The future of money: Will finance as we know it cease to exist?

The world of finance is undergoing a paradigm shift. The emergence of digital currencies (Bitcoin, Ethereum, etc.), decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs) has the potential to transform economies and completely reshape the role of money in our lives.

Cryptocurrency has been encroaching on the territory of conventional financial assets. In Bitcoin alone, the last half of the decade has witnessed an average yearly growth rate (number of users and transactions) of almost 60%⁽¹⁾. Between 2018 and the final quarter of 2020, the number of users of various cryptocurrencies grew by 66 million⁽²⁾. Moreover, an increasing number of public and private sector investors are warming up to the idea of embracing crypto in their financial dealings (payment transfers, investments, value storage, etc.).             

Cryptocurrency: Road to the future

For years, major banks and institutional investors tried to modify Blockchain and cryptocurrencies according to the norms of conventional finance⁽³⁾. As a result, they missed out on the boom in crypto prices and the huge income generated from DeFi. Now, with zero yields and stretched valuations ringing the alarm bells in traditional financial markets, the big-money institutions are seemingly eager to join the crypto bandwagon. And the race is on to develop a robust setup that will facilitate the transfer of fiat money into new digital assets.

This will open a pipeline of possibilities. The total market capitalization of all cryptocurrencies, as per CoinMarketCap, stood at $2.02 trillion in late August 2021. Just 8 months earlier, it was at $775 billion. While crypto valuation and its market capitalization remain notoriously volatile, the impact of major banks coming in will be similar to the results of Tesla snapping up $1.5 billion of Bitcoin in February 2021. The American electric vehicle manufacturer’s announcement that it would accept the cryptocurrency as payment for its cars, combined with BNY Mellon getting into crypto custody and the listing of Coinbase, propelled the market to $2.53 trillion in the second week of May 2021.

Crypto landscape: The key players

With the crypto ecosystem growing at a blistering pace, who are the primary stakeholders in the field today?

From the public sector, the government of Venezuela has been one of the first to get in on the act. Other than that, the central banks of China, Saudi Arabia, and Sweden are actively working on creating viable cryptosystems. Organizations like GDF (Global Digital Finance) and CVA (Crypto Valley Association) are also in the mix.

In the private sector, the ones looking to embrace the digital currency revolution include the following.

• Institutional Investors
• Harvard Endowment Fund
• Crypto Hedge Funds, banks
• Cryptocurrency Exchanges
• Coinbase
• Bitstamp
• Banks & Finance
• P. Morgan
• Fidelity Investments
• Swissquote
• Tech
• IBM
• Microsoft
• Power & Utilities
• RWE

Emergence of Decentralized Finance (DeFi)

DeFi refers to financial services on public Blockchain networks. A decentralized finance system provides users with most of the services that traditional commercial banks offer. Functions like borrowing, lending, earning interest, buying insurance, trading derivatives, and more can be easily carried out on a DeFi network, in much less time and without the need for any paperwork or compliance with third-party regulators. Much like crypto, DeFi is global, peer-to-peer (directly connecting two people/parties/entities and not routed through a centralized system), and open to everyone.

Around the globe, there is an increasing need for secure, hassle-free, transparent, and accessible financial systems. This is mainly due to the current centralized financial systems’ abject failure to deliver monetary freedom and transparency to its users. A lot of them consider DeFi as the solution that can provide greater transparency and more transactional security by removing the cumbersome processes that have come to define conventional financial setups.

This is probably why decentralized finance has been steadily gaining traction in investing, borrowing, trading, and lending. Anyone, anywhere can connect to a DeFi network created on a public Blockchain and expect foolproof security of their transactions. This has also led to a higher demand for, and accessibility to, cryptocurrency exchanges in recent times.

Future outlook

Blockchain and other crypto-related digital technologies are evolving all the time. At the moment, the following are the most apparent benefits of a blockchain-based financial system.

• Privacy

Anonymous transactions and data protection through various cryptographic techniques keep the users’ sensitive information from falling into the wrong hands. All transmitted info is completely hidden from unauthorized personnel. 

• Security

Highly secure networks ensure that transactions cannot be modified or forged in any way. However, financial records are traceable for proof. 

• Access & efficiency

Cryptocurrency might be a viable alternative and concrete solution for a world where a huge chunk of the population remains unable to access formal financial services. 

Blockchain and crypto seem to be on course to disrupt conventional financial systems that require tedious third-party checks and are not all-inclusive. As the technology develops further, more entities are expected to acknowledge cryptocurrency as an alternative financial network. 

1. https://www.finyear.com/Cryptocurrency-Redefining-the-Future-of-Finance_a42657.html
2. https://www.statista.com/statistics/1202503/global-cryptocurrency-user-base/
3. https://www.euromoney.com/article/2901f1yjgu1ofguda7qio/defi-and-crypto-the-bridge-to-the-future-of-finance