A seismic shift is brewing within the financial services infrastructure

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Prepare for users to regain control of their data in the wake of Distributed Ledger technology and the emergence of web3 services

What is Web3?

Web1 refers to today’s global, interoperable network, built on standards and increasingly with services and platforms with which we all connect and interact (web2).

With Distributed Ledger Technology (DLT), and especially blockchain technology, the idea of ​​a web3 has emerged.

Or web2 has spawned multinational behemoths, amassing massive amounts of user data (forcing regulators to react with regulations such as GDPR), web3 is looking to take advantage of the features of DLT and in particular blockchain and to provide services where data security and confidentiality are ensured for financiers. , personal and professional data.

What distinguishes web3 from web2 is ownership and control of data.

With blockchain’s fully decentralized ledger, records managed by users themselves with no central authority or intermediary – and combined with blockchains’ unique use of tokenized data, we are indeed witnessing the birth of the next computing revolution. . A revolution that will undoubtedly and dramatically upset many areas of our daily lives.

While there are many current and emerging examples of Web3 services, there are still many areas to cover. Why, how and ultimately when individual industries and societies will be affected is an open question and a work in progress.

However, there is no doubt that some industries and areas are already showing the outlines of potential seismic disruptions and shifts for their entire value chain.

Impact on the financial sector and banks

Cryptocurrencies, and in particular Bitcoin, are probably the most well-known use of blockchain technology falling under the web3 service.

But the Bitcoin blockchain is just one of many public and private blockchains. The open-source Ethereum platform supporting many different blockchains has been particularly popular among developers. And aside for the platform’s native Ether cryptocurrency, there’s thousands of cryptocurrencies on the platform. In total, there are between 6,000 and 13,000 cryptocurrencies (as well as stablecoins) on various independent and open DLT and blockchain platforms.

The whole market has been hyped to say the least in recent years, which translates into a market capitalization whose supposed value is equivalent to a breathtaking 2.2 tUSD (at time of writing).

Being open, the Ethereum platform has also given birth to a myriad of financial applications other than cryptocurrencies. In particular the use by the Ethereum blockchain of token standards (ERC-XXX) and its ability to support a variety of so-called smart contracts has fueled this development. Smart contracts are a very simple little piece of “if this, then that” code that can trigger a tokenized asset to perform certain actions.

With smart contracts, digital asset management applications have become both simple (credit/loan) but also the trading of complex financial products, be it derivatives, flash loans, shorting, etc. . All done using cryptocurrencies and assets – and outside the realm of the traditional financial industry (and for now, its regulatory constraints). Collectively, this is referred to as decentralized finance (or DeFi) and is cited to encompass the equivalent of 160 bUSD in market value (at the time of writing).

Additionally, along with smart contracts, non-fungible tokens, or NFTs, have come into existence. NFTs are powered by smart contracts that manage the transferability and verification of ownership of anything digitized. In 2020, a digital artwork by artist Beeple, reached a price equivalent to 69.3 mUSD!

Incumbents and regulators react

The application and use of blockchain has not gone unnoticed by either incumbents or regulators.

The EU is making progress MiCa Directive (Crypto-Asset Markets). ETA end of 2022. MiCa covers all crypto assets with “representation of value or rights that can be transferred and stored electronically, using DLT or similar technology”…

Mid-November 2021, the European Parliament announced an agreement with the European Council on a 3-year sandbox pilot program to enable financial markets to tokenize conventional financial instruments such as stocks and bonds using blockchain technology.

And in payments, most central banks in the world are engaged in a digital form of their physical Fiat currencies – known collectively as Central Bank Digital Currencies (CBDCs). And although central banks motivational factors vary, the idea and thoughts on designing a CBDC seem to be heavily inspired by DLT, especially blockchain. Private and public platforms such as R3s, Corda, Stellar, Electronic money, Hyperbook, G+Ds Filiaand SETL are just a few in play for CBDCs. And in a
CBDC Challenge organized by the Monetary Authority of Singapore (MAS), SETL supported by Citi, even presented a vision of a CBDC network be able to support more than CBDCs. An idea that could leverage and provide an even stronger argument to regulators and governments to enable a network of CBDCs.

Want to know more?

This editorial is a personal point of view, but I would be remiss if I did not add that CBDCs are a priority of mine. If you want to learn more about CBDCs, I invite you to read this blog post from August 2021.

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