How Cryptocurrency & Decentralization Impact Global Finance

Considering the events of 2018, you’d be forgiven for thinking the tech world had heard the last of cryptocurrency. From a January 2018 high of $20,000 to a stumbling low under $4,000, the world’s foremost cryptocurrency — Bitcoin — had seemingly burst its bubble.

And while the Bitcoin tumble has dragged down the entire speculative cryptocurrency market, some analysts see a resurgence in the works. Common sense economics explains why this is the case.

When cryptocurrencies like Bitcoin existed only as unregulated speculative financial assets that huge numbers of people bought and sold in hopes of turning profit, the market essentially floated on investors’ expectations. The absence of regulation and the lack of feasible real-life use cases essentially guaranteed a severe correction.

When it comes to cryptocurrency and decentralized digital financial markets, however, we’ve only seen the tip of the iceberg. Enterprising FinTech firms see the Bitcoin example as an experiment, and a successful one at that.

Cryptocurrency as a Means of Exchange

The first thing FinTech developers, product managers, and business leaders must do to understand the future of cryptocurrency in a decentralized marketplace is understand why Bitcoin crashed. When Stripe stopped supporting the cryptocurrency, it cited several reasons:

  • Long transaction times
  • High transaction costs
  • Price volatility
  • Lack of regulation

As a result, Bitcoin was a valuable financial asset, but not a good means of exchange. Future developments with new cryptocurrency technologies can address these problems and generate fast, cost-efficient solutions that are stable and regulated.

Some cryptocurrencies are already paving the way. Ethereum doesn’t suffer from many of Bitcoin’s weaknesses and adds additional features that could prove extremely attractive to FinTech business leaders. For example, the ability to program self-executing subroutines called smart contracts that fulfill themselves upon certain conditions.

But the true power of cryptocurrency is in its capability to democratize the global financial market and give FinTech innovators the ability to sidestep banking barriers when making transactions.

The ability to safely and securely transfer value between individuals without requiring a third party to oversee the transaction represents a major step forward for the FinTech world.

For example, FinTech developers may decide to implement a cryptocurrency-based payment processing solution that does not rely on the slow legacy systems of banks. Developers could establish a system that ensures instant, safe, and secure payments across entire continents.

Where Centralization Fails, Cryptocurrency Succeeds

As of yet, there are no mainstream, globally-accepted cryptocurrency standards or frameworks in existence. Developers around the world are rushing to be the first to implement a new FinTech standard that uses the lessons learned from Bitcoin to address the many problems centralized banking systems have:

  • Unequal Access to Financial Instruments. It should come as no surprise that the traditional financial system is designed to serve the needs of the wealthy. This does not need to happen at the expense of the poor, but nonetheless it often does. Decentralized financial instruments can drop barriers to entry for financial literacy and service.
  • Arbitrary Censorship. Centralized payment providers may seize assets, block payments, and assess liens with zero transparency, and often without any notifications. Decentralized assets are far more difficult to manipulate arbitrarily.
  • Counterparty Risks. You need to look no further than the 2008 Financial Crisis for the perfect example of centralized counterparty risk. For-profit financial institutions are not supposed to make promises they cannot keep — but profit is a powerful incentive to do so, and if enough institutions fail to cover their debt obligations, the entire economy can collapse.
  • Lack of Transparency. Until very recently, the public’s visibility into the inner workings of the finance industry was effectively zero. However, the industry has not yet undergone the radical change towards public, open-source transparency that blockchain-based solutions promise.

Different cryptocurrencies address these issues in different ways. Each one puts its own emphasis on certain failings of the traditional financial system, and each one offers a unique outlook towards a decentralized future economy.

This outlook is where FinTech leaders can align their own goals and ambitions with a vision of a faster, more efficient, more secure financial future for people around the world. The promise of cryptocurrency and decentralized finance is in transactions being made between trusting partners without the traditionally slow and laborious process.