Bitcoin allowed people to trade directly with each other while being in different parts of the world. But the underlying blockchain technology has proved to be applicable far beyond the payment system. Soon, it will completely change the whole world of finance. Let’s understand how.
Even the most breakthrough technology needs time for adaptation and mass implementation. Five, 10, even 20 years.
There have not been any major global changes in the world of finance for a long time. The last example would be plastic cards.
The first ATM appeared in 1967, but they received mass adoption and were being used everywhere only in the early 80’s, because up to this point the production of plastic cards was too expensive. The same thing happened with blockchain – 10 years have passed since the advent of this technology, but the first working projects are not expected for another 3-5 years. And they will become “working” only after mass introduction.
In the meantime, it is logical that the public and media pay more attention to the bitcoin exchange rate. For example, Twitter CEO Jack Dorsey and Apple founder Steve Wozniak believe that bitcoin will become a new world currency that will replace the euro and dollars. Many financiers don’t agree with them. For example, the head of the investment holding Berkshire Hathaway Warren Buffett and CEO of J. P. Morgan Jamie Dimon tend to consider the most popular cryptocurrency “rat poison” and “fraud.”
But investors and financiers can no longer ignore the opinion of representatives of the IT sphere. After all, IT companies, along with banks and regulators, will determine the future of the financial industry. Although IT specialists will never agree with bankers on considering cryptocurrencies as poison or good, they agree on the main thing: Blockchain will forever change the world of finance.
Money Transfers on Blockchain
The spread of the Internet has had a huge impact on the way banks transfer money. Mobility and connectivity are two trends that have dominated the remittance market in the last decade. Initially, the Internet just accelerated the exchange of data between financial institutions, and the emergence of smartphones has led to the emergence of a new trend – mobile banking.
Now the customer does not have to go to the bank to send someone money or make a payment. All operations are performed through a special application on their smartphone. This saves time for users and money for banks. After all, now they do not need to spend money on physical customer service and, therefore, do not need such a large staff. Additionally, there are already banks that do not exist in physical form – only on the Internet. The physical departments, to which we are all so accustomed, are gradually fading into the past. This is clearly evident from data from the US: From mid–2016 to June 2017, more than 1,700 offices closed there – the highest figure in the last decade, even comparing to the time during the global financial crisis.
According to Business Insider, 83 percent of bank customers worldwide use mobile banking. Even ATMs are connected to the network. The world is gradually moving towards non-cash payments. This process is led by Sweden, where banknotes and coins account for less than 20 percent of all transactions in the country. For the country’s economy, the lack of cash is a big plus.
But this process has its pitfalls. The first of them: Not everyone is ready for a world without tangible money. First of all, we are talking about the elderly who do not have Internet and, even more so, do not know how to work with mobile banking. The second problem is the lack of stable Internet connection in a number of remote areas. Finally, the third is the possible consolidation of power in the hands of only a few financial institutions. According to Niklas Arvidson, professor at the Royal Institute of Technology, who is one of Sweden’s leading specialists in the field of payments: “The growth of technology companies that develop services that can compete with traditional banks will be counteracted by this. And then, let’s hope, we will have a market with a fairly high level of competition, where there will be no oligopoly and the focus of power in the hands of only a few participants.”
Professor Arvidson talks about a phenomenon that originated half a century ago, about the same time when the first ATM appeared. We are talking about fintech companies. The term itself is more than four decades old, but people started talking about this phenomenon only in the last 10 years. Today, the world is ruled not by banks, but by technological giants. Their names are familiar to everyone – Apple, Google, Facebook, Microsoft, Samsung, Amazon, Alibaba, WeChat. Each of them already has its own payment system. And unlike banks, which took decades to open representative offices in different countries of the world, these IT giants are not stopped by state borders. Because the Internet has no boundaries.
Blockchain technology is the next phase of development of the money transfer industry. Financial institutions are forced to unite with IT corporations and technological startups. The most striking example is the R3 Consortium, which includes more than 80 banks, regulators, and technology companies. All together, they are now engaged in the development of a single blockchain platform for the financial services market, which is called Corda. And JP Morgan Chase launched an interbank payment platform based on the Ethereum blockchain.
The use of blockchain in bank money transfer systems allows to:
- Save money by eliminating intermediaries between the client and the beneficiary bank.
- Make payments, even international payments, in real time.
- Improve the security of stored user data and the transparency of the banking system.
- And in case of successful scaling of public blockchains, such as Bitcoin, users will no longer need banks to make money transfers.
ICO and DAO
We have already discussed that the emergence of blockchain has allowed companies to raise capital through the issuance of tokens – ICO. Such platforms do not give advice on where to invest your money. In the future, that will be powered by artificial intelligence (more on that later). The task of decentralized platforms is different – it is to help investors and project owners to find each other.
The most popular projects among these platforms were Ethereum, Waves, and Bitcoin Fork.
But the developers do not stop there and are looking for new approaches to fundraising. So the ICO, which already sparked enough scandals around scamming investors, is replaced by the STO – security token offering. Unlike ICO, investors buy a token which is backed by a real asset, revenue, or profit of the company. Thus, investors are more protected.
So far, this method of crowdfunding is only gaining momentum, but it is already engaged in many large platforms, such as Polymath or a subsidiary of Overstock – tZero.
Decentralized services for attracting capital differ in terms of a set of options and target audience: Some are aimed at attracting professional investors, others are aimed primarily at helping startups. But according to experts of consulting company Deloitte, “Decentralized platforms will compete with traditional intermediaries to attract investment. Increasing the number of ways to raise funds will reduce the average time between financing stages, helping new companies grow faster.”
Tokenization of Everything
In addition to issuing their own tokens that perform the function of a cryptocurrency, and tokenization of shares, as we have already mentioned, real goods and assets can stand behind the tokens. In the future, it is the widespread tokenization of real assets that will become a new trend.
One of the most promising markets for tokenization is real estate. Tokenization of a residential house will give people the opportunity to become its owners and conduct voting on digital platforms, making decisions based on the share of each of the voters in the house.
You can tokenize any property, whether it is a residential building or office, warehouses, or restaurants. One of the platforms running in this market is Proof, whose platform was created on Ethereum. Transactions are held between the participants directly with the help of smart contracts. The tokens themselves are traded on the exchange. Speculators are provided with a Currency Prediction Marketplace, where they can make predictions on the value of the token and earn on it in case of a correct prediction. In addition, the company has its own insurance fund, which protects against losses (up to 50%) if the property is lost.
Another interesting project in this area is Swissrealcoin that tokenizes commercial property in Switzerland. Each issued token (ICO of the project is scheduled for September) will be backed by a portfolio of real estate in the country. Investment in such an asset carries low risks, and the property itself is in great demand in the market. As a result, the price of tokens will gradually grow. And the stability of the exchange rate will be achieved by issuing additional tokens and investing them in new real estate objects.
It is also possible to tokenize resources such as oil or gold, which will significantly facilitate the process of trading them. For example, Digix Global platform works with gold tokens. At the same time, in the case of resources, it is necessary not only to keep their records in a single digital database on blockchain, but also to monitor that these resources are really available.
At the same time, there are two types of tokens in the Digix system: DGX and DGD. The first one is supported by real gold (1DGX = 1 gram), which is safely stored and is audited one time in three months. DGD, in turn, is a dividend token that pays out a quarterly portion of the profits from DGX turnover through the use of Ethereum smart contracts. It also gives the right to vote on the development of the ecosystem.
Blockchain is not simply improving the existing economic and trade mechanisms. Blockchain is a completely new type of relationship. Control over operations is now entirely given to users, and the operations themselves become more reliable and protected from fraud.
Thus, tokenization allows you to turn into assets what previously could not be represented as a tradeable unit. Any goods, resources, securities, and real estate — anything can be the subject of exchange and trade between two persons or companies. The new boundaries of the market lie through cell phones. This is the future.
Bitcoin became the first truly decentralized payment system, allowing people to trade among themselves without the help of proxies and intermediaries. However, not everyone is willing to spend huge amounts on the purchase of mining equipment to get bitcoins from the system as a reward. Therefore, they are forced to go to specialized cryptocurrency exchanges, which conduct operations for buying and selling digital currencies, and at the same time keep the savings of users.
Exchanges of a new type differed little from traditional ones – except that their activities were not regulated for a long time. This has led to the fact that only in the last few months several large cryptocurrency exchanges have been hacked. On June 10, South Korean Coinrail suffered from hackers who stole coins from user accounts totaling about 40 billion won. In January, a total of $500 million were lost by customers to Japanese Coincheck, and in December last year, South Korean Youbit users suffered.
Any centralized exchanges are subject to hacking, and also respond quite slowly to changes that occur with the cryptocurrencies themselves. Therefore, in the future, decentralized exchanges will begin to appear, which provide for trading between users directly on the basis of the blockchain. In this case, decentralized exchanges perform the function of an aggregator of buyers and sellers orders or an exchange engine (matching engine), while users trade from their personal wallets, without transferring funds to the exchange account, which can be subject to hacker attacks. The Zeus Exchange team intends to develop its own decentralized exchange initially based on NEM Catapult technology, and then on the technologies of other blockchains.
Robots are gradually replacing humans. First, the machines replaced people in the workplace, where they perform the same type of mechanical work, then they learned to drive, and now they are ready to control your wallet. Artificial intelligence already knows how to collect data, analyze it, and self-study. So nothing prevents it from managing investments – at least, to be an assistant to the investor and to tell where to invest, and when to withdraw.
The first results of the introduction of a “trader” with artificial intelligence are amazing. At the end of last year, a robot from AI Powered Equity Fund entered the market, the initial portfolio of which was estimated at $2.5 million. “We were shocked by the level of income, – said in a December interview with the new York Post Art Armador, one of the founders of the technology company EquBot LLC, which invested in the Fund. – We started with $2.5 million of assets and hoped to get at least $40 million by the end of the year, but we achieved this goal in a week, and now our portfolio is estimated at more than $70 million.This is simply incredible.”
Whether the brainchild of AI Powered Fund will become a model for future projects is unknown. The market is constantly developing and becoming more complex, and developments in the field of artificial intelligence are not standing still. But the fact that these two areas are perfectly combined with each other is undeniable.
Olga Duka is CEO at Zeus Exchange. She is an infinitely curious serial entrepreneur with strong product vision backed by 15 years of experience in financial markets. Her professional career includes working as a trader and a portfolio manager in international markets and launching startups that produce unique events and develop products in arts and education.