Cryptocurrency All-in-One For Dummies. Peter Kent
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now pay friends through their phones almost instantly in almost any type of currency or cryptocurrency. More and more retail stores have begun utilizing cryptocurrency as a way to pay for goods and accept payment from customers. In Kenya, using cryptocurrency is now the norm. But this is still not the mainstream option for most of the world. Western markets are still in the early adoption phase.
Given that most individuals have their wealth locked into legal tender issued by governments or locked into assets that are within existing government systems, fintech innovations must merge with these existing systems before the public sees the mainstream utility of blockchain or digital currencies. If regulators find ways to tax and register accounts, then mass adoption of customer-facing wallets with digitized tokens is only two or three years down the road.
The business-to-business market will start utilizing blockchain much more quickly. In fact, a production-hardened system with the associated policies and operations is now being tested. Ripple and R3, among others, have been hard at work making this possible. These systems will first focus on the institutional creation of digitized representations of deposits. These are IOUs between internal organizational departments and between trusted partners, like vendors. Regulators, central banks, and monetary authorities are all investing heavily in making this possible. Canada and Singapore are two countries that have been moving very quickly in this direction.
Know your customer (KYC) and anti-money-laundering (AML) regulations require banks to know who they’re doing business with and to ensure that they’re not participating in money laundering or terrorism. Banks issuing cryptocurrencies still have significant challenges to overcome. In order to stay compliant with KYC and AML regulations, they need to know the identity of all the individuals utilizing their currency. In many cases, people’s bank accounts are already offering debit and credit service transactions, like distributed ledgers in blockchains. The first candidates in this area are going to be regions where regulators, banks, and central banks work together. Singapore and Dubai are good candidates that already have blockchain initiatives: Singapore used blockchain technology to verify COVID-19 test results, and the UAE government launched the Emirates Blockchain Strategy in 2021, aiming to transform 50 percent of government transactions into the blockchain.
Moving money faster: Across borders and more
It is difficult to assess the transaction volume that needs to be met by a blockchain handling the currency of an economy like that of the U.K. or U.S. The U.S. alone is processing billions of transactions a day and over $17 trillion in value a year. That’s a lot of responsibility for a new technology! The nation would be crippled if its monetary supply were compromised.
The International Monetary Fund, the World Bank, the Bank for International Settlements, and central bankers from all over the world have met to discuss blockchain technology. The first step toward faster and cheaper money would be adopting a blockchain as the protocol to facilitate bank transfers and interbank settlement. Official digital currencies that ordinary citizens use on a daily basis would come much later.
Individual consumers wouldn’t directly feel the cost reduction from utilizing a blockchain for interbank settlement. The savings would be seen in the bank’s bottom line as cost reductions for fees charged by intermediaries.
Consumers will still want retail locations and commercial banks for the foreseeable future. But millennials have already adopted app-activated payments through PayPal, Venmo, Cash, and more. A new way of paying through their phones won’t faze them.
The great challenge is that if all money is digital, compromising it could be catastrophic. It’s possible that the architecture of blockchain systems could be strong enough. Instead, the issue might be that the code within the system is executed in an unexpected manner, as happened in the decentralized autonomous organization (DAO) hack on Ethereum (see Chapter 5 of this minibook). If the cryptocurrency were operating on a traditional public blockchain, then 51 percent of the nodes in the network would have to agree to fix the issue. Getting an agreement in place might take a lot of time, and it wouldn’t be practical for businesses and people who need stable and secure money at all times.
Creating permanent history
Data sovereignty and digital privacy are going to be huge topics in the future. Fraud prevention will be easier because if the entire economy is utilizing a cryptocurrency, then there will always be an auditable trail inside the blockchain that secures it. This is enticing for law enforcement but a nightmare for consumer privacy.
From a customer perspective, there’s already an audit trail for everything you purchase with a credit or debit card. From an institutional perspective, it’s beneficial to have audit trails because it increases transparency of documentation and life cycles of the movements of these assets between different regions. It adds legitimacy to the trading of assets and allows them to bake compliance into their day-to-day transactions.
The “right to be forgotten” rules in Europe, which allow citizens the right to not have their data forever propagated on the Internet, are a difficult challenge for blockchains, because blockchains can never forget. Governments and corporations would have permanent historical records of every transaction, which could be devastating to national security if they were exposed to the public. In a company’s case, it may allow their competitors to have an inside scoop on how that company is investing.
The biggest challenge to using a permissionless blockchain such as Ethereum or Bitcoin would be in guaranteeing that you haven’t sent money to an OFAC (Office of Foreign Assets Control) country to support terrorism. The answer is that you can’t, because they are somewhat anonymous and anyone can open a wallet. It is possible to create algorithms to trace transaction movement — the U.S. government has been doing this for years — but anyone can move value in a permissionless world.
The need for KYC and AML makes a case for the permissioned blockchain in the shared ledger space. The software company R3 developed Corda, a private and permissioned blockchain-like platform, to meet many of these challenges directly. They specifically do not globally broadcast the data from their participants. This keeps the data within the Corda blockchain private, and it was the primary nonfunctional requirement requested by the more than 75 banks that worked with R3 to adopt blockchain technology. They need to maintain their privacy and meet strong regulatory demands.
Going International: Global Financial Products
Blockchains will usher in many new types of securities and investment products. New markets will be opening with more efficient ways of calculating risk because collateral will be a lot more transparent and fungible across institutions when they account for it within a blockchain back system.
Blockchain technology also has applications in helping reduce scams within the global warehouse market for fraudulent double-sold goods. Blockchain entries enable manufacturers and regulators to document the provenance of products and, in turn, allow buyers to check the authenticity of what they’re buying. Several solutions exist in the market, including Everledger and Provenance.
