In 2020, we saw legacy banks and financial institutions dive into the world of blockchain technology and digital currency. From banks developing central bank digital currencies (CBDC) to banks using blockchain technology as a way to settle payments at faster speeds for lower costs to digital currency companies becoming banks, we learned that blockchain and the digitization of business operations is becoming the clear way forward for many institutions—it is the next evolution of finance.
In this article, we will take a look at some of the revolutionary developments in banking and finance that took place in 2020 and involve blockchain technology and digital currency.
Central bank digital currencies
There was a ton of news around central bank digital currencies in 2020. Central banks and governments around the world have even been in a bit of a race to be the very first to launch a central bank digital currency at scale. Several countries are currently developing or have even launched a CBDC, these countries include:
|Country||Current Status of their CBDC|
And many more.
Although many countries around the world are working toward launching a CBDC of their own, many people are most interested in the CBDC’s that will come out of the world’s leading economies—the United States, China, Japan, the United Kingdom, and France.
Although the Bahamas has already launched its CBDC—the Sand Dollar—most of the world has its eye on the CBDC developments coming out of China. Out of the five major economies listed above, China is the closest to launching its CBDC and has gotten its CBDC—the DC/EP—into the hands of millions of citizens for pilots in participating cities. Over 3,000 merchants currently accept DC/EP.
Digital currency service providers becoming banks
In 2020, we saw a digital currency service provider become a national bank for the very first time when Kraken became a state-chartered bank. This development allows digital currency service providers to operate anywhere in the United States without having to apply for a license to operate in each individual state. It also paves the way for financial products that revolve around digital assets.
Kraken says, “From paying bills and receiving salaries in cryptocurrency to incorporating digital assets into investment and trading portfolios, Kraken Financial will enable Kraken clients in the U.S. to bank seamlessly between digital assets and national currencies.”
Shortly after Kraken became a national bank, digital currency company Avanti also received a state-charter; and in early December, we saw both Paxos and BitPay file with the Office of the Comptroller of the Currency to become national banks.
Tokenized stock trading
At the end of 2020, we began seeing digital currency service providers launch products that live at the intersection of blockchain technology and legacy finance. Both FTX and Bittrex launched tokenized stock trading. This means that users can trade shares of stocks, over the blockchain, that are pegged to the value of the underlying stock. FTX even allows its users to redeem their tokenized stock for the underlying stock.
Tokenized stocks may give the world a glimpse at the next evolution of the stock market. Although traditional banks and financial institutions will be slow to change, they could save a significant amount of money if their transactions took place over the blockchain. They could also settle payments at a much faster rate considering blockchain transactions settle almost instantaneously; which leads us to our last revolutionary development involving blockchain in 2020.
Banks using a blockchain and stablecoins for payment settlement
Legacy banks and financial institutions have begun integrating blockchain into their payment settlement layer. This year, we saw several institutions use a blockchain for bond and payment settlement, with the most notable instance of this being JPMorgan launching a new blockchain unit that solely focuses on using a blockchain and a stablecoin (the JPM Coin) to settle international payments.
When it comes to cross-border payments, JPMorgan moves roughly $6 trillion a day to over 100 countries. JPMorgan says that through their blockchain settlement system, the 400 banks participating in their blockchain network pilot will receive their payment settlement in minutes rather than days and that JPMorgan will save up to 75% of total costs in the process.
The evolution of banking, finance, and fiat
Central bank digital currencies, tokenizing stocks and real-world assets, and using a blockchain for the settlement of payments and financial products are all innovations that more enterprises are likely to adopt. There is a strong chance we will see more digital currency service providers file to become national banks in 2021 as well.
Just as money has evolved from a system of barter to paper money, debit cards, credit cards, and electronic payments, blockchain technologies and the products that can be built on top of them are the next logical evolution of banking and finance, as they significantly reduce settlement time and transaction costs while increasing the integrity of a system and better aligning with the digital lifestyles that many people in the world live.
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