This article was written by Sergey Ponomarev, CEO of SONM.
A recent United Nations report found that blockchain — the technology that underpins digital currencies like bitcoin — could improve security and cut costs in banks in Latin America.
The blockchain is particularly useful in financial transactions because it creates an immutable, public record that verifies the legitimacy of exchanges. As a result, virtual payment methods are able to withstand economic turmoil, providing a more stable store of value while ensuring that transactions and savings are secure.
Investing in digital currencies, like bitcoin, is increasingly being seen as a viable alternative to the traditional banking system, offering higher levels of stability and profitability than fiat currencies. When traditional fiat currencies suffer from high inflation, the exchange rates for digital counterparts, have skyrocketed, multiplying the returns of their investors. For instance, since the start of 2017, the bitcoin exchange rate has doubled, while Ethereum’s rate has grown six times over just the last three months.
Digital currencies have become extremely prevalent in South American countries that suffer from high inflation. In Venezuela in particular, the bolivar inflated by 450% last year and experts predict that it will continue to plummet in value as the country prints more and more money. Meanwhile, the currency’s devaluation renders basic necessities like groceries unaffordable to most Venezuelans. Digital currencies provide a secure means of exchanging and saving money.
The same principle doesn’t just apply to peer-to-peer monetary exchanges – it also has the potential to shake up the banking industry as a whole. The U.N. report highlights how Caribbean economies in particular are experiencing a phenomenon called de-risking. This refers to the circumstance where banks shun relationships in which the cost of regulatory compliance is viewed as disproportionately high in comparison to returns. De-risking is particularly problematic in developing economies because it has raised the cost of doing business to the point that some banks are abandoning regions like the Caribbean and South America.
Blockchain has emerged as a much-needed solution in these areas where much of the population has suddenly found itself bankless. This technology has key advantages over the current system because it can offer a means to monitor and more easily unearth illegal transactions. It also facilitates international monetary exchanges by eliminating the need for correspondent banks to conduct transactions that originate in a foreign country. In these ways, blockchain would reduce risks and costs — and thus, barriers to entry — for banks in Latin America.
The traditional banking system is on the cusp of major disruption from blockchain technology and digital currencies. Investors eager to save their funds from high inflation and maximize profits now have a tool to do so.