Recently, Blockchain platforms and solutions receive a lot of attention from VCs as well as established financial institutions which as a result direct many resources into it. Thus, it is appears that the first stop in the Blockchain revolution will be the Banking and Financial Services industry. Still, there are many unanswered questions around this emerging technology such as: How will it impact the financial services industry? What will be the new business models that will emerge around it? These are the types of questions that I will try to address in my second blog post about the Blockchain disruption.
Based on my previous post, financial services institutions have already begun exploring Blockchain’s capabilities and how these will impact their industry. Start-ups such as R3 CEV, tØ and Symbiont have already been experimenting with the new technology and utilized it to create new solutions and business models that are more efficient and beneficial for all stakeholders.
Based on a 2013 Federal Deposit Insurance Corporation (FDIC) survey, nearly a third of the US population (~106M people) are unbanked or underbanked. As a result, introducing a technology that will reduce dramatically the barriers to entry for these individuals to the financial ecosystem will have a widespread impact.
Additionally, based on the nature of the ecosystem and its capabilities, once customers’ entities are captured on the Blockchain, the possibilities and benefits increase exponentially. This impressive growth is possible due to the utilization of the personal information in parallel ecosystems (e.g., Insurance, healthcare) which could be shared with institutions and other users based on the individuals’ preference.
So what makes Blockchain attractive for financial institutions?
The unique capabilities of the technology are attractive to a wide range of stakeholders within the financial industry and hence will radically increase its adoption:
From the Consumers side, Blockchain dramatically reduces the fees and interest rates associated with operations and actions within the financial space. As an example, using the Blockchain for money transfers worldwide can reduce fees in current methods from 5%-17% to ~0.02% per transaction, more than a 100X reduction in costs for the end user!
In addition, as a result of the lower fees and the general decrease in barriers to entry based on an-easy-to-use interface that creates a seamless experience to existing clients, the entire platform is more accessible for a larger amount of users. Furthermore, it enables a fast, reliable and efficient approach to an existing cumbersome process.
From the financial institutions perspective there are numerous benefits too. The increase in users and the ability to gather more data about them will enable these companies to customize their products optimally and create new revenue streams and products that will address their new customers’ needs better and faster.
Moreover, since Blockchain has the ability to transform the financial platforms into secure, safe, private and compliance-ready ones, it has the ability to decrease many of the industry’s current pain-points and highest cost drivers (e.g., cyber security, compliance, auditing) which makes the new technology very attractive even more attractive.
Also, the Blockchain stack-based structure and modular nature satisfy the multiple risk-averse stakeholders within the sphere as well as de-risk the development process of new platforms and solutions.
There are many more advantages that make the Blockchain attractive to other stakeholders not mentioned above such as regulators and investors.
Current disruptors within the space
Understanding the capabilities and huge potential of the Blockchain, many start-ups and incumbents experiment with it and develop new business models to enable them to monetize the new rules of the playing field and disrupt the existing status quo. After mentioning some of these in my prior post (Abra, R3 CEV), I will highlight some different ones here:
NASDAQ Linq is a pioneer in Blockchain experimentation. NASDAQ is the first major global stock exchange to launch a digitally managed asset trading platform for shares in private companies as part of NASDAQ Private Market suit of services. The new innovation enables issuing, cataloging and recording of shares transfers of privately-held companies. Furthermore, the platform facilitates easier auditing and transparency about companies’ ownership. Currently, the platform experiments with only one node and includes six startups and their investors as users.
Symbiont has created the first issuance and trading platform based on its previous open source stack Counterparty for smart securities which are programmable securities that exist on a Blockchain. These new assets enable faster and efficient trading while dramatically reducing the associated costs. Also, the new solution enables increased liquidity, transparency and security to all stakeholders. As a smart-contracts based platform, Symbiont’s platform enables users to issue, trade and process a range of instruments in a single, global, decentralized peer-to-peer network.
BTCJam offers a peer-to-peer lending marketplace which is very similar to Lending Club but is based on Bitcoin and therefore makes it accessible to investors and borrowers worldwide. To qualify borrowers and assess their risk profiles, BTCJam has developed a unique online credit scoring system that does not require a traditional credit score. Furthermore, the platform enables flexibility as borrowers can determine their own repayment parameters and rates. Additionally, as all transaction occur on top of the platform, BTCJam enables a peer-to-peer reputation system based on actual behavior within their platform to enable investors to make better investment decisions. Up until now, users have used the platform to borrow ~$16M in more than 19K loans.
WeiFund uses a Blockchain-based platform that enables peer-to-peer crowdfunding with minimal fees. The easy-to-use solution enables investors to own shares within their investment securely and reliably by using tokens (a mechanism that Blockchain uses to enable ownership that can later be tradeable). Another impressive benefit of the platform is that by using ownership tokens, the platform also enables investors to enjoy future profits of the venture in the form of equity sharing. In addition, the solution has a modular orientation that permits easy linkage between WeiFund’s assets to other platforms.
Bringing all of the Blockchain benefits into personal financing
An exciting stage in the emergence of any new disruptive technology is the development of new business models that are based on the unique capabilities enabled by the new technology. Blockchain is similar in that sense as it enables innovative approaches for users’ communication and facilitation of transactions that will transform the way we do business.
So how can Blockchain capabilities be translated into financial services?
I propose a one-stop-shop solution for personal financing, a payments, lending and credit peer-to-peer network of marketplaces that is based on the Blockchain.
The payments platform will be very similar to existing Bitcoin solutions that already exist in the market. It will provide users to transact with other users all over the globe fast and with minimum fees.
The lending platform will enable users to borrow funds from peers globally based on their own terms and preferences. This will also enable users an alternative investment opportunities as well as diversifying their portfolio with micro-investments at various risk levels. To reflect the optimal market, borrowers and investors will be able to interact through encrypted on-platform messaging and silent auctions. These will guarantee flexibility and that all parties are satisfied with the results.
Later these investments can be repackaged (utilizing the token concept mentioned earlier) to create a secondary market for additional investment alternatives.
The credit platform will let investors provide credit to borrowers based on the borrowers’ terms and preferences through encrypted messaging and silent auctions as well. This market will also enable an emergence of a secondary market around it.
To allow investors and borrowers evaluate their risk levels, an important component that should be existing in the platform is user’s reputation that is based on one’s behavior within the platform. Reputation, in addition to other relevant personal information that can be shared voluntarily using Zero-Knowledge-proof technology with others during the listing of new requests for borrowings/ credits will enable borrowers to enjoy from better terms and Investors to evaluate their risk better.
By combining all of these applications on top of the Blockchain, we can create a one-stop-shop for personal finance that is accessible, cheap, efficient, auditable, private and beneficial for all stakeholders.
This post is the second in of a series of blog posts about the Blockchain, its implications and challenges for mainstream adoption.