The Global Economy Continues to Suffer Due to Inaction from Major Banks

Big banks have had ample time to innovate by utilizing blockchain technology for cross-border and interbank transactions, yet they have largely failed to take action. The consequences of this inaction are significant, resulting in billions lost due to outdated systems. This article explores the inefficiencies created by traditional finance, the diminishing perceived risks of using blockchain technology, and how these systems could benefit emerging economies.

Key Takeaways

Major financial institutions have missed the opportunity to adopt blockchain technology for cross-border transactions.
Delays in traditional banking lead to unnecessary costs and inefficiencies, impacting both individuals and institutions.
The perceived risks associated with smart contracts will lessen as technology and security measures mature.
Blockchain technology offers significant advantages in terms of liquidity and efficiency, particularly for investors and emerging markets.
Developing nations are particularly affected by banking inefficiencies, but blockchain can provide solutions to these issues.

Until banks and financial service providers fully embrace blockchain-based settlement, the global economy will continue to pay for their laziness

The Cost of Inaction

The traditional finance sector is plagued with inefficiencies. Issues such as delayed securities settlements, banking cut-off times, and slow foreign exchange transactions often take several days. Each delay represents a hidden cost, as capital becomes idle instead of generating returns. For instance, in Brazil, cross-border retail payments often route through offshore branches, increasing time, cost, and compliance challenges. For regular users, this leads to higher fees, while institutions face challenges to their liquidity and capital effectiveness.

Longer settlement times mean someone is incurring costs. Much like the risk in credit markets influences interest rates, inefficiency in payment systems impacts spreads and fees. Banks realize this and could have taken steps to improve the system for a competitive advantage—so why haven’t they?

The Future of Smart Contracts

At the start of the internet age, analysts often included "internet risk" in their financial models, thinking online systems could fail and disrupt business operations. Now, the internet is a standard part of infrastructure, and no one factors that risk into their calculations. A similar transition is likely for blockchain technology. In 2030, accounting for "smart contract risk" will seem as outdated as considering "email risk" today. As security audits and insurance standards improve, blockchains will transition from being viewed as a risk to a deficiency-mitigating infrastructure.

Revised Liquidity Premium

The inefficiencies in traditional finance present opportunity costs to investors. In private equity, funds are often locked in for 10–20 years before investors see any liquidity. However, in the crypto world, tokens can become liquid much quicker, trading on international markets immediately after vesting. Some unvested tokens can even earn yield or serve as collateral, even when they're not transferable.

This constant circulation of capital in the blockchain ecosystem reduces the notion of a “liquidity premium” where investors seek higher returns for illiquid assets. In traditional finance, assets can sit idle, but blockchain allows for rapid unlocking and utilization of funds.

This speed advantage extends to fixed income and private credit markets too. On-chain yields are calculated in real-time, accruing every few seconds, offering far more efficiency than traditional bonds that pay semiannual coupons.

When significant market events occur, like major liquidations in the crypto space, the on-chain ecosystem can settle billions of dollars rapidly, showcasing how blockchain technology can enhance efficiency compared to traditional methodologies.

Transforming Economies with Blockchain

Emerging markets face the harsh implications of banking inefficiencies. For example, Brazilians can’t hold foreign currency in local accounts, necessitating foreign exchange transactions for international payments. Latin American currencies often need to settle in U.S. dollars, creating added delays and costs.

Blockchain technology allows for stablecoins directly trading cross-border without intermediaries, eliminating unnecessary steps. Legacy systems impose strict cut-off times which hinder real-time transactions across different time zones. In contrast, blockchains operate continuously, removing these limitations.

These are ongoing issues that banks could have resolved long ago, especially given that Brazil has not faced significant legislative resistance to crypto like that in the United States. There’s no justification for these enduring challenges.

In finance, waiting is typically associated with risk. Blockchain technology mitigates this risk by substantially reducing the time between transaction initiation and settlement. This ability to quickly reallocate capital is revolutionary. However, banks are neglecting to provide their customers with these benefits. Until banks and financial service providers fully embrace blockchain-based solutions, the global economy will remain burdened by their ineffectiveness, and the costs will only increase over time.