Cryptocurrencies are volatile, and while they may have been a great investment for some, it’s unlikely that people would want their paycheck to be in bitcoin or a cryptocurrency. The world’s financial and retail markets are not designed to handle bitcoin or cryptocurrencies yet.
You can’t go into Walmart and make a purchase with bitcoin.
Volatility is the main factor holding cryptocurrencies back from going mainstream. But blockchain technology is much closer to changing the financial system.
Blockchain Has the Potential to Reduce Fees
Big banks have spoken, and Santander, a major European bank, suggests that blockchain could save banks $20 billion in fees. The report suggests that blockchain technology has the potential to:
- Increase product confidence
- Allow for near-instant clearing
- Reduce the margin of error
- Include transaction irreversibility
Distributed ledger technology has the potential to save big banks money, but there’s no certainty that this savings will be passed on to the customer. Banks will benefit from less intermediary services being required, reduced errors and faster clearing.
Smart Contracts are Possible
Smart contracts are the wave of the future. These contracts are built into the blockchain and are often called self-executing contracts. From a financial perspective, smart contracts may offer the most exciting development in the financial industry in centuries.
The development is simple:
- Conditions are built into a smart contract
- The contract executes based on the conditions
If a web host required a smart contract, it may require $100 to be paid before the hosting environment was unlocked. A smart contract would wait for the $100 condition to be met before allowing the site owner to access the resources.
The contract could be used for anything, from product purchases to real estate purchases.
Smart contracts eliminate costly legal fees and are designed for precision. There’s less risk of fraud or contractual agreements not being made.
Peer-to-Peer Investing Options
The Harvard Business Review explains that blockchain allows new businesses to access growth capital much faster than with traditional means. Access to growth capital is done in a different way with blockchain than the traditional initial public offering or venture capital.
Peer-to-peer lending is an option that allows for lending through initial coin offerings, or ICOs.
ICOs have come under great scrutiny because a lot of the companies offering ICOs are fraudulent. But the ability to raise money has been impressive. Blockchain companies raised $200 million in funding through ICOs in 2016.
Risky and not recommended for the new investor just yet, companies in the future may build upon ICOs to fund their growth rather than go into IPOs.
Federal governments are also using blockchain technology to their advantage, with many considering their own cryptocurrency. There’s a potential for a future FedCoin, which Yale University has proposed. A FedCoin would allow for negative interest rates in the financial market, and monetary policies would be more enforceable and flexible, too.
The Bank of England also conducted a report stating that a central-bank virtual currency has the potential to boost the country’s GDP by 3%. There are a lot of legal and consumer hurdles that need to be met before a FedCoin becomes truly viable, but blockchain has the potential to change the financial industry like no other technology available.