CREDITS Article: Decentralisation of the financial system
Blockchain changes the world. It is obvious for many people that after October 2008, when Satoshi Nakamoto wrote his landmark article "Bitcoin: A Peer-to-Peer Electronic Cash System," data storage and transaction methods, especially in finance, are unlikely to ever be the same.
Blockchain and cryptocurrencies, especially in the financial sector, are no longer just a fashionable subject, but a technology that penetrates our lives. Indirectly, this is confirmed by the rejection of new instruments by financial regulators. In this case, fear lies behind the negative.
For example, the former head of the Federal Reserve System Bernd Bernanke in 2013 made the assumption that bitcoin and other cryptocurrencies are unlikely to succeed, and already in 2015, he spoke of them as a threat to the regulator. Even more radical is the head of JP Morgan, Jamie Dimon. He calls bitcoin a “fraud”, people who invest in it – "fools", and his employees were forbidden to work with cryptocurrencies under the threat of dismissal. According to The New York Times, the Federal Reserve System is likely to be headed by G. Powell – a tough opponent of cryptocurrencies. However, there is another point of view. According to T. Richards and E. Emery from the Reserve Bank of Australia, it is pointless to regulate and limit cryptocurrencies, because they cannot be taken under control due to their nature, and the supervision of the distributed ledger is ineffective. Unfortunately, such a balanced position, as of the Australian state authorities, is much less popular.
The thing is that regulators already understand they may not have a place in the new financial system. At the same time, we can now confidently say that the development of cryptocurrencies and blockchain will stimulate the development of national economies. Thus, the legalisation of cryptocurrency in Japan as a means of payment has already caused an influx of customers to the exchanges and allowed to attract billions of yen in investments. Note that in this case it is too early to speak about the loss of state control over cryptocurrency turnover, since the relevant exchanges must be registered with the Financial Services Agency. However, state institutions can no longer intervene in the very process of transactions and the formation of a distributed ledger. Thus, Japan is already taking its first steps towards getting rid of the control national regulators have.
A number of the world's largest banks are already working on the introduction of distributed ledger technology. In August, Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and U.S. Bank have publicly announced work on the creation of a blockchain platform for trade financing. Among other things, it should help working with letters of credit, and, therefore, optimising the exchange of data between banks. Of course, we are not talking about the cryptocurrency turnover here yet. However, the fact that private and even close to the state financial structures are boldly working with blockchain, is setting an optimistic mood about the future of this technology.
As we can see from the latter example, banks have already realised the benefits of creating their own rules of blockchain-based game in comparison with following the rules originally imposed by national regulators. Payment systems also try to keep up with them. Mastercard has already begun providing its customers with the opportunity to conduct payment transactions using blockchain, while using fiat currencies as a payment. At the same time, Mastercard's top management tries in every way to emphasise the lack of ambition to create, own or use the existing cryptocurrencies. In this sense, payment systems are approximately at the same stage of blockchain development as banks. It was announced as early as 2016 that the work of the largest data transfer system between SWIFT banks over its own blockchain platform.
Thus, progress in the implementation of blockchain by payment systems and banks is obvious. At the same time, the capability to conduct financial transactions through blockchain assumes the absence of intermediaries of transactions. Consequently, the existence of payment systems, and in the long term, of banks, is under threat. The chairman of the British network forum Financial Services Club, Chris Skinner said that "Bitcoin has the potential to replace SWIFT." A similar opinion is shared by the founder of the Etherium platform, Vitalik Buterin, also emphasising the drawbacks of corresponding blockchain-based applications, in particular, the low level of security and poor technical development. However, in a few years, the distributed ledger technology will impose competition on Mastercard or Visa.
The market already has solutions that in the very near future will be able to provide a really beneficial solution for the financial industry. The most notorious is the Swiss start-up Tezos, which raised record $230 million during ICO. Unfortunately, a conflict between the founders and a lawsuit brought on by investors put the idea into question. The promising NEO blockchain project, already called the "Chinese Ethereum", is developing in the field of "learning the technological value from the use of blockchain-based applications in new Internet OS and further Smart Economy development." In connection with the September ban on ICO in China, this project had many questions and concerns from investors. It is worth mentioning the new player in this market – CREDITS project https://credits.com. They are working on a platform capable of becoming a serious competitor both to Ethereum, and also to other start-ups offering their own developments for the Internet of things (IoT) and smart contracts. The company launches the ICO in January 2018.
The main indicators of the payments system efficiency are its speed of transactions, low cost and reliability of data storage. And, despite the undoubted successes of electronic systems, blockchain platforms are already beginning to press them up. If the Visa payment system is capable of processing 65,000 transactions per second, then, for example, the CREDITS platform promises to conduct up to 1 million transactions per second. To date, this is the highest figure among financial sector projects: NEO claims about 1,000 transactions per second, the Ripple project which specialises in interbank payments, talks about 100 thousand transactions per second. At the same time, the processing speed of a single Visa transaction is 1.4 seconds at best. The same Ripple platform takes an average of 5 seconds per transaction. MVP (minimum viable product) developed by the CREDITS team shows almost similar results with up to 3 seconds per transaction, but it will fall in time due to the growth in the number of the system nodes.
Regarding costs, it is obvious that Visa does not charge commissions or payments from end users. However, banks do charge them, and without any clear established standards. Everyone is faced with commissions when transferring funds between banks which, in some cases, can reach up to 10%. Compared to banks' commissions, the transfer of funds through financial blockchain platforms is much cheaper and is less than one hundredth of one token.
The major payment systems, including Visa, provide data security, as well as using advanced encryption technologies; but their capabilities are initially lower than that of blockchain platforms. Blockchain projects are experimenting with consensus achievement algorithms, combining and matching different approaches trying to abandon the original version of PoW. The above-mentioned NEO platform uses the Bytentine-Fault Tolerance (BFT) algorithm; the CREDITS project, among other things, uses homomorphic encryption, federative decision-making to verify validity of transactions at each stage.
The blockchain projects in finance sector are fighting for leadership, providing users both with fast transaction processing speeds, and also a scope for their application. After rebranding, the NEO project announced a successful transition to the NEO 2.0 smart contract system, not to mention the flagship of this direction – Ethereum, which has already presented a number of successful test smart contracts. CREDITS developers went further and announced their intention to provide their platform for the Internet of Things (IoT) industry development.
Blockchain and cryptocurrencies quickly entered our life and are already changing it. The prospect of perishing of financial regulators and serious transformations in the banking system may shock, but, such fundamental changes in the financial system offer new opportunities for development.