Blockchains could become the ultimate solution for a global payments infrastructure and potentially replace the existing banking system, according to a Binance Research report.
Although today’s banking systems, such as Visa or Mastercard, provide almost instant payment authorisation for consumers, the settlement of money between several banks can take at least one day. This process can take even longer in the case of cross-border transactions, where banks from different countries must communicate.
The inefficiencies in cross-border interbank communications are particularly evident in remittance transaction times. Surprisingly, about 30% of digital remittances take more than a day to reach their destination, compared to 20% of cash remittances. The World Bank attributes this to two factors: digital remittances include traditional banking services with slower speeds, and many non-bank remittance service providers pre-fund transactions to offer faster service to end users.
In terms of speed and cost, blockchain technology is likely to be an improvement. While a typical bank transfer from one country to another takes more than a day, a similar transaction can settle on a blockchain network in under an hour. The cost of blockchain transactions is also likely to be lower on a blockchain network. In the first quarter of this year, the average cost of sending remittances across international borders was 6.35%, with Sub-Saharan Africa being the most expensive region at an average cost of 7.73%, according to World Bank data. In contrast, Solana, like other blockchain networks, facilitated transactions whose fees were a fraction of a cent.
However, a challenge remains in terms of the scalability of blockchain technology. While Visa can process over 65,000 transactions per second, platforms that exist today, like Solana, for example, can barely handle a bit over 1,000. This, however, does not support suggesting the global use of the system in high-volume payment systems.
Beyond speed and cost, blockchain technology offers other potential advantages. In an era where traditional payment systems like SWIFT can be influenced by geopolitical factors, blockchain presents a decentralised alternative. Every transaction on a blockchain is recorded on an immutable ledger, visible to all network participants, fostering transparency and accountability. The decentralised nature of blockchains distributes control across a vast network, reducing the risk of single points of failure and potential abuses of power.
The security of blockchain networks is further enhanced by their decentralised structure, making them resilient to attacks. Compromising a blockchain network would require immense computational power, far exceeding that of traditional systems. Additionally, blockchain streamlines transactions by enabling peer-to-peer payments, reducing intermediaries and potentially lowering fees.
However, the regulatory landscape for cryptocurrencies and blockchain technology remains uncertain and evolving. Regulations vary widely across different countries, complicating global operations and cross-border transactions. Some countries, like Switzerland and Singapore, are developing clear regulatory frameworks to provide guidance and foster innovation in the blockchain space. The European Union’s Markets in Crypto-Assets (MiCA) regulation aims to create a harmonised regulatory environment.
The blockchain industry is also developing compliance solutions to help businesses navigate the regulatory landscape. Providing tools for monitoring and ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations will be crucial for widespread adoption.
(Photo by Traxer)
See also: Market turbulence: Cryptos plunge on weak economic signals
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