Cryptocurrency or crypto, is a fully digital currency that exists virtually and uses cryptographic algorithms to secure transactions. Its purpose is to function as a medium of exchange through a peer-to-peer network that does not have a central issuing or regulating authority. The underlying blockchain technology uses a decentralised computer network system to record transactions, in a secure distributed transaction ledger that only stakeholders have access to. Along with cryptography, the consensus-based system enables parties who are unknown to each other to conduct transactions on a blockchain without requiring a traditional trusted intermediary like a bank i.e. “disintermediation”. For the finance sector this breakthrough innovation directly accrues in the following benefits:
- Streamlining of transactions (specifically, cross-border ones) – Transaction execution and recording simplified, along with a triple-entry booking system and an immutable audit trail
- Elimination of intermediaries – No dependence on third-party intermediaries, in-built trust mechanisms and greater transparency in the shared public ledger
- Growth in business volume – With controlled costs and efficient payment systems
- Enhanced speed and security – Lack of redundant records and seamless funds transfer improves speed; with cryptographic and access controls ensuring security
- Enhanced financial inclusion – Democratising access to finance and banking, fostering greater participation from hitherto underrepresented sectors globally
The euphoric pace of developments enabling the integration of cryptos into the fast-paced global finance industry, seem to substantiate this belief. Cryptos like Bitcoin, Ethereum and BNB, up to the more purposeful Stablecoin, have been taking the world by storm due to the above features, which include critical qualities such as ease of use and accessibility from all over the world, at all times, allowing for almost real-time settlements. Many stakeholders from leading financial and consulting firms of the world to startups, have explored and integrated cryptos into financial processes in myriad innovative ways.
Cryptos have emerged as a catalyst for change in mainstream finance sectors like banking, and spawned new business models in the FinTech space like Decentralised Finance (DeFi) and tokenised assets. DeFi, based on cryptocurrencies, blockchain technology, and software components, allows people to directly transact with each other without needing centralised financial institutions to monitor their interaction. The robust, well-established banking sector, despite centuries of existence, is poised for a major disruption by crypto. Recognising this, the Reserve Bank of India (RBI) has already launched India’s digital Rupee technically known as RBI Central Bank Digital Currency (CBDC), which is based on Distributed Ledger Technology using Blockchain. RBI was one of the earliest central banks to issue digital currency. This entails moving from centralised to decentralised processing, storage, and control of data for speedy and efficient transaction processing, clearance, and settlement over very secure immutable systems, thereby transforming the way we look at banking functions. Experts opine that a lot of financing activities like securing funding and investing in securities will undergo a positive change with the adoption of crypto.
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A word of caution, however, is due. Systems developed using the crypto base are going to be fraught with uncertainty related to its rapidly changing dynamics since it is yet in the nascent stage of development. The ecosystem has to stabilise and become predictable as well as dependable for outcomes. The extreme fluctuations in value and the ability of stakeholders to remain anonymous in crypto transactions are other complications. The lack of a legal framework governing its use is also a major impediment. All these have led to there being very few live use cases yet, and unless widespread adoption happens, most of these issues will not even out.
That being said, the global cryptocurrency market is already at $2.25 Trillion today, with over 15,000 businesses accepting payment in cryptocurrency. The pathway to the large-scale integration and adoption of crypto has to be paved first by its legalisation. Regulating this sector is a very challenging task since, by the very nature and usage protocols, cryptos are a paradigm shift from all established models of finance. Governments and other regulatory bodies of the world will have to define a legal ecosystem for crypto to be seamlessly used as a currency and recognised as an asset class. Investing in this asset, for instance, has already met with a huge response due to the returns accrued, but it is still not legal in many countries. It should be formalised with the necessary processes and rules in place so that transparency in operations will make it an investment class accessible to everyone the world over. Laying the regulatory framework is necessitating collaborations between many stakeholders, with the European Union, International Monetary Fund and World Bank already taking the lead in this.
In conclusion, the borderless, decentralised nature of digital currencies, with a built-in trust mechanism makes this an innovation that addresses most of the inefficiencies inherent in all established financial systems. The transformative technology has the potential to revolutionise financial markets and the way we transact business. However, businesses as well as individuals, need to carefully consider the implications of crypto adoption and develop appropriate strategies to leverage them to their advantage. Governments and other regulatory bodies should do the needful to give cryptos a stable monetary value and establish an elaborate legal framework for its use. As and when this happens, we can expect cryptocurrencies to be widely integrated into finance and influence a shift in all established global financial paradigms.