Money in Web3 needs neither crypto nor cyberspace

Accenture, Alibaba and more explain why the future of finance doesn’t necessarily involve cryptocurrency and extended reality 

Is crypto dead? Recent market plunges in all things Bitcoin might give that impression. This month meanwhile saw Google Cloud partner on a smart contract blockchain service from Binance, a cryptocurrency exchange that’s faced legal trouble in a variety of nations. The announcement, perhaps unsurprisingly, fully focuses on the rebranded BNB Chain with nary a mention of Binance itself.

A Deloitte survey from June though suggests something different about the future of crypto: out of 2,000 retail executives, 85 percent want the capability to accept payment in cryptocurrency. 54 percent have already invested more than $1m towards enabling digital currency payments, while 83 percent believe crypto will be legal tender within 10 years.

More recent news saw the first pound-backed stablecoin launched in the UK with KPMG in place as auditor, in effect giving cryptocurrency the rubber stamp of enterprise authority. 

But whether cryptocurrency stays afloat or vanishes into the ether may be a moot point when one instead considers it as the first wave of something new on the horizon. Web3 is the name of this looming tech, or Web 3.0 in some quarters. Touted as the next iteration of online space, Web3 would be a decentralised form of the current internet, with distributed ledger technology (DLT) as its backbone.

Out of DLT we get cryptocurrency, blockchain, self-sovereign identities (SSI) and decentralised finance (DeFi). The last in that list may either pose an existential challenge for today’s financial enterprises, or a chance for the nimbler of today’s bodies to undergo reinvention.

“DeFi is a broadly used term for experimental forms of finance that utilise smart contracts on blockchains to perform financial services functions but without relying on the traditional intermediary model,” explains Dr Joerg Ruetschi, chief operating officer at financial software firm Cosaic and author of new book, Transforming Financial Institutions.

“Self-sovereign ID lets services providers focus on service provisions and customer satisfaction” Dr Joerg Ruetschi / Cosaic

 

Blockchain, the COO believes, is the key technology of this evolution, and one that can already be found in some enterprises’ arsenals. Shane Rodgers, a veteran investment banker and CEO of payments and digital banking platform PDX Global, explains to ERP Today the significant inroads into the financial industry which have been made by the tech.

“Payment platforms utilising the architecture are now used by corporate CFOs, who seek to save cash by speeding standard digital payments and eliminating fees that typically go to middlemen,” he reveals.

 

Accenture and Alibaba on blockchain

Outside of finance, blockchain has found use in the current supply chain crisis. Stephane Crosnier, supply chain and operations lead for Accenture UK, cites the example of a global energy major looking to establish a more connected supply chain across its ecosystem and what it poses for financial structures.

“The project aims to create a shared data platform for the industrial sector that both improves the buying experience and streamlines workflows among business partners,” Crosnier explains. “Product movement information, inventory level, and available storage capacity is captured through IoT and track-and-trace capabilities.”

“Reduction in cycle time lays the foundation to transform trade financing models”, Stephane Crosnier / Accenture UK

 

Based on these inputs, he elaborates, the blockchain layer serves to create a shared record of product provenance, one with strong implications for current financing frameworks. 

“Integration with partner systems of record, combined with purchase order and delivery data, eliminates most instances of transactional mismatch and reconciliation. Codified business logic contained within smart contracts minimises the need for manual interventions and drastically reduces the procure-to-pay timeframe. 

“Web3 will align individual identities to accounts with NFTs and biometrics”, Jaco Vermeulen / BML Digital

 

“This reduction in cycle time enables zero-day financing, freeing trapped working capital within the supply chain and laying the foundation to transform trade financing models.” 

Companies like Alibaba Cloud already offer blockchain as a service (BaaS) that, as its spokesperson tells ERP Today, offers an enterprise-level platform service which aids financial customers to build ‘a secure and stable environment’.

“In addition to a wide variety of security strategies and multi-tenant isolation on cloud, BaaS also provides advanced security protection leveraging advanced encryption technologies,” explains the Alibaba Cloud representative.

Looking away from the razzle-dazzle of all things cryptocurrency, it’s clear the underlying tech provides a security boon for today’s financial enterprises. As Rodgers at PDX Global puts it, current financial systems “are much more susceptible to fraud than a well-secured blockchain”.

“We’ll look back and see it as one of the biggest financial innovations, like the original 1400s’ lending agreements” – Shane Rodgers / PDX Global

 

“Yes, we have seen major attacks on crypto exchanges,” he elaborates, “but these are due to the cowboys running the industry who fail to install basic customer protections against hackers. I expect the crypto shake-out occurring right now to eliminate the players with weak security and weak management.”

“The peer-to-peer digital transactions are securely recorded on the blockchain; they eliminate middlemen in the payment process who create greater risk exposure; and eliminate the risk of lost cards and stolen PIN numbers.”

The same sense of security permeates the idea of Web3 as a whole, according to Jaco Vermeulen, CTO of BML Digital.

“Web3 tools are likely to push credit/debit cardless methods and tie accounts to individual identities with NFTs and biometrics,” he explains. “This would be both for payment account identifier and transaction validation. Thus is removed the need to know account or card numbers, making it more secure.”

 

Know your identity

What Vermeulen is hinting towards is the Web3 tenet of self-sovereign ID (SSID), tools with which individuals are able to prove their identity without sharing personal data. Using blockchain, it would be possible to create and manage digital identities that provide greater privacy and control of data using a decentralised identifier (DID). Users sign-up to an SSI and data platform to create and register a DID, coming away with a pair of encrypted private and public keys which are then used to prove or control an identity, such as when opening bank accounts.

According to Cosaic’s Ruetschi, this removes the authority of large, centralised corporations and returns the control of their own personal data to the customers. As such, it will not only become easier to switch service providers, but also the “core platforms that are owned and run by the incumbents in the industry’s new service model.”

“In the financial industry, onboarding and know-your-customer (KYC) processes are time and resource-consuming as well as cumbersome,” Ruetschi adds. “Self-sovereign ID represents a huge opportunity to resolve the issue, and lets financial services providers focus on their service provisions and customer satisfaction. 

“At the same time, consumers can much more easily open new relationships and switch platform providers through whom they are accessing those services under the industry’s new service model. As a result, the service provision becomes more consumer-centric and the ecosystem more competitive, driving towards best-in-class service access.”

Peter Heywood, director, banking financial services and insurance (BFSI) at tech consultancy ISG sees SSID as an important part of the financial value chain.

“(In June) the European Banking Authority reached an agreement to provide such protections on AML/KYC and fraud under the proposed Markets in Crypto Assets regulation (MiCA). For a financial market to operate efficiently it must have these fundamentals in place. 

“The Nordics are leading in this space. Norway uses VIPPS, a national payment and identity network that allows you to find a property and secure financing all within 30 minutes. This is using distributed ledger technology.”

 

Atomic Kitty

Use of Web3 on such a national scale could help the tech replace the internet as it currently operates. For now, though, a lack of integration will keep enterprises operating in Web 2.0 just that bit longer.

Going back to Deloitte’s research, its survey of retail execs found 45 percent believe the complexity of integrating crypto conversion with existing systems and across other crypto currencies is a bottleneck issue. But Rodgers of PDX Global sees a solution in his company’s offering, PDXPay.

“We have a small unit that sits on top of any POS system to make the conversion within our blockchain-based digital banking platform, which then drops the fiat currency back into the POS.”

The CEO and team are also developing for the metaverse, an immersive version of cyberspace that is developing adjacent to Web3, with a tool where gamers can make payments in cryptocurrency using gesture-based commands.

But, as Heywood reminds us, there remains a lack of interoperability amongst the current fragmented networks and protocols which make up the blockchain space.

“Currently, custody at the institutional level is a challenge. If you are trading on a self-custody decentralised exchange, it can’t be managed by an asset manager. Normally a custodian would provide this service.

“There’s (also) a chain link which bridges off-chain data (for example, weather data) to on-chain data. That presents a real challenge in how to verify data, and people, using a zero-knowledge protocol (the way one party proves to another that a given statement is true, without revealing additional data).”

The ISG director, though, sees hope for Web3 in Citi’s recent announcement of a custody service, with other Tier 1 companies working on similar initiatives. He’s also excited by new possibilities made available by the advent of distributed ledger technology: atomic swaps, for example, which are exchanges of cryptocurrencies from entirely separate blockchains.

As such, Heywood can see DeFi and traditional finance (TradFi) co-existing in the long-term. 

“Traditional finance is principally about risk management. DeFi is using the principles we learnt and applying this to a new asset class of digital and crypto assets. This will completely transform finance. We’ll look back and see it as one of the biggest innovations in finance, along with events like the original lending agreements in the 1400s, the advent of brokers, and shipping underwriting in the 1700s.

“The way DeFi and TradFi will coexist is through a mature financial markets infrastructure that provides the bridges between the TradFi world and the Defi world.”

With years of investment banking experience behind him, Rodgers agrees, pointing to how financial institutions are already looking for replacement payment systems:

“There is little need for fear  –  a good crypto conversion solution will completely sidestep the legacy system with all its integration issues, offering instead a parallel system that simply spits the end result back into their enterprise software.”

“Those financial institutions who get on board early,” he believes, “will reap the benefits of offering more payment options to merchants and customers.”