By Andre Sterley, Digital Asset Group Leader, Senior Manager
When I moved from Mazars South Africa to Mazars USA, one of the first things I needed to perform was a cross border payment. It was then that I came face to face with the challenges of international money transmission, and more specifically the obstacles posed when using the traditional financial tools available.
Soon after I experimented with my first bitcoin transfer and could hardly believe the speed, efficiency and low cost of the transaction. Clearly, this technology holds a lot of promise to reduce friction and overhead inherent in our current financial system. This got me thinking – are cryptoassets and blockchain technology the next steps in the evolution of money?
Looking back, history chronicles the evolution of money and its journey of continual reduction of friction and inefficiencies since the days of ancient Mesopotamia and Babylon more than 2000 years ago. It’s hard to believe that at one point, paper money backed by a commodity was a significant innovation. Bitcoin is ten years old and whether it will still be here in the next ten is subject to anyone’s speculation. However, regardless of how much the crypto landscape continues to change, evolve and develop, I think cryptoassets and blockchain are here to stay for three primary reasons:
Bitcoin’s whitepaper(1) makes it very clear that payments are the originally intended use case for it. Payments, specifically inter-bank cross border payment, is the number one use case being explored by banking executives. Benefits include shorter settlement and clearing times, reconciliation cost savings and improved transparency and auditability of transactions.
The 2008 financial crisis created a significant opportunity for the entrance of Bitcoin, cryptocurrency and blockchain technology. In fact, in the first block of the first blockchain (i.e. Bitcoin) you will find an encoded message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,”(2) referring to the London newspaper’s lead story of the day. A covert message that signals at the problems of our modern fiat financial system.
The financial crisis created the opportunity to rethink the trust and roles of intermediaries. Bitcoin introduced an entirely novel system where consensus can be reached by two strangers in a peer-to-peer fashion on the state a transaction by relying on cryptographic proofs and thereby eliminating the need and related costs of placing trust in intermediaries. In short, a new model of trust between distrusting parties.
#2: Digital Assets
Digital assets or crypto-assets do not only refer to cryptocurrencies seeking to act as a medium of exchange, but one of the most compelling attractions of blockchain technology is the ability to digitally represent or “tokenize” real assets and digitally native securities on a blockchain.
Examples of real assets that can be “tokenized” include commodities such as gold and diamonds, tangible assets such as real estate and fine art, and digitally native securities such as bonds, equities and derivatives.
There are many benefits to the digital representation or “tokenization” of real and digitally native securities. Some of the primary benefits include increased liquidity, faster and cheaper trade settlement, transparency around tracking the history of the asset to its creation, encoding rules and regulations.
#3: Financial inclusion
It can be said that crypto is a step towards an open global financial system with more equality of opportunity. Over two billion of the world’s population does not have access to financial services. Most of them rely on remitting micro payments each month from a family member that works in the city back to support the remaining family in their villages, often across borders.
The transaction cost for sending just $100 ranges from between 15 – 25%. An incredibly high cost on the most disadvantaged segment of the world’s population. Imagine having an alternative that makes the same transaction for less than a dollar and in a fraction of the time.
Crypto also offers an alternative to citizens of countries where economic instability and hyperinflation are a harsh reality. Bitcoin for example, has already been widely used as a hedge against inflation in countries such as Argentina, Venezuela and Zimbabwe.
The Road Ahead
In just ten years the crypto and blockchain space has come a long way as regulators worldwide have started weighing in, prosecuting bad actors and more recently we are seeing established financial institutions launching and offering their crypto related products and services.
As the financial ecosystem begins retooling itself and organizations begin institutionalizing crypto and blockchain, it is of course not without a shortage of risks and concerns. Uncertainty and hurdles to overcome include everything from regulatory compliance, protocol governance and key management to accounting, financial reporting and tax implications to name a few.
The road ahead will continue to be fraught with challenges and most cryptocurrencies we know today, may very well not exist in the next few years. I do however think it reasonable to say that crypto and blockchain are here to stay. And given that blockchain is fundamentally a ledger-based technology for the recording, transfer and ownership of assets, it is of particular relevance and importance to the accounting and auditing professions.
This paper is part of the #InnovatorsAtMazars series. If you would like to learn more about this campaign, please visit our website.