Blockchain is swiftly revolutionising finance, impacting payments, trade finance, and capital markets. Its decentralised, transparent nature enhances security, efficiency, and accessibility in financial transactions. Emerging as a versatile tool, blockchain reshapes the financial technology landscape, prompting global exploration.
Blockchain is a decentralised ledger technology that records secure and tamper-resistant transactions across multiple computers. Each block links to the previous, forming a chain. The World Economic Forum’s 2017 notes position blockchain as a transformative global resource in industries like supply chains, healthcare, and financial services. Emphasising transparency, fraud reduction, and process streamlining, the report underscores blockchain’s potential. The consequences of a lack of governance in blockchain technologies have far-reaching implications across various domains. Policymakers must therefore consider the critical consequences and ensure that regulations strike a balance between fostering innovation and addressing potential risks.
The alliance of blockchain and fintech reshapes traditional finance, bringing transparency, security, and efficiency. Blockchain innovations, such as Decentralised Finance (DeFi), cross-border payments, and asset tokenization, are pivotal. Citibank explores converting cash to digital tokens for efficient asset transfer, as reported by the Financial Times. JP Morgan’s JPM Coin, operational since 2019, allows customers to program accounts for time-sensitive payments, anticipating future exchange rate arbitrage opportunities.
Similarly, TechCabal reports that the Nigerian blockchain-backed digital product Zone, formally called Appzone, has been adopted by several commercial banks in Nigeria to improve the speed and accessibility of ATM transactions with ambitions to roll out capabilities that provide improvements to the speed and accessibility of online payments and direct debit transactions. This is good news as many Nigerians can relate to tedious, painful and time-consuming experiences with ATM withdrawals. Like Zone, Ripple demonstrates the efficacy of blockchain in enhancing cross-border payment systems. By facilitating real-time and cost-effective transactions, Ripple has become a leading example of how blockchain can address longstanding challenges in the financial industry.
Governance challenges in blockchain technologies
Considering the benefits of the blockchain-fintech nexus, the need for robust governance frameworks remains a crucial challenge for responsible and effective implementation in the financial services sector.
Regulatory uncertainties impede the broad adoption of blockchain-based fintech products. Global variations in cryptocurrency regulations, such as China’s strict approach to cryptocurrency trading and ICOs versus Switzerland’s more permissive stance, illustrate the diverse regulatory landscape impacting the development and deployment of blockchain solutions.
Integrating blockchain solutions with existing legacy systems poses a significant challenge. Legacy systems often operate on traditional databases and structures, creating complexities when interfacing with the decentralised and distributed nature of blockchain. In this context, projects like R3’s Corda have emerged as blockchain solutions specifically designed for seamless integration with legacy financial systems, emphasising the ongoing efforts to bridge the technological gap.
Also, the absence of standardised protocols and smart contract languages in the blockchain space contributes to interoperability challenges. Without common standards, different blockchain networks struggle to communicate effectively. Interledger Protocol (ILP) is an example of a standardisation initiative aiming to facilitate transactions between different ledgers. ILP operates as an open protocol for transferring value across payment networks, demonstrating efforts to establish common ground in the blockchain space.
Blockchain’s inherent transparency poses challenges in handling sensitive financial data. Solutions like Monero, a privacy-focused cryptocurrency, have been developed to address this concern by providing enhanced privacy features. These privacy-centric technologies showcase ongoing efforts to balance the transparency advantages of blockchain with the imperative to protect user privacy in financial transactions.
Overcoming governance challenges
To overcome these governance challenges, recent academic research emphasises a solution architecture perspective. Establishing industry-wide standards and protocols becomes paramount. For instance, the InterWork Alliance (IWA) is a collaborative effort between blockchain industry leaders to develop standards that facilitate multi-party computations, offering a step toward addressing interoperability challenges. However, to what extent will international relations impact this initiative, especially in capital markets?
Collaborative industry initiatives, such as the Enterprise Ethereum Alliance (EEA) and the Global Legal Blockchain Consortium (GLBC), aim to bridge the gap between blockchain technology and legal governance. These initiatives bring together stakeholders from the legal and blockchain fields to develop standards and governance models that ensure regulatory compliance and legal consistency within blockchain ecosystems.
As privacy concerns persist, technologies like zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) are explored for privacy-focused transactions. Zcash, a cryptocurrency utilising zk-SNARKs, exemplifies the application of advanced cryptographic techniques to enhance transaction privacy while operating on a blockchain.
The National Blockchain Policy set by the National Information Technology Development highlights blockchain’s application to address inefficiencies, aiming to scale up existing pilots and initiate new ones. Key recommendations focus only on regulatory considerations, creating a national blockchain infrastructure, and promoting research, development, and workforce skilling. However, a robust regulatory framework for fintech products utilising blockchain appears to be missing in Nigeria, in contrast to the proactive regulatory involvement of the U.S. Securities Exchange Commission (SEC) in blockchain and ICOs. The SEC has applied existing securities laws to ICOs, considering tokens as securities subject to federal laws. Security tokens, utilising blockchain, are also subject to similar SEC regulations as traditional securities.
Unlike Nigeria’s stance on cryptocurrencies, the U.S SEC. oversees cryptocurrency exchanges dealing with digital assets and security tokens, taking action against non-compliance. The SEC can enforce penalties, cease-and-desist orders, and settlements for ICOs violating securities laws. The lack of comprehensive standards emphasises the industry’s need for collaborative initiatives to establish governance, interoperability, and privacy solutions in the financial sector.
In conclusion, the documented benefits of blockchain technologies extend to various sectors, particularly financial services. The potential for revolutionary blockchain-backed fintech products is noteworthy. In the nascent stage of the Nigerian fintech sector, uncertainties surrounding the regulatory frameworks for such products raise serious concerns and persistent risks. As these innovations progress, there is a critical need for rapid evolution in the regulatory and governance frameworks. This is crucial to establish a consistent environment promoting financial inclusivity, fostering economic growth, and advancing opportunities within the Nigerian capital markets.
Aderogba is a fintech professional renowned for her expertise in the intersection of sustainable development planning and finance.