expressed opinion entrepreneur Contributors are themselves.
Centralized financial systems have dominated markets since the dawn of organized commerce, often as a black box in the eyes of customers. In addition to their lack of transparency, they operate in a monopoly fashion, building empires along the way by simply acting as intermediaries.
However, as the next iteration of the internet unfolds, these traditional economic and financial systems are being reimagined like never before. With this next-generation internet called Web3, concepts like blockchain, cryptocurrencies, and decentralization are rapidly making their way into the mainstream economy. This paradigm shift marks the arrival of a new business arena that could fundamentally restructure the global financial system as we know it today, making it a more transparent, inclusive and secure place to transact. Here are five examples of how blockchain can improve and replace the legacy financial systems our society relies heavily on today.
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1. Trade Finance
Trade finance is a fundamental part of the global financial system, used to reduce risk, extend credit and enable importers and exporters to trade across borders. Like most industries, trade finance suffers from logistical bottlenecks stemming from old, outdated manual documentation systems. For example, physical letters of credit are often still issued and transferred between various intermediaries to secure payment.
The versatility of blockchain can provide exceptional support for international trade transactions that would otherwise be cost-prohibitive due to trade and documentation processes. By storing and securing these processes on-chain (on a blockchain), companies can digitally prove transaction details, such as country of origin and product information, in a reliable and cost-effective manner. With superior transparency and data security, this will greatly increase trust between exporters and importers in the market. Furthermore, this mitigates some of the most significant risks facing trade today, including documentation discrepancies and oversight around the movement of goods, among other uncertainties.
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2. Decentralized Identity
In order to attract clients, TradFi (traditional financial) institutions need to verify their identity in a process called “know your customer” or “KYC,” which requires clients to submit personal information such as passports, driver’s licenses and various supporting documents. The TradFi system uses This KYC process takes an average of 24 days, leading to poor customer experience and reduced user retention. Banks store customer information in centralized systems, making this data vulnerable to various hacks.
Instead, clients only need to upload their KYC information to the blockchain once to grant institutional access on an ongoing basis. By storing KYC information on-chain as a “decentralized identity” or DID, the KYC process can be performed in seconds. Additionally, financial institutions will no longer be responsible for the long-term security of customer data, which will reduce costs and liabilities.
3. Settlement infrastructure
Today, moving money across the globe is a logistical nightmare. A simple bank transfer from one country to another must go through a cumbersome series of intermediaries, from escrow services to correspondent banks, to reach its destination. Each intermediary adds cost, increases processing time and introduces another security risk. Most importantly, the two account balances must be reconciled in a complex, decentralized financial system.
In contrast, institutions can utilize blockchain technology as a distributed ledger to securely track all transactions. By allowing transactions to be settled directly on-chain, this single source of truth can effectively eliminate intermediary networks in use today – a 10x improvement over SWIFT.Additionally, this could allow for “atomic” transactions that are instantly cleared and settled using verified payments, eliminating Multi-day transit time 24-hour transfer time for international transfers and domestic transfers as specified by the financial service provider.
4. Modern Bookkeeping
TradFi institutions such as Mastercard, JP Morgan and Blackrock process large volumes of sensitive financial data every day that needs to be transferred, reviewed and audited. Today, maintaining and reconciling ledgers securely and with absolute certainty is expensive and difficult.
Instead, institutions could publish this data to private blockchains, which would fundamentally improve internal processes by allowing information to flow in a time-ordered, immutable, and transparent manner. This can greatly improve security, as blockchain’s traceability features can help detect fraud and develop a trusted audit trail.
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5. Personal finance
Today, banks offer negligible 0.21% p.a. on the customer’s savings account. Meanwhile, behind the scenes, the bank’s interest in client funds has grown considerably, reaping most of the profits.
Blockchain, on the other hand, is premised on creating a user-first marketplace. When users instead place their savings in blockchain apps like Aave or Compound, they can earn 8-15% APY or more in some cases.
To date, one of the main reasons people buy cryptocurrencies is to combat the rampant inflation that most countries face.Today, the average global inflation rate is A staggering 8.8% will almost certainly grow. With inflation far exceeding the APY offered by the bank, people have no choice but to look for better alternatives or watch their money dwindle.
For these two reasons, in the long run, the public is likely to move more of their savings into cryptocurrencies, reducing savings in banks and ultimately leading to a decline in TradFi revenues.
Many expect blockchain to completely replace the TradFi industry. Others believe that blockchain technology will simply serve as a complementary infrastructure to the existing TradFi system. Overall, it remains to be seen how and to what extent the financial industry will embrace blockchain technology. However, one thing is certain; blockchain will bring a new era of transparency, fairness, and security to finance.