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There has been a lot of buzz surrounding terms like “bitcoin,” “blockchain,” and “cryptocurrency” lately. While some of it may be hype, these terms are pointing to significant changes in the financial services industry.
So what do they all mean?
In this article, we will explain why many industry experts are paying close attention to these terms.
Let’s get started with some quick definitions.
Blockchain, Bitcoins and Cryptocurrencies
Blockchain is, quite simply, a digital, decentralised ledger that keeps a record of all transactions that take place across a peer-to-peer network. The major innovation is that the technology allows market participants to transfer assets across the Internet without the need for a centralised third party.
Blockchain is a decentralised digital ledger that records transactions securely and transparently. It enables the existence of cryptocurrencies like Bitcoin and has potential applications in various industries.
A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses cryptographic techniques and its protocol to verify the transfer of funds and control the creation of monetary units. (PwC).
Bitcoin is the name of the best-known cryptocurrency, the one for which blockchain technology was invented.
Despite the thousands of cryptocurrencies available, Bitcoin still reigns as the most popular crypto in the US. Other popular cryptocurrencies are Ethereum (42% ownership) and Dogecoin (30% ownership).
From a business perspective, it’s helpful to see blockchain technology as a type of next-generation business process improvement software.
Collaborative technologies, such as blockchain, promise the ability to improve the business processes that occur between companies, radically lowering the “cost of trust.” For this reason, it may offer significantly higher returns for each dollar spent than most traditional internal investments.
Financial institutions are exploring how they could also use blockchain technology to upend everything from clearing and settlement to insurance.
What’s Going On Here?
As of 2021, China was the largest owner of blockchain-related patents, accounting for 84% of global patents. Despite the country banning the mining and use of cryptocurrencies, the interest in blockchain technology remained high.
According to a report by Statista, Nigeria and Turkey have the highest crypto adoption rate in the world. Other countries with high cryptocurrency adoption rates are the UAE (31%), Indonesia (29%), and Brazil (28%).
Only 16% of Americans own or use crypto however, 55% of young Americans anticipate buying Bitcoin by 2025.
ICOs or Initial Coin Offerings
ICOs are the hot new elements in the blockchain community. They are an alternative to crowdfunding and have the potential to transform the way companies capitalise themselves. They are also of dubious legal status. It’s essentially a way for blockchain startups to raise money outside the traditional VC world.
Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities.
It’s sort of like an IPO, except for early stage blockchain projects. It’s effectively a Kickstarter campaign that uses blockchain-based “tokens” (a.k.a app coins, cryptocurrencies, digital assets) to raise money.
The ICOs raised for the cryptocurrency industry amounted to 14.8 billion U.S. dollars as of November 2019.
“ICO as a new business model leveraging blockchain technology will sustain as the digital way, combining crowdfunding and (a) new hybrid asset class of equity ownership and currency,”
What Does This Mean?
A lot of companies have been raising money through ICOs (by offering their new cryptocurrencies to investors in exchange for existing cryptocurrencies or cash), and in the last few months, the amount of fundraising has shot up exponentially. However, unlike traditional fundraising methods, ICOs have been largely unregulated. This presents a problem for governments and central banks as they try to assess the effects on investors and the financial system. China is concerned about ICOs being used to fund criminal activity and perpetuate fraud.
Recently, Australia, Japan, Russia, and South Korea announced plans to regulate cryptocurrencies, which would legitimise them even if it would require increased administrative costs (like better user verification). Chinese regulators weren’t as permissive and banned ICOs altogether – how far other countries will go is yet to be seen.
Central Bank Digital Currency (CBDC)
Central bank digital currency (CBDCs) is a digital version of fiat money, issued by a country’s central bank. CBDCs have become popular now as it is a potential solution to the digital payment challenges and the increasing use of private digital currencies such as Bitcoin.
CBDCs are similar to cryptocurrencies, but their value is fixed by the central bank and equivalent to the country’s fiat currency. CBDC acts as an alternative payment option, which enhances safety, reliability, and accessibility for all.
What are the Benefits of CBDC?
- One of the main benefits of CBDCs is that they can provide a secure and reliable means of digital payment and remittance.
- CBDCs can be integrated into existing payment systems and will work for both online and offline payments.
- CBDC can also be used to facilitate faster cross-border payments and offer more transparency
- CBDCs ensure financial inclusion for those who have no access to banking services
Conclusion:
In conclusion, the world of Bitcoins, blockchain, cryptocurrencies, and ICOs represents a revolutionary shift in the landscape of digital currencies. From the groundbreaking emergence of Bitcoin to the transformative power of blockchain technology, these innovations are reshaping the way we think about and engage with financial systems.
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