The Global Economy: Paying the Price for Big Banks' Inaction

This article discusses the inefficiencies of traditional banks and financial institutions in adopting blockchain technology for cross-border settlements. It highlights the significant costs incurred by the global economy due to banks' reliance on outdated systems and emphasizes the potential benefits of blockchain in transforming financial transactions.

Key Takeaways

Traditional financial institutions have not fully embraced blockchain technology, resulting in billions lost in inefficiencies.
Delays in cross-border payments increase costs for both retail users and institutions.
The perception of risk associated with blockchain will diminish as security standards evolve.
Blockchain technology allows for quicker access to liquidity and reduces the time for transactions and settlements.
Emerging markets like Brazil face significant challenges and costs due to outdated banking systems, which blockchain could help address.

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

The Costs of Inaction

Over the past decade, financial institutions and large banks have had the opportunity to explore blockchain solutions for cross-border and interbank settlements but have largely fallen short. They could have conducted pilot projects, developed internal expertise, and established compliant models in anticipation of regulatory approval. However, this has not happened on a large scale.

While there are some notable exceptions, like JPMorgan’s Onyx project—now renamed Kinexys—these efforts remain isolated and have not set a precedent for the industry. As a result, when regulators were finally ready to embrace innovation, the industry was unprepared to roll out effective solutions. This inaction is costing the global economy billions due to the friction caused by relying on outdated systems that slow down money transfers in an age where speed is crucial.

Inefficiencies in Traditional Finance

Traditional finance is plagued with inefficiencies, including slow securities settlements, bank cut-off times, and multi-day processes even for routine foreign exchange trades. These delays represent additional costs of capital, akin to hidden fees tied up in intermediary accounts. Retail cross-border payments in countries like Brazil often go through offshore branches, leading to increased costs and complexities. This process results in higher fees for consumers and inefficient capital utilization for businesses.

When settlements take longer, it’s easy to see that someone somewhere pays for that inefficiency. Just as credit risks are factored into interest rates, the weaknesses in the payment system are embedded in pricing structures charged to customers and businesses alike.

Evolving Perceptions of Blockchain Risk

When the internet emerged, analysts often considered what they referred to as “internet risk”—the chance that online infrastructure might fail. Today, that risk is no longer a concern factored into valuation models, despite the potential massive costs of downtime. Similarly, the perception of “smart contract risk” will evolve. In the future, after thorough audits and the establishment of security standards, blockchains will be regarded as a necessary infrastructure for reliable operations, not as a risk factor.

Transforming Liquidity with Blockchain

The glaring inefficiencies of the current financial system result in opportunity costs for investors. In traditional private equity or venture capital, investors may wait 10 to 20 years for liquidity. In contrast, the crypto sector allows tokens to vest much faster, providing immediate access to liquid markets, disrupting the lengthy process of financing through private equity and IPOs.

Moreover, unvested tokens can often generate yields or serve as collateral while they remain non-transferable, meaning that capital typically stagnant in traditional finance continues to circulate within the blockchain ecosystem. The traditional concept of a “liquidity premium” diminishes as assets can be fractionally unlocked and utilized in real-time.

This change isn't limited to cryptocurrencies; blockchain technology also transforms fixed income and private credit markets. Unlike traditional bonds, which pay interest every six months, blockchain yields can accumulate nearly instantaneously. Furthermore, while traditional financial systems may require days to respond to margin calls, the decentralized finance sector enables immediate transaction responses.

Blockchain Benefits for Developing Countries

Emerging economies like Brazil heavily feel the impact of banking inefficiencies. For instance, Brazilians cannot hold foreign currency in local accounts, resulting in mandatory foreign exchange trading for every international transaction. Such processes increase both time and costs as they often require conversion through U.S. dollars as intermediaries. Blockchain allows for direct settlements, bypassing these unnecessary procedures.

Strict cut-off times dictated by legacy systems further exacerbate the problem. In Brazil, foreign exchange operations face deadlines that can hinder real-time settlements, especially for businesses operating across different time zones. Blockchain’s 24/7 operations eliminate these barriers, allowing for immediate transactions and settlements.

These issues are concrete examples of inefficiencies that banks could have addressed years ago. With fewer legislative hurdles surrounding crypto in Brazil compared to the United States, it is hard to justify the continued existence of these problems.

In finance, waiting is generally viewed as risky, and rightly so. Blockchain mitigates that risk by shortening the time from transaction to settlement, fundamentally changing the dynamics of capital allocation. However, banks are missing out on these advancements. Until banks and financial service providers adopt blockchain settlement fully, the global economy will continue to suffer from their lack of initiative, and as time equates to potential earnings, the costs will only continue to grow.