regulators to verify the legitimacy of transactions, as each transaction is undisputable and is observable to all the blockchain participants. A reason for concern for certain participants as privacy is restricted due to all participants in the network accessing each other transactions. 

Potential Applications

Currently, to undergo a virtual currency payment or transfer is done by converting fiat currency to cryptocurrency and then make the transfer using the blockchain system, then converting back the cryptocurrency to fiat currency. This process can be done in a couple of minutes and with minimal costs. However, some would argue that the volatility witnessed by cryptocurrencies can, add uncertainty and extra costs to the transaction. This is somewhat true, except that the largest Bitcoin value change is less than 1% within a few minutes, making it still more cost effective than many of the conventional currency transfer services out there.   

The potential use of cryptocurrencies to disrupt the current use of foreign currency when travelling abroad is imminent, as debit and credit card providers charge in between 2-6% on top of the difference in currency exchange when making a transaction abroad. This can be eliminated by either holding cryptocurrency such as Bitcoin and converting what is required to whichever currency. Another technique is to transfer the whole sum into cryptocurrency and then back into fiat currency and deposit it into one of the many international banking institutions that operate in the country, if you do not want the money in cash (which attracts an extra 3-8% charge when using debit or credit card). All of this will be eliminated if both sides of the transaction deal with and accept cryptocurrencies as payment method, removing the need to convert and use intermediary financial institutions. With around 15,174 businesses worldwide accepting bitcoin as a means of payment and 328,370 bitcoin transactions go through every day, which is impressive as the first bitcoin transaction took place a decade ago. It is meniscal compared to fiat currency used with 1.01 billion credit card transactions taking place on an average day around the world. Though, cryptocurrencies possess the growth potential to become a world player as businesses, people and investors look at the benefit cryptocurrencies provide.

The transfer speed alone is an impressive feature of blockchain technology, increasing the speed of trade and commerce across nations and the greater added security. Eliminating the risk of losing transfers due to fraud as blockchain ledger is incorruptible and transactions are irrevocable. This eradicates the issues that financial institutions face, such as the loss of over ￡205 million (equivalent to $277 million) in the first half of 2020 within the UK banking sector alone.

The other benefit of cryptocurrencies usage in international transfers is the minimal cost attached to each transfer when compared to wire transfers used by banks and foreign exchange organisations such as Western Union that charge fees of between 4%-6%. Whereas, in the cryptocurrency arena, Binance moved $1.26 billion worth of Bitcoin in 2018 costing them $124.60 in network fees. Yet for you and me achieving this trivial amount of fees is not possible due to the size and resources available to Binance. The realistic fees for Bitcoin is currently between 1%-2% depending on the platform used. Some might argue that the difference might be slight, but the World Bank has estimated that if financial institutions cut fees by a mere 0.05%, customers will save up to $16 billion a year in remittance cost per year. This is affecting developing nations mostly as 77% of all remittance in 2019 was directed to them. This is only 0.05% cut in fees, so what savings will customers enjoy if fees dropped by 2%-5%, 40-100 times the amount proposed by the World Bank.    

Challenges

The benefits are clear when using blockchain technology to conduct international currency transfers, but the number of businesses providing such a service is still small. Another issue is the lack of regulatory compliance, which provides safeguards for users. Some argue that complying with current banking regulation will eliminate the advantages that blockchain technology has over conventional banking practices. Also the anonymity of transactions will be problematic when complying with banking regulation especially with regards to money laundering laws. Then comes the issue of seeing if the blockchain system can handle the sheer volume of transfers that Swift currently experiences. If these challenges are overcome, immense benefits can be derived from blockchain technology.  

To sum up, the use of blockchain technology can be crucial to speed up the economic recovery and allow those nations that are struggling from the aftermath of the pandemic to recover, due to the benefits this technology derives. The banking sector will need to increase the speed of digital transformation in order to increase the speed of service provision and reduce fees to be at the same pace as other industries when it comes to technological adoption. This long path should have been initiated by banks a long time ago and the lack of progress will cause them to lose valuable market share to competitors who are more technologically accepting. Banks need to do more to increase the flow and speed of liquidity in the economy, in order for businesses who have been hard hit by the pandemic to nourish and regain some of what it has lost during the Covid-19 restrictions.  

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This article is part of a series of articles that shed light on Blockchain Technology with the first being What is Blockchain? 

Sadiq Alesia is the Co-founder and Managing Director at Ashford & Alesseea. You can follow him on twitter @SadiqAlesia or contact him on [email protected]. 

Visit https://ashfordalesseea.com/blog to view and partake in other interesting topics.