Role of blockchain networks in global wealth transfer
blockchain and crypto technology have the potential to revolutionise finance by tokenising assets”
Blockchain technology recently concluded its first decade of operation, and because it is flourishing in many industries – not least in finance – optimism for future uptake, across a range of sectors, is high. Its potential has been championed by many progressive economic leaders, and it will be fascinating to watch what blockchain developments take seed in the coming years.
An important point overarching all other blockchain uses is the gradual transfer of global wealth from traditional fiat currencies onto the blockchain through the storing and trading of cryptocurrencies. The more recent development of tokenising crypto assets will also play a key role in the transformational technology’s unstoppable evolution.
A key challenge remains, though: the lack of widespread adoption for everyday use. Greater accessibility to crypto funds coupled with user-friendly wallets are expected to play vital roles in the blockchain revolution.
The shift towards digitisation is already prevalent, with electronic fiat money and the Internet permeating all facets of society and industry. Now, in-line with this trend, wealth is gradually being transferred onto blockchain networks.
Yoni Assia, Chief Executive of eToro, the global multi-asset investment platform, believes that “we are standing at the dawn of the biggest transfer of wealth in human history”. He explains that “blockchain and crypto technology have the potential to revolutionise finance by tokenising assets”.
In recent months, tokenisation has taken flight thanks to the migration from initial coin offerings (ICOs) – where investors purchase a stake in the proposed platform – to security token offerings (STOs), where buyers’ purchases are backed by tangible assets. There are hurdles, however, in this shift. “Understanding crypto assets is one of the barriers to wide scale adoption and investment,” says Assia.
Given the relative youth of blockchain technology, it should not be a surprise that there continue to be challenges including efficiency, scalability, and ease of use. Indeed, many argue that blockchain has taken a side road, through the explosion of cryptocurrency, into a trend that better resembles traditional, centralised currencies and practices rather than focusing on the decentralised nature of distributed ledger technology (DLT).
It’s clear: using cryptocurrency as a payment method is in its infancy. Although transactions cost fractions of their fiat counterparts, overall cost increases with the typical transaction resembling the chain fiat-crypto-crypto-fiat, adding more layers to payments. For instance, buying a coffee with bitcoin would probably cost more in handling fees to complete the long-winded transaction.
Accepting payments and, more importantly, receiving them in cryptocurrency is desirable to make the system more attractive to end-users. The development of user interfaces (UIs) including crypto wallets plays a vital role here, as do other applications such as the Lightning Network.
Although using cryptocurrency for payment has stalled in recent years – largely thanks to the market downturn following the highs of late 2017 – total revenues increased in 2018 at the payment service provider BitPay, which reported a “record $1 billion (£750 million) in transactions”. Furthermore, in countries with unstable currencies – including Venezuela and Argentina – crypto payments are increasing popular (such as bitcoin and dash) to avoid wild price fluctuations. Additionally, a growing number of large corporations such as Starbucks, United States retail company Kroger, and Japanese electronics organisation Rakuten are looking into accepting cryptocurrency payment methods.
The recent release of the Lightning Network is another innovation to enable the ease of payments and facilitate wealth transfer. Unlike typical crypto payments that can take minutes or even hours, the Lighting Network is instant. Rather than writing each transaction onto the blockchain, it functions as a balance sheet between users. Only once the payment channel is closed does it write the final balance onto the blockchain. Lightning Network has the benefit of vastly reducing block sizes as well.
The potential of Lightning Network is that, with widespread adoption for daily transactions (such as coffee), endless transactions can be performed in an open payment channel in the shared multi-signature wallet.
The bitcoin (BTC) hard fork in 2018 created bitcoin cash (BCH) as an attractive payment method as well with minimal fees and mostly empty blocks. BCH is increasing in popularity as a payment method and it’s already accepted everywhere BTC is. With developers in favour of making block sizes smaller, this will encourage the use of Lightning Network and similar faster payment systems.
Low transaction fees when making international transactions are another aspect that makes blockchain networks attractive over traditional finance infrastructure, especially for migrant workers where the beneficiaries stand to receive more of the total sum.
The Stellar protocol by the Stellar Development Foundation is designed specifically for cross-border payments between any currency pair. Stellar, with its low transaction fees and almost instant transaction processing and combined with its cryptocurrency counterpart: Stellar lumens (XLM), are set to enhance international payments at a fraction of the cost. Litecoin (LTC) is another example with almost instant and near-zero cost transactions: for up to $99m (£74m) it will cost just 40c (30p).
Some organisations are taking an even more user-friendly approach and managing the entire blockchain transaction process themselves. The payment app Circle handles the cryptocurrency backend processes for rapid international payments at a price of between 0.25 per cent and 0.5 per cent on the exchange rate. With the advance of blockchain-based international payment methods, the amount of wealth being transferred from around the globe is on course to increase.
In Sweden, which is leading the charge to become a cashless society, crypto is being used for everyday transactions including buying coffee and beer. Fintech competence is high in the country where physical cash has almost disappeared completely in favour of digital payment methods.
“There’s a very high level of knowledge about cryptocurrency here, and a high level of digital competence in the fintech space,” enthuses Claire Ingram Bogusz, researcher at Stockholm School of Economics.
Martijn Wismeijer, a marketing manager at the bitcoin products company General Bytes, takes this to the next level by storing the original mainstream cryptocurrency under his skin to pay for items.
Following the example of Sweden, it is apparent that crypto assets, their apps, and platforms have real-world and practical benefits where the only perceived barrier seems to be technical understanding.
The move from physical cash has already begun, with debit cards overtaking cash as the preferred payment method for the first time in the United Kingdom in 2018. When viewed through the prism of this wider trend, the transfer of wealth onto blockchain platforms in the form of crypto asset and tokenised assets seems less radical. In fact, with lower transaction fees, no centralised control, and greater privacy it may even sound more attractive than its traditional counterparts.
There will always be a need for money, be it physical or digital. Blockchain transactions are secure and personal information remains private, plus they come with all the benefits of digital payments. Moreover, networks such as BTC, XLM, and LTC may prove to be essential in preventing potential issues surrounding cashless societies including surveillance, censorship, and centralisation.
With innovations continually enhancing blockchain network UIs and accessibility, this wealth transfer revolution is set to march on, gathering momentum every day.
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