The global financial sector is evolving at such a fast pace that only some countries are able to keep up with the pace of growth in the industry. New products are coming in every day, but key among them is the introduction of blockchain technology as an alternative way of conducting financial transactions, hence replacing the current global financial system. Blockchain technology can be applied literally in all financial transactions including making international payment in real time, trading of securities at the capital markets, online trading of underlying assets in companies such as Stern Options
and in smoothening e-commerce across the globe.
Though the new wave of using bitcoins to replace the currencies we are using now is facing a lot of resistance from many governments and financial regulators, just like any other innovation, the technology will finally find its way into the system and replace the old financial system. Even developed countries like the US have not yet agreed on whether to adopt or reject fully the blockchain technology. There are efforts to understand the financial sector innovation though, with more support coming from high ranking officials within the financial sector.South Africa slowly embracing blockchain technology
In South Africa, the South African Reserve Bank (SARB) seems to be loosening its stance on the introduction of the new technology. While giving a speech in August 2016 at a cybersecurity conference in Johannesburg, the central bank governor, Mr Lesetja Kganyago, said that “as a central bank, we are open to innovations despite the different opinions of regulators on matters such as cryptocurrencies. We are willing to consider the merits and risks of blockchain technology and other distributed ledgers.”
His remarks were interpreted to mean that the government and regulators were now trying to understand the new technology instead of fighting it. Back in 2014, the National Treasury issued a joint advisory, warning the public against the dangers of the cryptocurrencies.
The statement read in part, “The National Treasury, the South African Reserve Bank, the Financial Services Board, the South African Revenue Service and the Financial Intelligence Centre would like to warn members of the public to be aware of the risks associated with the use of virtual currencies for either transactions or investments.” US still debating mass deployment of blockchain
In the US, Federal Reserve governor Lael Brainard said that the blockchain technology is revolutionary but it has first to prove itself. Speaking at the annual meeting for the Institute of International Finance in October 2016, Brainard said, “We recognise the potential of distributed ledger technology, or blockchain, to transform the way financial market participants transfer, store, and maintain ownership.” She however added that at the same time, “we want to maintain public confidence.”
Brainard was not very optimistic though that the technology will go mainstream in the near future as opposed to what fintech advocates think. She said, “Potential applications are in their infancy, and the industry may still be several years away from an application that is ready to be fully implemented.” She then concluded by giving guidance on the steps she thinks will make the transition smooth over time. In her words, “Initial relatively simple proofs of concept must be followed by much more complex demonstrations in real-world situations before these technologies can be safely deployed in today’s highly interconnected, synchronised, and far-reaching financial markets.” Risks associated with blockchain technology
As highlighted by most financial sector regulators in countries across the world, the major challenge facing blockchain technology is the issue of cybersecurity. A blockchain is an open public ledger that keeps building up as more cryptocurrency transactions are conducted
through it. The danger with it is that it is not regulated by any central bank and hence poses another risk of fraud and opening money laundering channels that governments cannot control. The greatest fear for most financial regulators is that the blockchain with its unregulated nature, it will support illegal business to flourish since the flow of money into and out of a country is not monitored by the central banks.
The challenges and downsides of blockchain technology notwithstanding, with regular iterations and continuous improvement a working model will finally be arrived at and deployed globally. How soon this will be, I will let you be the judge.