Legacy Financial Processes Morph into Web3 using Blockchain Innovations

It may be Crypto Winter but it sure feels like Blockchain Technology Spring. Innovative blockchain projects are transmuting financial services systems into Web3.  These projects leverage the unique attributes of blockchain technology:

1. Censorship -resistant payments (on public chains)
2. Real time settlement
3. Tamperproof shared systems of records

Here are some real life examples of how financial services are beneficially upgrading into Web3 :

1. 1. Real Time Stablecoin settlement for Payment Acceptors

Crypto exchanges, merchants and other fiat payment acceptors typically must wait for ‘banker hours’ for payments to be settled into their accounts. For example if a consumer funds an account or makes a payment using a debit card on a weekend, the money won’t arrive in the merchant account until Monday morning when payment settlements resume.

Now consumers can originate payments with fiat debit cards and acceptors can choose to have those funds immediately converted and settled into a stablecoin account (on a blockchain) any time of day, seven days a week, in near real time.

Payment processor  Checkout.com says they were the first company to go live with this type of stablecoin settlement and reports they already settled north of $1 billion in stablecoins, mainly for crypto-exchange customers like FTX.

2. Lightning Network (Bitcoin) payments

Crypto payments on the Lightning Network – a Layer 2 network for Bitcoin payments-  are consistently gaining adoption across the globe, especially in inflation ridden countries like Argentina where the current inflation rate is 78.5%.  (Some well-respected investors, like Stanley Druckenmiller suggest cryptocurrencies will become more attractive to populations that lose faith in their central banks as inflation erodes confidence and value).

For example, Lightning payment processor OpenNode  works with Lemon Cash serving about one million Argentinian consumers.

The Lightning Network currently has about $100 million worth of Bitcoin in its network, still a pittance compared to legacy payment systems, but not trivial for those who use it.  See Lightning Network Real Time Statistics

3. Mega Mainstream Financial Services projects

We previously wrote that we are seeing gargantuan financial blockchain use cases start to roll out from The Depository Trust & Clearing Corporation (DTCC) (working with R3 Corda) and Broadridge (working with VMware and Digital Asset DAML ) that prove the value of this technology for mainstream companies, totally independent of cryptocurrency and NFT trading.

DTCC processes all trades in the $40 trillion plus U.S. stock market. The fact that stocks now take two days to settle creates much risk for the financial system, as was particularly evident during manic volatile days of meme stock trading.  DTCC’s blockchain can potentially help eliminate these systemic issues by upgrading to real time settlement. See Coindesk on DTCC

Other mainstream activity by financial institutions like JP Morgan and Goldman Sachs was recently featured in an article in the Wall Street Journal

Gartner expects to see even more mega financial services projects move onto blockchains as financial organizations gradually migrate away from siloed murky and very inefficient batch systems into blockchain’s transparent and immutable shared record system.

4. Traditional Credit/Debit payment cards integrate with Web3 

Lots of companies are integrating crypto into payment cards for all types of rewards and marketing programs. The example below combines Web 2 products with Web3 innovations in order to build out consumer businesses:

• • • Fintech firm Alviere uses NFTs to provide rewards linked to the use of traditional debit cards. For example, consumers who buy NFTs can get 2% cash back on their cards or a ticket to physical world event. Sports teams can leverage these card programs to build communities around their NFTs and link NFT rewards and benefits to debit card spending and accounts.

Central Banks React

Central Banks have in part reacted to the potential threats of cryptocurrencies by creating their own Central Bank Digital Currency. A recent IMF Report finds Asia Pacific region ahead of the rest of the world in CBDCs. (See Figure 1).  They point to China and India as leading the charge with CBDCs.

Many market observers are justifiably nervous about government surveillance that monitors and controls individuals’ use of CBDCs. Indeed, they should be nervous. It is entirely possible for the central bank to control any — and all — CBDC spending and accounts based on any conditions stipulated by the central bank.

The Bank of Israel and VMware recently tested the use of privacy technology with Israel’s pilot CBDC Program , and successfully were able to protect the privacy of user CBDC transactions using Zero Knowledge Proof technology (without compromising system performance).  Under the tested scheme, users are given a ‘privacy budget’ and when they spend above that budget, their payments are no longer privacy-protected with ZKPs.

The problem with that is that theoretically, a central bank or a designate, presumably still has the centralized power and access rights to change a privacy budget at any time.

Many Risks Remain

Aside from privacy risks there are many other risks associated with blockchain technology that we have covered in other research (see Figure 2 below)

Figure 2:

See FAQ for Cryptocurrencies on Blockchains and Web3 Ecosystems  and   FAQ for NFTs on Blockchains and Web3 Ecosystems   and Garbage In, Garbage Forever: Top 5 Blockchain Security Threats

Blockchain Intelligence 

The good news is that Web3 risk mitigation and fraud protection tools are rapidly developing . Companies like Chainalysis, TRM Labs  and Ciphertrace turn transparent blockchain data into meaningful information that can be used to manage fraud, protect consumers and more recently to acquire and retain consumers (See Chainalysis Playbook product).

These analytic systems may look to some like Big Brother and Web 2.0 surveillance systems all over again. But the truth is the data on blockchain is public and transparent. And what needs to be protected can be protected using privacy tech like ZKPs that operate in permissionless environments and under data-owner control.

U.S. Federal Reserve Board Chairman Powell recently said at Jackson Hole that the Fed has no plans to ban cryptocurrency.

See Fed Chairman Comments  That’s a good thing.  It will be even better when the US comes up with clear rules and regulations that provide the needed guardrails to embrace this technology.

That day is supposedly coming soon and let’s hope whatever laws are instituted make sense and encourage continuing innovation.