• Niall Nolan

Finance is Broken. Is Blockchain The Answer?

Updated: Nov 21

The promise of blockchain poses big questions for the future of centralised high finance

Financial infrastructure has been faltering for a while, but the cracks are beginning to widen. Disparities in infrastructure across countries have led to high fees and long transaction times for international payments, observed through remittance flows. Blockchain, as a uniform payment system, has the capability to revolutionise payment systems, reducing fees, transaction times and government reliance. Is blockchain technology a viable solution?

Current infrastructure requires 3rd parties, or intermediaries in order to establish trust in a transaction between 2 parties (the sender/receiver of a payment). However, the cost associated with employing intermediaries is dependent on the quality, and accessibility of finance infrastructure in an individual country. The adverse effects of this are most prominent in emerging economies, who lack the necessary finance infrastructure required to support international payments, facing the highest fees, and the longest transaction times.

The inefficiency in the international payment system is illustrated effectively when considering remittance flows. An average remittance payment ($200) incurs a 6% fee, with this value higher in emerging economies such as Sub-Saharan Africa, due to the compliance cost – the cost of adhering to a country’s finance regulations - associated with setting up the necessary infrastructure. Remittance flows – a non-commercial transfer of money from a foreign worker – are vital for such economies. In Lesotho, remittance accounts for 27% of their GDP, surpassing both official aid and FDI contributions to the country. Flows to the Sub-Saharan region are projected to hit $49b as of 2022. However, fees stand at a staggering 7.8%. The implication, $3.8b of capital is ‘lost’ to the system, siphoned off from the intended recipients of these remittance payments.

This poses a systematic problem. Countries most in need of such flows are the ones affected most by current finance infrastructure. It also clarifies something important. The world would greatly benefit from a more capital efficient, uniform finance infrastructure, which delivers quicker transaction times, at a lower cost. A technology like this could change the game, and solve a global issue. Enter Blockchain, which may very well be the answer.

Blockchain is a shared, immutable ledger in which transactions are available for all to see. Blockchain differs from the conventional finance system, in that it is decentralised. This means there is no single authority, or government, that has control over the infrastructure. Blockchain facilitates transactions to be made in a secure, 'trustless' manner, made possible by the underlying technology. What is important, however, is the implication of this, which is that because of this decentralisation, there is no need for an intermediary, or 3rd party.

Without the requirement for an intermediary, blockchain is both considerably faster, and cheaper than the current payment system. Average transaction time on blockchain is 10 minutes, for both domestic and international payments, a stark contrast to the transaction time for international payments currently (2-5 days). This technology can revolutionise international payments, increasing real money flow individually, institutionally, and collectively, unlocking billions of capital, with the benefits felt most crucially in emerging economies. Uniting economies under a uniform global payment system, accessible to all. The potential of blockchain cannot be denied, even by the most sceptical of critics.

However, blockchain is by no means perfect. Stories of scams, rug pulls, and bank runs continue to plague the space, breeding scepticism about the real utility of blockchain technologies, and the space as a whole. Fundamental challenges of acceptability and ease of accessibility still loom large. These represent some of many hurdles blockchain technology must vault in order to become the prominent payment system. It must be accepted collectively, as a storage medium for purchasing power (PPP), and as a resource for allocation – or a ‘money’ database. Infrastructure is another vital proponent. At what ease can individuals and institutions alike transact, both domestically and globally?

This is a question in need of an answer. Problems within the finance system are not going away. If anything, they are getting worse. Cost and time inefficiencies within conventional infrastructure are felt most pervasively in emerging economies, due to the compliance costs of adhering to financial regulations, and implementing trusted intermediaries, or 3rd parties. The result: billions of dollars lost to the system, disproportionately taken from countries in need of it most.

Blockchain, a decentralised technology, offers a viable solution, in its ability to bring billions of people into a uniform finance system, minimising structural differences in country’s’ finance infrastructures and drastically reducing both the transaction cost/time for payments.

Whether blockchain is accepted as a global payment system is dependent on the ease of accessibility to users, made possible by the supporting infrastructure, and the collective acceptance of digital currency as ‘money.’ This is yet to be determined. Whilst the vision for blockchain is clear, the path is less so. Only in traversing it will blockchain’s purpose gain further clarity.