COVID-19 has accelerated a long-term shift in the nature of financial transactions. While consumer spending has largely been down, consumption has shifted online with consumers gravitating toward digital channels and digital services across industries. In fact, what we are seeing today is a sea change in the use of virtual payments and online services in the evolution of financial technologies (FinTech).
As the principal means for supporting financial transactions across a frozen economic landscape, digital platforms have been critical to managing the COVID-19 crisis. However, even before the pandemic, the global FinTech market was already expected to grow at an annual rate of 24.8 percent. In fact, the current market value of FinTech companies like PayPal, Square, Visa and MasterCard is over $1 trillion— larger even than the largest banks.
The burning question today is what comes after the coronavirus pandemic? In 2008, the global financial crisis spurred an economic contagion and $250 trillion in spiraling global debt. Now as the coronavirus continues to wreak havoc on markets around the world, many fear that another global financial crisis is building.
Blockchain to the rescue?
Beyond the coronavirus pandemic, we can expect to see substantial interest in new fintech services as growing demand for virtual and online services continues to build. Within the telecommunications industry, for example, the pandemic is driving the need for expanding digital infrastructure and data-driven services. Telecom companies are now increasingly focused on network resiliency and reliability— particularly in terms of 5G investments.
As DBS Bank’s chief economist Taimur Baig explains, we are seeing a “pandemic-led acceleration of adoption” of new fintech services in the form of cryptocurrencies. The value of blockchain-based cryptocurrencies is that they guarantee public access to encrypted ledger data that is secure and transparent.
Indeed, what seems likely is that distributed ledger technologies (DLT) like blockchain and blockchain-based cryptocurrencies could soon become “core enablers” of the post-COVID recovery. Beyond finance, many industries have already begun deploying blockchain to streamline identity management, health care, and commercial real estate. Digitally connecting users and consumers alike, blockchains provide a universal record of all transactions made on the network. Linking together blocks of encrypted data, blockchains use cryptography to permanently document transactional records.
In the face of unprecedented financial instability, some investors are moving toward cryptocurrencies as a hedge against economic volatility. In fact, banks and financial institutions have been interested in using blockchain technology to reduce costs and increase efficiencies for some time. Some even now speculate that blockchain applications could replace the SWIFT bank transfer system altogether.
Inspired by Bitcoin and similar blockchain-based cryptocurrencies, central bank digital currencies (CBDC) or fiat cryptocurrencies are emerging as the next big blockchain application. The key advantage of fiat-based digital currencies is that they can be issued by governments instead of physical cash, and directly targeted as payments to citizens and businesses.
In fact, China and Sweden have already led the way in developing CBDC. China has reportedly begun trials in several cities including Chengdu, Shenzhen, Suzhou, and Xiong’an, areas that will host some of the events for the 2022 Beijing Winter Olympics.
Blockchain as infrastructure
Earlier this year, Beijing launched the Blockchain-Based Service Network (BSN) as part of the country’s national blockchain strategy. BSN is designed as a platform supporting global software developers building blockchain and cryptocurrency applications. Framed as the “blockchain Internet”, China’s state-owned financial services firm China UnionPay and telecom giant China Mobile manage BSN’s technical architecture (i.e., network’s nodes and servers).
Blockchain has the potential to do for value what the Internet has done for information. Looking further ahead, for example, the distributed consensus ledger (DCL), underlying blockchain applications means that highly-scaled industries like telecommunications could be facing substantial transformation. In addition to the many use cases being explored for industries such as finance, healthcare, and government, there are plausible applications of blockchain for telecoms, as well.
In South Korea, SK Telecom is launching a blockchain-based eWallet to manage electronic certificates. The telecom giant’s eWallet is compatible with the South Korean ministry’s own Government24 digital certificate initiative. This includes copies of resident registration cards, health insurance qualification certificates, and immigration certificates— all previously issued on paper and signed by hand. Initially, SK Telecom’s eWallet will include 13 types of certificates, eventually scaling to some 100 types of certificates, including tax-related documents.
In fact, the Enterprise Ethereum Alliance has recently published a report that outlines dozens of conceptual use cases for blockchain in the telecom industry. To take only one example, AT&T recently began accepting bill payments in Bitcoin via BitPay. And behind the scenes, AT&T has begun to work on a blockchain-based supply chain tool designed to track returns and repairs of phone handsets.
The rise and rise of cryptocurrencies
Taken as a whole, the COVID-19 pandemic presents real challenges to the established industries in the short term. But it also stands to unlock new opportunities over the longer-term. In a global era increasingly dependent upon international trade and global coordination, cryptocurrencies have a unique advantage that current national currencies simply do not: a hard separation between money and the state.
As the consulting firm Accenture observes, “cryptocurrencies are creating a money revolution.” By making some intermediary functions redundant, cryptocurrencies call into question the paradigm of traditional fiat currencies and the role of central banks and financial institutions. Indeed, in the 12 years since Bitcoin’s inception, cryptocurrency has become the pinnacle of non-state cooperation in the modern era.
Indeed, some suggest that Bitcoin could fulfill the role of an independent currency in a post-COVID era. Bitcoin’s value rests on algorithms and encryption rather than the state and its use of force. As a digital currency, Bitcoin is the world’s first decentralized cryptocurrency existing and operating without state control or state intervention. Moving beyond geopolitics, cryptocurrencies like Bitcoin represent the next disruptive force in reshaping the global financial system. With its potential to disrupt the role of government in the financial arena, some believe that Bitcoin could be poised to become the next global reserve currency.
Moving towards a new reserve currency
While the full impact of the pandemic remains to be determined, one of the immediate effects of the current economic crisis includes increasing bankruptcies across vulnerable industries. In fact, forecasts suggest that we are now facing the worst economic crisis since the Great
Depression. As central banks across industrialized economies have flooded the global economy to buoy global markets, many fear that government-led inflation is driving a new financial bubble.
Building on global lockdowns and a slump in consumer spending, a labor-market implosion is driving rising social instability. What is clear is that the pandemic has generated significant volatility in global capital markets with no obvious end in sight. As the virus continues to spread globally, it could tip the balance across an already fragile financial system. In fact, the pandemic could be the most serious challenge to the global economic order in nearly a century.
An increasingly fragmented geopolitical environment suggests that we may be entering a new era in need of a new financial system. Questions about the long-term viability of US leadership and the US dollar are leading many to speculate on Bitcoin or another cryptocurrency as a replacement reserve currency for the dollar. With the outbreak of COVID-19, there has been
increased interest from financial institutions and private individuals looking for a safe haven in digital assets. Of course, one major challenge to cryptocurrencies like Bitcoin is their extreme volatility.
Since the end of World War II, the United States has enjoyed significant advantages related to the dollar’s role as the world’s reserve currency. Today, more than 60% of all foreign currency reserves in the world are in US dollars. But there are big changes on the horizon. The coronavirus pandemic has struck the world economy with the biggest shock since the Great Depression. As the Financial Times reports, a dangerous financial environment marked by spiraling global debt signals major problems ahead.
What’s clear is that the post-COVID era will be substantially different from the past. This does not mean that the US dollar will be replaced anytime soon. But it does suggest that demand is growing for an alternative reserve currency. To be sure, the global trend toward “de-dollarization” has been under way for some time. Together, China, Russia, and other emerging powers have been moving away from the dollar in international trade for the past decade. Last year the European Union established INSTEX, a European special-purpose vehicle (SPV) to facilitate non-dollar transactions and non-SWIFT transactions with Iran. All of which signals major changes ahead.