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Fintech Revolution

NYC_Street_Scene_052220A
(Street Scene , New York City, NY, U.S.A. - The Rockefeller Foundation)
 

 

The New Financial Technology (FinTech) Revolution:

Challenges, Opportunities and Future Directions

 

 

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1. Overview

- An Inclusive Economy

An inclusive economy is one with greater opportunities for broader shared prosperity, especially for those who face the greatest barriers to improving their well-being. Quite simply, more people have more opportunities. Based on extensive input from experts, scholars, peers, and public opinion, the Rockefeller Foundation defines an inclusive economy through five interrelated characteristics: participation, equity, growth, sustainability, and stability. 

The unprecedented disruption caused by COVID-19 is accelerating the urgency of agility, adaptability and transformation. Industry structures and business models are being disrupted - the digitization of the economy is accelerating rapidly. An estimated 70% of the new value created in the economy over the next decade will be based on digital platform business models. However, 47% of the world's population is still not connected to the Internet.


- An Emerging Financial Services

We have entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs. No company is immune to impending disruption, and every company must develop a strategy to take advantage of the powerful advantages of the new financial technology (FinTech) revolution.

FinTech is the future of transactions and commerce, a synthesis of financial technologies that describe the emerging financial services sector of the 21st century. Fintech companies integrate technologies such as artificial intelligence, blockchain and data science into traditional finance to make it safer, faster and more efficient. Fintech is one of the fastest growing tech industries, with companies innovating in nearly every area of ​​finance; from payments and lending to credit scoring and stock trading. 

Fintech is an area that is fundamentally changing the way we live as a society and how we conduct business in a professional manner. It is dramatically reshaping human economic life. It is opening up markets, investment and credit. Fintech is inventing new solutions to age-old financial problems. It lowered fees, disintermediated banking, and brought financial services to emerging economies. The rise of fintech has opened up a world of possibilities. Businesses can offer more services than ever before, and at a fraction of the price.

 

- Artificial Intelligence (AI) in Finance

Artificial intelligence (AI) is revolutionizing the way consumers and companies access and manage their finances. AI in finance covers everything from chatbot assistants to fraud detection and task automation. Most banks are highly aware of the potential benefits of AI. The benefits of implementing AI in finance (for task automation, fraud detection, and providing personalized recommendations) are enormous. Technological advancements, increased user acceptance, and shifts in regulatory frameworks will accelerate the decision of financial institutions (FIs) to adopt AI. 

Banks using artificial intelligence can greatly improve the customer experience by providing 24/7 access to their accounts and financial advisory services. Front- and middle-office AI applications can transform the financial industry by enabling frictionless 24/7 customer interactions, reducing the need for repetitive work, reducing false positives and human error, and saving money

 

- Moving Towards A Cashless Society

The next decade is expected to be swept away by technological disruption as we digitize every aspect of our daily lives. The way we pay for things is no different. E-commerce accounted for $3.5 trillion in global sales in 2019, and smartphones are becoming ubiquitous even in the least developed countries. Banks are slowly closing their brick-and-mortar branches in favor of full digitization, while people are generally tired of waiting days on end for international transactions to be executed. All these developments point to one question: What's the point of cash? While it can still be used, especially between banks, physical currency is expensive to store, transfer, and produce. Most coins produced are worth less than the materials used to make them. 

As the COVID-19 pandemic accelerates our transition to a cashless economy, it's important to ensure the transition is seamless and prepared for the new financial reality on the other side. The world is moving towards this exciting future -- a cashless society.

 

2. Digitization, Digital Platforms, and Financial Inclusion

- The Rise of Digital Platforms

Advances in digital technology have expanded awareness of the benefits of conducting financial transactions online or using mobile devices. At the same time, digital advancements have brought financial services to billions of previously unserved and underserved consumers around the world, especially in less developed economies. 

Based on current trends, digital platforms will be the preferred and dominant business model for banks and financial institutions in the future. Digital platforms provide consumers and small businesses with the ability to connect with financial and other service providers through online or mobile channels as an integral part of their daily activities. We are entering a new era of financial services where banking will no longer be "where you go, but something you do". A groundbreaking shift from a business-centric financial model to a consumer-centric financial model.

 

- Future of Banking

As consumers increasingly use the Internet to buy products and services, they demand payment and banking services that are convenient, secure and familiar. This trend of digital self-service in banks, regardless of time and location, is expected to continue thanks to the increase in mobile devices.

We have entered a new era of fully mobile real-time service environments (e-banking) that can provide human-centric virtual services without any physical infrastructure. To meet the needs of modern customers and remain relevant, banks must adapt to the key behaviors of mobile internet users, which are characterized by real-time, on-demand, fully online, DIY and social. In order for banks to provide fully customer-centric services, they need to be responsive to consumer demands immediately. 

As new technologies and consumer behavior continue to change the way we do business, financial institutions will need to assess their true points of differentiation and their economic sustainability over time. This could mean finding new ways to meet broader customer needs, differentiating the customer experience or seeking to become a best-in-class product manufacturer. Regardless of the strategic direction, being part of a mobile digital ecosystem will be inevitable for today's financial service providers to create lasting customer value.

 

- Shaping the Future of Digital Economy and New Value Creation

In emerging markets, where billions of people around the world lack access to traditional financial services, fintech could spark a revolution in financial inclusion and membership in the new global digital economy. Individuals and businesses have access to useful and affordable financial products and services to meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable manner. Financial inclusion is a key enabler for reducing poverty and boosting prosperity. 

The shift from paper to digital is accelerating and raising consumer expectations as distribution costs decrease and participation simplifies. This presents an opportunity for traditional financial institutions to transform traditional delivery options, while also challenging the business case for existing physical infrastructure. 

The digitization of financial services will also improve identity management through enhanced biometrics. This will impact access to banking services in underserved markets and improve traditional payments and global money flows. 

The digital economy and new value creation platforms help companies use technology to stay agile in the face of disruption and create new digital business models for the new normal – post-COVID, purpose-driven, sustainable and inclusive.

 

3. FinTech and Disruptive Technology

- Synergy and Disruption: Trends Shaping Fintech

FinTech (FinTech) is an economic industry composed of companies that use technology to improve the efficiency of financial services. It is usually applied in technology startup scenarios to disrupt industries such as retail banking, lending and financing, payment and transfer, wealth and asset management, market Trading with exchanges, insurance, blockchain, etc. Refers to a new application, new process, new product or business model in the financial services industry. However, the term fintech has begun to be used for a wider range of technological applications in the space – front-end consumer products, new entrants competing with existing players, and even new paradigms such as Bitcoin. The financial services industry is one of the last areas that new technology has yet to fully conquer. Fintech companies are trying to disintermediate the existing financial system and challenge traditional companies that are less reliant on software. 

Internet-based technologies have made it cheap to gather information and network. This empowers the sharing economy, allowing fintech companies to snatch intermediary business from banks. But both fintech and “sharing economy” businesses manage information centrally—they act as middlemen—just like traditional financial institutions. The FinTech revolution is forcing the financial services industry and everything involved to evolve rapidly.

 

- Digital Lending

Banks have historically processed most consumer and small business loans because they have the resources to assess the creditworthiness of borrowers and obtain regulatory approval to fund the loans. However, this model has some key inefficiencies - interest rates are not individualized, underwriting loans is expensive, loan decisions can take months, and especially small businesses are excluded from the process. This leaves room for a market for online lending — known as peer-to-peer (P2P) lenders — to use the internet to offer better deals to borrowers and investors.  

Digital lending is characterized by a focus on providing cheaper loans through a completely digital approach. It also focuses on automating the entire processing of this low-cost asset. Alternative lending is a collective term used to describe the wide range of loan options available to consumers and business owners beyond traditional bank loans. Alternative lending models, such as peer-to-peer (P2P) lending and business-to-business (B2B) lending, provide cheap loans to audiences who are cash-strapped or traditionally viewed as invisible to credit. FinTechs may have discovered a new market segment and created a new ecosystem, but banks remain key to thriving and evolving throughout the lending cycle.

 

- FinTech Automation

As automation technologies such as machine learning and robotics play an increasingly important role in everyday life, it is no surprise that their potential impact on the workplace is a major focus of research and public attention. Automated processes can help augment the work of human financial advisors or replace them entirely. Companies are using automation to improve the efficiency and accuracy of business processes. Automation is the replacement of most repetitive tasks with machines. It will continue to evolve from simple rule-based systems to complex augmented and autonomous decision-making systems. 

Automation aims to replace more management functions with artificial intelligence (AI). AI is about replacing human decision-making with more sophisticated technology. These are not repetitive tasks, but judgment-based jobs that require a more sophisticated set of algorithms and machine learning that can use a variety of inputs to identify patterns, predict future outcomes, and make decisions. For enterprises, AI is expected to continue to serve functions such as business intelligence and predictive analytics. Merchant services like payments and fraud detection also rely on AI to find patterns in customer behavior to weed out bad transactions. AI could help banks with their anti-money laundering or employee misconduct detection efforts by replacing expensive functions currently done manually by humans.  

Financial companies are using artificial intelligence to manage customers' funds. AI evaluates communications with customers through emails, text messages, and other notes. It then applies machine learning to evaluate other ideas it can suggest to clients. Machine learning is a type of artificial intelligence that provides computers with the ability to learn (or grow and change) without being explicitly programmed when exposed to new data. Natural language technology is one way to test how artificial intelligence handles human requests. Now, the technology is moving towards more complex problems to replace human interaction. For wealth management clients, this means more immediate responses to everyday requests, such as rebalancing your portfolio or selling stocks, via a mobile app, website or voice.


- The RegTech Revolution

Regulatory Technology, also known as “RegTech,” is a subcategory of FinTech that uses technology, particularly information technology, in regulatory monitoring, reporting, and compliance to benefit the financial industry. Just as fintech is being used to digitize customer-facing financial services, regtech promises to digitize back-office regulatory compliance, simplify regulatory reporting, and enable employees to better assess risk and monitor regulatory compliance. RegTech is another example of an industry rapidly being transformed by software. 

After the 2008 financial crisis, financial regulators wanted to ensure that the industry would not face the same problems again. New regulations were created to improve risk control, maintain capital and create a more transparent financial sector. As financial regulation continues to change, banks and financial institutions are under constant pressure to keep up with the latest rules. Now, a new wave of technology is emerging to help these organizations ensure they understand the rules and can manage risk. 

RegTech companies were born out of a combination of regulatory change and more efficient technology. There are many companies that offer such services. Some offer solutions for financial institutions to help them comply, while others are designed to help policymakers monitor those they are regulating. RegTech companies work with financial institutions and regulators to share information using cloud computing, big data and data visualization technologies, and blockchain. RegTech is an exciting development that embraces the following characteristics: agility, speed, integration and analytics. Ultimately, RegTech will leverage these characteristics and information to enable more efficient and effective regulation and compliance. 

When applied to current compliance and risk management practices, the adoption of RegTech will provide operational efficiency and cost-effectiveness. It is expected that regulation will only continue to increase as the demand for regulatory data, reporting and operational processes increases. Fund managers and banks are seeking support and partnering with regtech startups to address growing regulatory and compliance needs and help promote adoption of regtech solutions for payments and governance. 

The application of RegTech is still in its infancy. Some ideas require the support of regulators and the maturity of the technology, while others are as simple as giving compliance officers better information — and are available today.

 

- Embracing the FinTech Revolution

If you are in banking, you should pay close attention to the fintech industry. In addition to providing innovative new technologies and ideas for the banking industry, these exciting fintech startups also offer innovative solutions to small business owners. If you're looking for low-cost solutions for your business accounting and finance needs, from invoicing to payroll to investing, the fintech industry is an exciting field. 

There are four broad categories of fintech users: (1) banks B2B and (2) their business customers; (3) B2C for small businesses and (4) consumers. The trend in mobile banking, increased information, data and more accurate analytics, and the decentralization of access will create opportunities for all four groups to interact in unprecedented ways. Connectivity, simplicity and personalization are three fundamental trends in fintech. Connectivity is the ability of anyone or anything to interact, trade, or exchange information anytime, anywhere. Technologies such as APIs and IoT are driving factors. To simplify is to reduce complexity. There are many processes and technologies that can be simplified, and blockchain is just one of them. Personalization is making services easier or closer to users through technologies such as big data and machine learning. 

It is clear that a digital revolution in financial services is underway. Digital disruption has the potential to shrink the role and relevance of today’s banks, while helping them create better, faster and cheaper services, making them a more important part of institutional and individual daily lives. To have a positive impact, banks need to shake off institutional complacency and recognize that simply riding the wave of regulation and waiting for rates to rise will not protect them from obsolescence. Embracing openness and collaboration and making smart investments is a great place to start. The fintech industry has orchestrated a radical shift in customer preferences and expectations of the modern “banking” experience in just a few years. The next decade will demonstrate the impact of this disruption, as customers choose financial services based on product experience rather than product breadth.

 

4. The Future of FinTech is Artificial Intelligence (AI) and Big Data Analytics

- AI's Role in Digital Transformation for Financial Services

Artificial intelligence (AI) will have a major impact on financial services, proving to be its most disruptive force. Financial firms, from major Wall Street firms like Morgan Stanley to robo-advisors and start-ups, are studying how tools like algorithms, data mining and natural language processing can help. The results are already evident as global banks close branches and lay off thousands of financial services workers. 

Historically, the fintech industry has been one of the first to adopt AI. Today, AI is becoming the main driver of the digital transformation of traditional finance and the gold standard for fintech services. Artificial intelligence and data analytics go hand in hand, and emerging technologies such as machine learning, neural networks and natural language processing continue to improve the data processing capabilities of financial industry players. 

With the fierce competition in fintech, businesses must offer truly valuable products and services to stand out. The business that provides the best user experience usually wins. The development of artificial intelligence may offer something extra, especially if it can promise to eliminate guesswork and human error in finance. Today, customers interact with banks and financial institutions through many different channels, which has led to an explosion of customer data collected by these organizations. This data can be effectively harnessed using AI to gain insights into current and future customer behavior. 

Fintech business areas actively leveraging AI include: generating new revenue streams through the introduction of new products and services, process reengineering and automation, risk management, customer acquisition. However, leaders in AI adoption have invested heavily in the digitization of customer service, making it a priority for AI and analytics implementation.

 

- The World’s Most Valuable Resource Is No Longer Oil, But Data

In the digital age, data is one of a company's most valuable resources. Banks have vast amounts of customer data that has the potential to bring real value to customers, allowing banks to better understand their needs. Furthermore, data is the lifeblood of artificial intelligence. "Data access" plays a central role in the scope and impact of AI systems. Data, and the various rules and processes that support and regulate access and use of that data, are at the heart of disruptive fintech businesses. Even the most advanced and intelligent algorithms and models are useless without efficient, secure and legal access to detailed, accurate and up-to-date datasets. 

Big Data. Machine learning allows software programs to analyze large amounts of unstructured data. One way this could help bankers is by improving fraud detection. Traditional fraud monitoring systems rely on specific impersonal rules (such as geography) to detect fraudulent transactions. Machine learning can be used to analyze each customer's transactions, flagging those that don't fit their normal habits. This improved analytical capability has the potential to provide banks with insights that allow them to develop better credit models and identify risks more accurately. However, the power of big data is highly dependent on the quality of the data, which is not always readily available. 

Today, bank customer data is often unstructured — stored in systems that are inconsistent and may not communicate with each other. A customer may have multiple accounts at a bank, all in different systems with inconsistent identifiers. Many banks, as well as core processors, are struggling to coordinate these systems. Some are working on building additional data warehouses to aggregate disparate customer data to create a unified customer view. As these customers continue to interact with their bank digitally, a complete digital view of a customer can help the bank better understand and serve that customer. Banks started offering value-added services to customers, providing them with more information about these users.

 

- Data-driven Cybersecurity Becoming Mainstream
One of the effects of the digitization of the financial industry is the increasing number of security threats. To protect customer data and financial integrity, financial industry players will invest more in robust data-driven security systems based on machine learning.

 

5. Wireless 5G, Internet of Things (IoT), and Financial Services

- Internet of Things (IoT)

The Internet of Things (IoT) is a network or ecosystem of Internet-enabled objects capable of sharing and exchanging information between them in real-time. It is nothing but machine-to-machine communication between machines connected to the Internet. Bringing the IoT into focus is the proliferation of smartphones, wearable tech devices, cars and smart homes with built-in sensors, as well as the growing ability of financial institutions to use big data predictive analytics and artificial intelligence to predict customer needs. Although still in its infancy, the Internet of Things is already full of energy and shows no signs of slowing down anytime soon. 

The Internet of Things is a set of technologies and applications that use embedded sensors in physical items to generate customer, operational and other data that can be aggregated and analyzed to gain valuable insights that could have huge implications for the financial services industry impact, resulting in a range of future opportunities for better data on customers and their physical assets. The Internet of Things could transform financial services. Many financial services organizations are using sensor data to improve operational performance, customer experience and product pricing. Banks can use sensors and analytics to gather more information about customers and provide more personalized services. Insurance companies and commercial banks can also use sensors attached to assets to track shipments. For example, banks may be able to use connected devices to make better loans and monitor collateral. Small business inventory or livestock can be monitored in real time. This will allow banks to continuously monitor customers' balance sheets, giving them the tools to make better lending decisions or adjust credit lines in real time.

 

6. Blockchain: Disrupting the FinTech

Fintech disrupts banks, and blockchain disrupts fintech. Blockchain is a very powerful technology capable of performing complex operations. The distributed ledger technology that underpins blockchain systems is designed for near real-time data transfer. It can provide instant solutions for customers' transactions and interactions with banks. Blockchain technology enables the entire financial services industry to significantly optimize business processes by sharing data in an efficient, secure and transparent manner.

 

- Blockchain: a Comprehensive, Always Up-to-date Accounting Record 

Blockchain is a comprehensive, always up-to-date accounting record of who holds what or who transfers what to whom. It is becoming a way for people to instantly conduct and verify transactions on the network without a central authority. A block is the "current" part of the blockchain, which records some or all of the most recent transactions, and once completed, goes into the blockchain as a permanent database. Every time a block is completed, a new block is generated. Blocks are linked to each other in a proper linear time order (like a chain), and each block contains the hash of the previous block. Blockchain has no transaction costs. 

Taking traditional banking as an example, blockchain is like a complete history of banking transactions. Just like banking transactions, Bitcoin transactions are entered into the blockchain in chronological order. At the same time, blocks are like personal bank statements. A complete copy of the blockchain records every Bitcoin transaction ever performed. As such, it can provide insights into facts such as how much value a particular address was worth at any point in the past.

 

- Three Main Types of Blockchains

There are three main types of blockchains: public (a platform where anyone on the platform can read or write to the platform), private (only the owner has rights to any changes that must be made), and consortium (public and private Hybrid, literacy can scale to a certain number of people/nodes). Ethereum is a distributed computing platform based on a public blockchain. It provides a way to create online marketplaces and programmable transactions called smart contracts. Ethereum is the biggest innovation after Bitcoin.

 

- Smart Contracts and Distributed Ledger

A core component of next-generation blockchain platforms, smart contracts are computer agreements designed to facilitate, verify, or enforce contract negotiation or performance. Proponents of smart contracts claim that various contract terms can be partially or fully self-enforcing, self-enforcing, or both. The purpose of smart contracts is to provide security to traditional contract law and reduce other transaction costs associated with contracts. Smart contracts use self-executing software programs that run on distributed ledgers to automate business processes. A blockchain is a database, and smart contracts are the application layer that makes many of the benefits of blockchain technology a reality. Smart contracts lead to the convergence of smart devices, analytics, artificial intelligence, cloud and blockchain technology. 

Smart contracts are mainly used in cryptocurrencies. The most prominent smart contract implementation is the Ethereum blockchain platform, also known as decentralized applications or dapps. Additionally, trade finance, post-trade services, and event-driven insurance are the main use cases that financial services institutions are piloting/piloting. Loyalty and rewards, smart grids and digital rights management are the main use cases piloted in other areas.

 

- Emerging Applications For Blockchain

Blockchain shows great promise in a wide range of commercial applications. Now, more and more companies from all walks of life are exploring how to use blockchain technology to eliminate friction in business processes and establish a trust system for value exchange. A blockchain database powered by an enterprise-grade, scalable and secure core database is at the heart of unlocking potential. 

By using blockchain, individuals can securely exchange money or purchase insurance without a bank account. Financial institutions can settle securities in minutes instead of days. Blockchain technology allows strangers to record simple, enforceable contracts without a lawyer. It can sell real estate, event tickets, stocks, and just about any other type of property or rights without a broker. Blockchain can also track and ensure that all payments are done correctly. Businesses of all types (government, banking, insurance, finance, accounting, healthcare, legal, supply chain and logistics, manufacturing, retail, etc.) can more closely manage the flow of goods and associated compensation. Unlike existing financial ledgers or databases used by banks and other institutions, blockchains are not updated and maintained by a single company or government. Instead, it is run by the user network.

 

- The Challenges To Blockchain Technology

However, blockchain's reputation also brings some new challenges, including interoperability, flexibility, scalability and governance. There are now many blockchain-based currencies, each optimized for a different purpose. And none of these currencies are compatible with other currencies, making it difficult for users to transfer funds between them. Also, there is a growing trend to use blockchain in other areas. These areas include the Internet of Things, supply chain, stock exchanges and other areas that are important for secure data transactions. However, the original blockchain used in Bitcoin was not designed to scale to all possible use cases, making it difficult to use it in these areas. Since the blockchain is a decentralized system, once a problem occurs, no one will sue and be held accountable, and there are also challenges in management. It will take some time to resolve these issues. The industry will have to work with governments to develop standard rules and laws governing transactions. Additionally, nodes holding copies of the blockchain continuously receive updates. These nodes are distributed all over the world. Therefore, blockchain has high latency. 

Blockchain needs to transform if it is to meet the requirements of every possible industry. The Hyperledger Project is an effort overseen by the Linux Foundation to advance blockchain technology by identifying and addressing key features of distributed ledgers' cross-industry open standards that could transform the way global business transactions are conducted.

 

7. Bitcoin and Cryptocurrency

- Worldwide Payments and Fast Peer-To-Peer (P2P) Transactions

Bitcoin is a digital asset and a payment system. It is an innovative payment network and a new kind of money. It is designed to enable users to send money over the Internet in a very simple and efficient way. Bitcoin made digital transactions possible without a trusted intermediary. The technology allowed this to happen at scale, globally, with cryptography doing what institutions like commercial banks, financial regulators, and central banks used to do: verify the legitimacy of transactions and safeguard the integrity of the underlying asset.

Like paper money and gold before it, bitcoin is a paperless, bank-less, state-less currency that allows people to exchange value, to pay directly for goods and services. It is a system which allows you to do anonymous currency transactions and no one will come to know about the payment or about all other info related to the payment, including who sent it, who received it, etc. Unlike its predecessors, bitcoin is digital and decentralized. The bitcoin generation algorithm defines, in advance, how currency will be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless. Since the system works without a central repository or single administrator, the U.S. Treasury categorizes bitcoin as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency. 

 

- Understanding Bitcoin

Bitcoin is a decentralized currency that uses peer-to-peer (P2P) technology, which enables all functions such as currency issuance, transaction processing and verification to be carried out collectively by the network. While this decentralization renders bitcoin free from government manipulation or interference, the flipside is that there is no central authority to ensure that things run smoothly or to back the value of a bitcoin. Bitcoins are created digitally through a “mining” process that requires powerful computers to solve complex algorithms and crunch numbers. They are currently (in 2019) created at the rate of 25 bitcoins every 10 minutes and will be capped at 21 million, a level that is expected to be reached in 2140.

 

- The Future Of Cryptocurrency

The success of bitcoin has led to the development of many alternative cryptocurrencies (or altcoins). Most of these altcoins offer their own take on the bitcoin protocol, and are interesting in their own right. Currently, there are hundreds of alcoins out in the wild being traded every single day. But, most altcoins don’t last very long. In addition, just like the unfounded fear of many governments in the world that bitcoin and other virtual currencies are a conduit for money laundering, smuggling, terrorism and tax evasion, they believe that the only means of curbing these harmful elements is through acceptance and regulation.

Cryptocurrency (Crypto) made the leap from being an academic concept to (virtual) reality with the creation of bitcoin in 2009. While bitcoin attracted a growing following in subsequent years, it captured significant investor and media attention in April 2013 when it peaked at a record $266 per bitcoin after surging 10-fold in the preceding two months. Bitcoin sported a market value of over $2 billion at its peak, but a 50% plunge shortly thereafter sparked a raging debate about the future of cryptocurrencies in general and bitcoin in particular. So, will these alternative currencies eventually supplant conventional currencies and become as ubiquitous as dollars and euros someday? Or are cryptocurrencies a passing fad that will flame out before long? The answer lies with bitcoin.

Some economic analysts predict a big change in crypto is forthcoming as institutional money enters the market. Moreover, there is the possibility that crypto will be floated on the Nasdaq, which would further add credibility to blockchain and its uses as an alternative to conventional currencies.4 Some predict that all that crypto needs is a verified exchange traded fund (ETF). An ETF would definitely make it easier for people to invest in bitcoin, but there still needs to be the demand to want to invest in crypto, which might not automatically be generated with a fund.

 

- The Future of Cryptocurrencies
Some of the limitations that cryptocurrencies presently face – such as the fact that one’s digital fortune can be erased by a computer crash, or that a virtual vault may be ransacked by a hacker – may be overcome in time through technological advances. What will be harder to surmount is the basic paradox that bedevils cryptocurrencies – the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence. 

While the number of merchants who accept cryptocurrencies has steadily increased, they are still very much in the minority. For cryptocurrencies to become more widely used, they have to first gain widespread acceptance among consumers. However, their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept. 

A cryptocurrency that aspires to become part of the mainstream financial system may have to satisfy widely divergent criteria. It would need to be mathematically complex (to avoid fraud and hacker attacks) but easy for consumers to understand; decentralized but with adequate consumer safeguards and protection; and preserve user anonymity without being a conduit for tax evasion, money laundering and other nefarious activities. Since these are formidable criteria to satisfy, is it possible that the most popular cryptocurrency in a few years’ time could have attributes that fall in between heavily-regulated fiat currencies and today’s cryptocurrencies? While that possibility looks remote, there is little doubt that as the leading cryptocurrency at present, Bitcoin’s success (or lack thereof) in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.

 

- Bitcoin's Golden Future?

Bitcoin, Ethereum and other blockchain assets are a new way for investors to gain exposure to a high-growth industry. Bitcoin and blockchain technology is a disruptive force in financial services and will likely be the foundation of the next-generation Internet also called Web 3.0. The current market price for a bitcoin is always changing due to the supply and demand for it. It goes up and down. Bitcoins are traded at bitcoin exchanges. A historical bitcoin price chart can be found at: https://blockchain.info/charts/market-price. How can we buy some bitcoin? If you are an individual investor and want to buy bitcoin the easiest way is through a digital asset exchange like Coinbase. Coinbase is one of the largest U.S.-based bitcoin companies that facilitates not only buying bitcoin, but also the storage of bitcoin. Open an account with Coinbase, and once you link your bank account you can buy and sell bitcoin. In addition, Coinbase also offers a "vault" that can be used to store your bitcoin. Since bitcoin is a new financial system that can operate without traditional banks, you control your finances. However, this financial freedom means that you are responsible for the safekeeping of bitcoin.

What does the future hold for bitcoin? As outlined previously, it has many advantages and for this reason it will remain relevant as a currency. We see the biggest risk to bitcoin being its substitution and/or parallel use by other cryptocurrencies. One of bitcoin's primary uses is being a store of value and for this reason other cryptocurrencies can always step in and enjoy similar status if aggregate demand requires it. Is bitcoin simply a 21st century version of gold, only without the storage issues? Or is it just a short-lived popular fad that may soon evolve into something quite different? Only time will tell. The only certainty is that its price will remain very volatile in the future.

The emergence of bitcoin has sparked a debate about its future and that of other cryptocurrencies. Despite bitcoin’s recent issues, its success since its 2009 launch has inspired the creation of alternative cryptocurrencies such as Etherium, Litecoin, and Ripple. A cryptocurrency that aspires to become part of the mainstream financial system would have to satisfy very divergent criteria. While that possibility looks remote, there is little doubt that Bitcoin’s success or failure in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.


8. Crytoassets and the Tokenized Economy

- Cryptoassets

Cryptoassets, including cryptocurrencies, security tokens, and utility coins, cannot be ignored right now. There are now more than 2,000 cryptoassets, including new types of assets such as stablecoins, with a combined market cap estimated at $211 billion. The number of users on the cryptocurrency exchange is said to exceed 30 million, while major financial services institutions such as Fidelity are launching crypto products and services. 

Together, these assets, coins and tokens have led to the emergence of a tokenized economy. Global financial services institutions are looking to actively restructure and participate in this blockchain-based tokenized economy. While it’s still early days and it’s hard to predict how the next 10 years will unfold, the tokenized economy could be one of the most impactful innovations that cryptocurrencies will bring.

 

- Tokenization

Tokenization is the process of digitally storing property rights to something of value (assets) on a blockchain or distributed ledger so that ownership can be transferred through the blockchain’s protocols. 

Today, many startups are using blockchain technology to build entire businesses. However, instead of turning to the public stock market or venture capital to fund companies, businesses are turning to cryptocurrencies. So-called initial coin offerings (ICOs) have been on the rise over the past few years. This is a new way of raising capital for startups that issue new digital tokens or coins. While much has been said about cryptocurrencies like Bitcoin in the past, these are just one type of cryptoasset and many others have emerged, including stablecoins, security tokens, and utility tokens. 

In particular, it points to the potential to tokenize traditional and emerging assets. The digital tokenized representation of these assets issued, traded and managed on a blockchain platform can reduce the friction and overhead costs associated with the issuance, transfer and management of traditional assets such as securities, commodities and real estate assets. Tokenization can also help increase liquidity, codify rules and regulations, and improve transparency throughout the asset lifecycle.

 

- Initial Coin Offerings (ICO)

An Initial Coin Offering (ICO) is essentially a fundraising tool. First, startups can create new cryptocurrencies or digital tokens through many different platforms. One such platform is Ethereum, which has a toolkit that allows companies to create digital coins. The company will then eventually conduct a public ICO, where retail investors can buy the newly minted digital tokens. They will pay for coins using other cryptocurrencies such as Bitcoin or Ether (the native currency of the Ethereum network). 

Unlike other fundraising methods such as an initial public offering (IPO) or even venture capital, investors do not receive equity in a company. For example, if you buy stock in a public company, you own a fraction of it. Instead, the promise of an ICO is that the coins can be used for the final product created. But there is also hope that the value of the digital token itself will appreciate — and can then be traded for profit.

 

9. National Digital Currencies: The Future of Money?

- National Digital Currency

China piloted a national digital currency in April 2020. The European Central Bank has convened a working group of major economies to coordinate digital currency research and development. The Fed said it was in the early stages of working on a digital dollar. Driven by the potential to modernize domestic payment systems, or play a leading role in updating the global payments infrastructure that supports cross-border trade and remittances, countries around the world are exploring the advantages and risks of issuing digital currencies. While many are in the early stages of research, central banks representing one-fifth of the world's population say they may soon issue a digital currency. 

A central bank digital currency (CBDC) or national digital currency is simply a digital form of a country's legal tender. Instead of printing paper money and minting coins, the central bank issues electronic tokens whose value is backed by the full trust and credit of the government.

 

- Digital Currencies vs. Bitcoin

Digital currencies can be issued by private institutions. These may be centralized, i.e. issued and regulated by a single agency (but not the government), such as Facebook's Libra. Alternatively, they can be decentralized like Bitcoin. Today (2020), approximately 3,000 privately issued digital currencies have a combined market capitalization of over $250 billion. Among them, Bitcoin ($170 billion market cap), Ethereum ($20 billion), and Ripple ($13 billion) are the three largest. 

Decentralized digital currencies like Bitcoin are often referred to as cryptocurrencies due to the underlying technology. They typically use distributed ledgers, which means that without a central authority, many devices maintain independent records of transaction activity and use a consensus model to decide which copy is correct. Cryptocurrencies also employ many algorithms and encryption techniques to keep them safe.

 

- Why might a country want a national digital currency?

Central banks are still in the early stages of exploring use cases for national digital currencies. According to the International Monetary Fund, a key reason advanced economies might consider using them is to combat the growth of private forms of digital currencies. Essentially, as users demand the convenience and low cost of digital payments, governments may be asking the question, "If it's not us, who is it?" As these economies become increasingly cashless, Venmo Apps such as WeChat, WeChat and M-Pesa are facilitating increased payment volumes, raising concerns about consumer protection, data privacy and operational risks. 

Recent proposals such as Facebook's Libra currency could further encourage policymakers to explore solutions before users adopt alternatives with limited government control. China’s recent digital currency pilots also introduced an element of great power competition, as an early lead in technology development could allow China to decide on the development of a global payments infrastructure that facilitates cross-border trade and remittances. 

Meanwhile, economists believe central bank digital currencies could improve market functioning. The Bank for International Settlements said it could boost liquidity by speeding up transactions, while the Bank of England noted it could boost GDP by 3% by reducing transaction costs. In many emerging economies, national digital currencies are primarily seen as a means of increasing financial inclusion, allowing governments to bring unbanked populations into the digital economy.

 

<updated by hhw: 3/5/22>

 

 

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