The Role of Crypto in the Fintech Industry and the Wider Economy
Over the past couple of years, modern society has witnessed the increasing prevalence and adoption of Blockchain technology. However, for the Padawans out there who think of the Blockchain as a network of nano-bots ready to overtake humanity, the Blockchain is basically just a set of code that records events, and each record is unalterable.
These resources could be anything from storage space to a ledger of peer-to-peer cryptographic transactions without the need for a financial institution acting as the middle man.
The Fintech Connection
But where does the Fintech connection arise? In an industry (read: Fintech) that relies so heavily on calculations and analysis, Blockchain is a critical driver of efficiencies and effectiveness.
Though still in its infancy, when it comes to adoption by centralized financial institutions, the revolution of Fintech is up and roaring as users worldwide are increasingly opting for Blockchain-powered cryptocurrency transactions to optimize their payment and transaction processes.
The Robust IT Infrastructure of Technology
With the rapid evolution of information technology over the last couple of decades, our world now has a robust IT infrastructure that spans all countries and continents, making it possible to leverage high-speed internet to facilitate and optimize financial processes.
Fintech companies can now narrow their line of sight and focus on their mission of delivering competitive and efficient financial services faster and more securely to their customers, all thanks to Blockchain tech and decentralized Cryptocurrencies.
What Crypto Brings to the Table for Fintech
Cryptocurrencies haven’t yet reached mainstream consumer acceptance. However, they are fast becoming an integral part of the financial ecosystem.
Cryptocurrencies seem to be the perfect alternative for countries that do not have a stable currency (e.g., El Salvador, also known as Bitcoin City).
In such countries, crypto can prove to be an immense asset — but crypto can be an asset worldwide.
However, given the speculative nature of crypto, relying too heavily on its value instead of fiat money (a legal tender utilized by governments) could prove to be an issue.
While several governments are banning or at least regulating the utilization of cryptocurrencies, the widespread adoption of crypto could make traditional banks obsolete and even cause a loss of faith in the concerned nation’s paper money.
Cryptocurrencies offer far-reaching value to Fintech institutions
That being said, cryptocurrencies offer far-reaching value to Fintech institutions. Let’s dive into analyzing all that crypto can offer the Fintech industry.
1. Helps in Unlocking New Markets
According to Kaspersky, Cryptocurrency, sometimes called cryptocurrency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions.
The average bank customer may not understand crypto and might be apprehensive of investing in cryptocurrencies because of a lack of information. This mistrust towards cryptocurrencies is primarily visible in developing countries with a reasonably stable national currency.
As mentioned earlier, cryptocurrencies enjoy widespread adoption in countries with unstable currencies. An example is the Bolivar, Venezuela’s currency. When it experienced massive devaluation, Vunezuelan’s moved towards cryptocurrencies that were a much more reliable option.
The FinTech Industry Massive Growth
The FinTech industry has shown significant growth over the last few years and is set to grow to $ 158 million by 2023, and crypto transactions for a substantial part of this figure.
Another sphere where cryptocurrencies can open doors to financial and Fintech services is the target group of people who own a smartphone yet does not have bank accounts.
This ‘unbanked’ group is about 1 billion strong, offering a vast market for crypto-powered Fintech services to roll out products and services which were until now unavailable for these consumers.
2. Efficient Money Transfer
Transaction approval in traditional financial institutions is excruciatingly slow. There are multiple levels of bureaucracy that the transaction needs to be approved by. This process becomes even more convoluted and tiresome when it comes to transferring funds across borders or between organizations.
Traditional money transfers are riddled with inefficiencies and delays making crypto transactions a far more appealing choice.
Cryptocurrencies are built on a decentralized ledger. They can be moved around a lot faster than a traditional currency that needs to pass through financial institutions on both ends. The removal of a middleman, in this case, middlemen, dramatically reduces the cost of such transactions.
Convenience, speed, and transparency are foundational to Fintech innovation, and cryptocurrency can offer transactions that match these aspects.
3. Reduced Risk of Fraudulent Activity
Fintechs are market disruptors, but they still face legacy financial institution issues like identity theft, fraud, money laundering, etc. Dealing with such problems is challenging and highly time-resource intensive.
Since cryptocurrencies are built on decentralized ledgers, verifying transaction records becomes easier. Blockchain tech is very secure. Given that documents on the Blockchain cannot be manipulated or removed, preventing fraudulent activity becomes a lot easier for Fintechs.
Fintech innovation has become a force to be reckoned with in the financial sector. Over the recent past, financial products and services have metamorphosed into pro-Fintech solutions while offering customers several appealing alternatives to traditional banking products and services.
“Regulation is probably one of the biggest overhangs in the crypto industry globally,” says Jeffrey Wang, head of the Americas at Amber Group, a Canada-based crypto finance firm.”
4. The Blockchain as Storage
When powered by Blockchain service administrations, data management systems display a significant positive impact. However, supporting in-house/traditional Data management capabilities can be costly.
By outsourcing these services to a Blockchain partner, Fintech companies can enjoy reduced costs in purchasing, installing, maintaining, and upgrading the required IT infrastructure for their on-premise servers.
The Blockchain offers Fintech institutions to secure their data assets more effectively and securely than the traditional route of owning every resource required.
Even while examining the cybersecurity aspects of the company’s data, the decentralized nature of the Blockchain is the safer option given the rigid protocols they implement and the measures they take to remain secure.
In the coming decade, cryptocurrency is set to play a significant role in formulating Fintech services and products to open doors to new markets and offer unmatched efficiency and know your customer regulations in crypto exchanges.
With quick and easy payments, innovative services and products, and inclusivity to the ‘unbanked’ populace, the crypto ecosystem is fast becoming a high-value financial market.
The Crypto Ecosystem—What are the Risks?
As with everything else, on the flip side of the advantages and opportunities of cryptocurrencies come significant risks and challenges.
As of September 2021, the value of crypto assets in the world has surpassed 2 trillion. This is a 10X increase in roughly a year. Furthermore, the entire crypto ecosystem thrives with various services and products like wallets, exchanges, miners, and stablecoin users.
1. Operational Inefficiency-
Unfortunately, most of these entities lack the required governance and risk mitigation practices.
The operational activities of these crypto organizations are mostly sub-optimal, and the cracks in their security structure become even more evident in times of market turbulence. Troubled times can bring many crypto assets experiencing massive fluctuations in value.
2. Hacking Risks
The threat of hacking is genuine in the crypto ecosystem. However, while high-profile cases like Mt.Gox and Allinvain are examples of the vulnerabilities of cryptocurrencies, the risk involved hasn’t yet reached a level that could impact financial stability.
However, as the adoption of cryptocurrencies grows, the potential implications of such hacks in the broader economy could become far-reaching. In addition, because of inadequate/limited disclosure, consumer protection risks increase.
Over 16000 tokens were listed on various exchanges, and today only 9000 remain. 7000 Tokens have disappeared, resulting in a considerable loss of customer assets. Many tokens were created either for pure speculation or direct fraud.
3. Utilization of Assets
Given that holders of crypto assets remain anonymous, the resulting data gaps can facilitate illegal activities like terrorist funding, money laundering, and the purchase of illegal substances and items, to name some.
The Blockchain allows authorities to trace such transactions; however, the perpetrators go scot-free given that each country has its own regulatory frameworks allowing perps substantial wiggle-room.
Most transactions on crypto exchanges occur through offshore financial centers making supervision and law enforcement, a tough task that demands no less than international collaboration (something every forward-thinking being has wanted since time immemorial)
4. The Emergence of Stablecoins
Stablecoins are cryptocurrencies that aim to set their value against a popular currency, in most cases the US dollar. As a result, the volume of Stablecoins is growing rapidly.
IT is notable; however, the term ‘stablecoin’ can be applied to a diverse range of crypto assets, and the term can be very misleading.
Depending on their reserves, stablecoins are subject to bull runs that could adversely affect the financial system. These runs could be driven by investor concerns regarding the authenticity of the coin’s reserves or the liquidation speed for potential customer redemptions.
The Challenges Ahead
It isn’t possible to accurately measure the adoption of crypto assets. However, surveys suggest that emerging economies lead countries to adopt cryptocurrencies. Over the past year, there has been a significant upsurge in crypto exchange trading volumes in developing countries like India.
In the future, if opt-ins for crypto-assets continue to increase, it could reinforce cryptoization (akin to dollarization) in the global economy. This would reduce the ability of centralized financial institutions to implement monetary policy.
Over-adoption could affect financial stability by enhancing solvency risks that may arise from currency mismatches in addition to the risks of consumer protection mentioned earlier.
2. Threat to Fiscal Policy
The threat to fiscal policy could also increase, given that the crypto-assets can facilitate tax evasion.
The profit a government makes from printing money versus its actual value (seigniorage) will also decline. In addition, increased demand for crypto assets could lead to capital outflows that could subsequently affect the foreign exchange market, jeopardizing the country’s economy.
Currently, the vast majority of crypto mining is based out of China. However, domestic energy usage levels could witness a significant spike once these activities migrate to other developing economies and emerging markets.
Countries that rely on CO2 intensive energy or governments that subsidize energy costs could be adversely affected given the massive amount of resources crypto mining demands.
What Can be Done- Policies and Actionable Points
1. Supervision and Law enforcement
Supervisors and regulatory authorities must monitor every development in the crypto ecosystem. Any data gaps should be immediately tackled and bridged.
Given that crypto is a global phenomenon, governments and policymakers should be ready to work across borders to minimize the risk of regulatory arbitrage and place adequate supervision and enforcement systems on crypto exchanges.
The implementation of global standards is a necessity. While most laws implemented by national regulators currently include only money laundering and bank proposal exposures, other aspects such as the regulation of securities, payments, and settlement payouts should also be focal points of attention.
As the prevalence of stablecoins grows, proportionate regulations counteract the risk they pose to economic functionality. In short, the rules applied to traditional financial institutions should also be used for crypto entities that offer similar products.
3. Strengthening Macroeconomic Policy
The risk of cryptoization is real. Weak central bank credibility, flawed banking systems, ineffective payment systems, and limited access to financial services are major contributing factors.
Respective authorities need to strengthen their macroeconomic policy and consider the benefits that a CBDC (central bank digital currency) can offer, e.g., improved payment technologies, and decreased cryptoization.
Policymakers need to build faster, cheaper, more secure, inclusive, and transparent cross-border payments by leveraging the G20 Cross Border Payments Roadmap methodologies.
The clock is ticking, and the need of the hour is decisive action, swift and well-orchestrated global strategy so that the benefits of crypto flow out while its vulnerabilities are mitigated.
The guidance and regulatory requirements demanded by digital assets are still insufficient, resulting in financial institutions becoming wary of crypto as a concept. However, while security and stability concerns hold back banks from entering the crypto space, Fintech companies have long since hitched a ride on the crypto caravan.
While traditional financial institutions are still discussing whether they should take the plunge, they should instead be preparing themselves to accept crypto as the world’s latest and hottest Fintech trend.
The Crypto ecosystem does have the potential for criminal activity. However, it does not make sense to ignore the power of this technology just because there are entities with malicious intent present.
The vast potential of economic growth that Crypto offers should be considered. However, instead of throwing the concept away, policymakers need to build standardized compliance guidelines to help traditional banks join the brigade.
Where Will the Mindset Change?
There needs to be a shift in the mindset of traditional financial institutions that view crypto as a threat instead of a partner. Para banking and Fintech initially faced scrutiny but now, barely a couple of years later, these industries are thriving contributors to the global economy.
The Enhanced role of banks in the crypto sphere
The need of the hour is an enhanced role of banks in the crypto sphere. Their presence will add assurance, security, and gravitas to the unregulated environment of crypto (one of its greatest drawbacks).
By adopting cryptocurrencies and blockchain tech, financial institutions can streamline their processes and take banking to its next evolutionary standpoint in terms of innovation and efficiency.
Image Credit: Provided by the Author; Thank you!
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