Leveraging Blockchain Technology in the Banking and Financial Sector

Ioannis Roussos, Head of Deposits & Investment, Eurobank

Ioannis Roussos, Head of Deposits & Investment, Eurobank

During 2020, the popularity of the Blockchain market has grown unexpectedly. We have witnessed businesses from a multitude of industries adopting Blockchain technology for enhancing their business processes. The COVID-19 pandemic accelerated the digital transformation drive in many areas, especially via the use of blockchain or distributed ledger technology. If finally, the Digital currencies will be adopted from Central banks, this may result the global blockchain market size to expand from USD 3.0 billion in 2020 to USD 40 billion by 2025, at an effective Compound Annual Growth Rate (CAGR) of 67.3percent during 2020–2025.The combination of technology and payment innovative developments like Instant payment and the impact of COVID-19 will further accelerate blockchain transition. New Projects We expect to see a reorientation of the various blockchain projects. Experts predict that 90percent of blockchain projects will require replacement within a year.

That is because most are ignoring key features such as tokenisation, smart contracts, and decentralised consensus. In addition, COVID-19 has put new challenges towards more realistic and pragmatic approaches to blockchain initiatives specifically focused on the day-to-day business “to continue their growth path”.

New Blockchain projects with clear benefits are expected has also been an uptick in the number of companies interested in participating in networks that specifically help to address some of the supply chain issues that the pandemic has put forward.

Due to market uncertainty sparked by COVID-19, many corporates had to pull back from some of their more long-term DLT-related projects for the time being. Moreover, long-term strategic projects requiring changes to the market structure or regulatory changes are prolonging their time schedules. Additionally, funding for experimental and R&D projects has been cut this year. And this will cause an even larger number of these projects will be put on hold.

Still, digital transformation is no longer a choice for businesses—it is essential to survival. Blockchain technology is expected to make the most transformative and dramatic changes in the way businesses function during the coming years. Many industries are, therefore, intensively looking at blockchain as a helpful tool to achieve the benefits of digital transformation.

Upcoming Trends

DEFI

Another interesting trend in 2021 will be DEFI or Decentralised Financial services. If we look at DEFI, it shows how blockchain could be used for financial use cases which up till now has been “the missing point” for enterprise blockchain offerings. DEFI illustrates the successful process of smart contracts for financial services. This alternative form of financing perfectly fits into a Fintech-driven economy. The total value of full-time decentralised financial services (based on cryptocurrencies) witnessed an impressive growth and even surpassed USD 10 billion.

ZKP

Zero Knowledge Proof (ZKP). ZKPs are urgently needed to meet challenges ensuring confidentiality that are currently holding blockchain projects back.

Blockchain-based ZKPs allow companies with different record-keeping systems to be verifiably “in sync” on a recordby-record basis without sharing sensitive information. Much progress has been made recently around ZKPs. There are increasingly coming all sorts of solutions on the market to deploy ZKPs in a broad way.

Financial Sector is changing

The banking and financial sector further dominates the market. Amongst all the industries affected by the COVID-19 pandemic, the financial sector is one area that has been hit particularly hard.

Reduced profitability and tightening margins have forced banks to adapt and increasingly meet their customers’ needs. The adoption of fintech and blockchain technology enables them to streamline their operations and reduce costs. This will probably lead to firm growth in contactless transactions and redesigned financial services.

The banking and financial sector is expected to show exponential growth in blockchain adoption in the coming years. As a result, this sector is going to hold the largest market size in the global blockchain market during the coming years.

Additionally, itis expected a considerable increase in the number of non-traditional financial institutions—ranging from non-bank lenders to crypto-currency based banks to fully decentralised financial (DEFI) services alternatives.

The biggest trend, however, is the adoption of Cryptocurrency by central banks (CBDC)

There is a proliferation of central banks worldwide that are exploring the possible launch of their own central bank digital currency (CBDC). According to a recent BIS report 80percent of central banks worldwide are researching the pros and cons of such a currency.

This process is expected to intensify in 2021, driven by the diminishing use of cash, the digitalisation of the economy, the upcoming private digital currencies like, Libra etc. The Chinese government is well in advance and are almost ready for a worldwide roll-out. The ECB will take a clear decision on their Digital euro project in mid-2021.

ECB and Crypto assets

The ECB welcomes the initiative of the European Commission to establish a harmonised framework at the European Union level for crypto-assets and related activities and services, and the aim of a proposed regulation addressing the different levels of risk posed by each type of crypto-asset, balanced with the need to support innovation. Furthermore, the ECB believes that a Union harmonised framework is critical to prevent fragmentation within the single market. I believe that Europe is on the cusp of making major steps forward in harmonising the legal, regulatory, and policy frameworks of the European Union member states on crypto assets.

On September 24, 2020, the European Commission published a proposal for a “Regulation of the European Parliament and of the Council on Markets in Crypto-Assets”, commonly referred to as the MiCA proposal.

This proposal is part of the Digital Finance package, which is a holistic package of measures to further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks. In addition to the MiCA proposal, the Digital Finance package also includes a proposal for a pilot regime on distributed ledger technology (DLT) market infrastructures, a proposal for digital operational resilience, and a proposal to clarify or amend certain related EU financial services rules. Europe’s strategy prioritises ensuring that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies.

The MiCA proposal, together with the proposal on a DLT pilot regime, represents the first concrete action within this area.

The years to come will be very interesting, not to say exciting. Let’s see.

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