Blockchain needs no introduction. It has given rise to many benefits such as “keyless” signature systems and the ability to track thanksgiving turkeys from farm-to-table. But arguably, the most disruptive manifestation of blockchain technology is cryptocurrency.
While the idea of having a digital currency that can be created by anyone, freely sourced, and unregulated by a central authority has been around since the 80s, it has failed for one reason or another — some due to regulatory crackdowns, and others due to the unavailability of a truly secure virtual mode of transaction, sans third parties. So, what’s different this time around and what does it mean for the future of the financial world?
We’ve seen many technological disruptions succeed only when the time was right. Take Uber for example: A Silicon Valley company that has become synonymous with the service it offers — you no longer take a cab or a taxi, you take an Uber. But cars and drivers were around long before Uber even existed. So, what was the magic ingredient that made a service so seemingly simple and ubiquitous, worth over $72 billion today? It was the advent of the smartphone revolution and the penetration of high-speed internet on mobile devices. This trend reshaped the digital landscape to an extent that made companies like Uber possible. It’s the same with cryptocurrencies today — earlier digital currencies lacked the magic ingredient of blockchain to take them to the next level.
Simply put, blockchain is a secure, decentralized, and immutable virtual trail of transactions that can be accurately tracked to its source. Cryptocurrencies powered by blockchain are encrypted and decentralized digital money — decentralized being their most important aspect, for that is precisely the advantage they have over traditional currency — they eliminate the middleman. There is no central authority such as the Federal Reserve to govern them. While this lack of regulation has led to wild fluctuations of their value over time, free market economics are sustaining them. And with investors clamouring for their share, cryptocurrencies like bitcoin seem to have taken the financial world by storm.
But how long before these innovations take off? Most experts like to compare cryptocurrency and blockchain to the internet in the 90s, saying that it may take a decade or so for these innovations to truly change the way we do things today. But as they demonstrate growing signs of maturity and disruption, organizations will need to be prepared to deal with the shifts in tide. The secure technology of blockchain and its potential to disrupt financial transactions has also piqued the interest of global tech giants. Recently, Microsoft announced its plans to embrace blockchains, and Amazon has also hinted at joining the fray. IBM surprised many by using cryptocurrency for cross-border payments.
It’s just a matter of time before the known world of traditional banking and financial services makes way for the uncharted territory of newer and more advanced financial technologies (fintech) — those that present various risks, but also provide unique opportunities for financial organizations that are willing to adapt and evolve. These organizations would do well to spend time evaluating the risks that are ahead of them, so that they thrive in this new environment, rather than being swept away.
With cryptocurrency no longer on the side-lines, prominent banking and financial institutions are also taking note: In a regulatory filing by Bank of America, the third largest bank in the US, cryptocurrencies have been mentioned as a risk factor with the bank warning that “cryptocurrencies could undermine many of its services, and that customers might go elsewhere if the firm fails to adapt.” JP Morgan also recently admitted that cryptocurrency is a risk for its business.
In the near future, we may see new regulations governing cryptocurrency or existing ones evolve in order to cover them. But to comply with additional regulatory requirements, address growing risks from cryptocurrency, and effectively manage this paradigm shift in business, organizations must have robust risk and compliance management policies, processes, and technologies in place.
With contributions from Vibhav Aggarwal.