We already see the huge impact of blockchain in the current world. Bitcoin is one of the first and largest in terms of market cap in this space. While we have heard a number of rags to riches stories through bitcoin, this is just the tip of the iceberg. Bitcoin is just one of the implementations of the underlying blockchain technology. Rest assured, there are and will be many more. Even large organizations are catching up with the buzz and planning to enter a shiny new world, trying to leverage this wonderful invention. As per the report from Statista Research Department, blockchain market is set to grow exponentially and reach 39 billion U.S. dollars in size by 2025. The finance sector is reposible for almost 60% of the total value, which is not surprising. Let’s take a look at how blockchain can prove its mettle in the payment system. Some of the advantages it offers are:
- Low transaction cost: In the absence of an intermediary, there is almost zero middle man fee. That is not to say that it is completely free either. But the cost of doing a transaction over blokchain is very less as compared to the tradtional channels where some organization(s) acts as intermediaries and settlement providers. A lower cost will naturally result in higher transaction volume resulting into a positive spiral and a digital boom.
- Faster payments: Right now, if you want to send a payment to someone overseas, it is not a trivial task with lots of regulation and rules governing the transaction. It is also time consuming. Although there has been a lots of improvements lately that enables a fast international turnaround time, still it is nowhere close to the efficiency offered by blockchain. It is fast, reliable and offers huge convenience over traditional methods.
- Digital currencies: There has been tons of crypto currencies created after the bitcoin success. It is such an easy task to create a new crypto currency that anyone can do it. For the payments scenario, either an existing one can be used or a new one creates specifically for use withing a given ecosystem. Regardless, there is no need to carry around cash physically any more.
- Easier KYC requirements: Contrary to the popular belief, blokchain does not always provide anonimity to the users. Depending on the implementation, the payment systems can created where a company can utilize the shared KYC information from the central ledger and be more efficient.
It is not all beds and roses, though. There are a few challenges in payment system that comes along with the blockchain technology:
- Regulatory challenges: Bitcoin has not been officially recognized yet by most of the governments as a valid currency. Given the sensitive nature, this is always going to be a tricky subject for the companies to take all the regulatory approvals before enabling payments through this channel.
- Volatile markets: Let’s say you want to send $100 worth of crypto to another person and you did that today. The receiver holds the amount in his/her wallet. But after a few days, the value of those coins may not be the same. It could be $80/$90/$120 or anything really, no one knows. This is caused due to volatility in the price of the underlying asset -in this case the crypto coins. Obviously, for most of the merchants/traders, this is not ideal. To solve this problem, many new coins have been created that are pegged to US dollar, either algorithmacally or backed by physical assets.
- Hacking risks: Cyber threats apply to both crypto and non-crypto sectors. However, in the traditional industry, there is a central authority or a bank who can verify your identity and help get your funds back if the regulations allow. Same is the case if you forget your banking password. However in the crypto world, by the very definition, there is no central authority involved. So, no one help you if you lose access to your funds or wallet.
Despite the challanges, use of blockchain in financial industry is expected to rise exponentially in the near future. There are innovative solutions being explored that would shape the future of our world tomorrow.