Reimagining the financial sector through blockchain

By Charalambos Sergiou, Alexandros Vacanas and Nikolas Stratis

Blockchain technology is based on the establishment of a decentralised network of trust between unknown participants, facilitating peer-to-peer transactions in a cost-efficient and secure manner. The emergence of the technology creates optimism for a more democratic future, as well as scepticism for its applicability in today’s environment. Nevertheless, being a collection of concepts and technologies, blockchain is expected to cause a significant disruption by acting as a point of convergence between the digital and conventional world. Advancements in the field have resulted in blockchain backed applications offering a high degree of automation responsiveness and accessibility.

One of the economic sectors that has the potential to capitalise on blockchain expansion is the financial one through refinement of existing processes and introduction of new products based on the capabilities of the technology.

Reimagining the financial sector

Blockchain technology and blockchain-backed cryptocurrencies provide the opportunity for creating a more inclusive economic environment. The security, arising from the cryptographic principles and the immutability of records, mitigates cyber security and data loss risks while improving the trust of the public when performing digital transactions. The decision of El Salvador to become the first country to officially adopt bitcoin as a legal tender can be used as a case study in the process of analysing the benefits of utilising cryptocurrencies for real time transaction settlements. Recognising the potential of blockchain, several central banks have already started exploring the opportunities arising from the establishment of Central Bank Digital Currencies (CBDCs) infrastructures that will take advantage of cryptocurrencies’ programmability.

Blockchain technology can also evolve the way that the global financial markets operate. Real time accounting on distributed ledgers and traceability of on-chain transactions can make data available to the main stakeholders of a company in a timely manner, allowing for more informed decisions to be taken. In addition, auditability of records and regulators monitoring becomes more automated when the relevant parties gain access to the tamper-proof distributed platforms used for recording of transactions.

Another important application of blockchain in the financial sector relates to development of decentralised smart contracts allowing for bespoke, complex financial instruments to be programmed and settled at low cost. This creates opportunities for the introduction of new blockchain-backed products that will fully utilise the technology’s responsiveness and automation.

In addition, the use of Internet of Things concepts and digitisation is of paramount importance in the process of developing sustainable business models under the circular economy principles established within the Industry 4.0 framework. Blockchain technology can facilitate the efficient, transparent and secure exchange of information between the physical and digital world by forming cyber-physical systems in the process of transforming the financial sector’s capabilities through better monitoring and control.

The need for legal and regulatory clarity

Broad adoption of blockchain technology comes with challenges associated mainly with the structural inertia of the current system to cope with the fast-changing economic environment. Legal and regulatory clarity can spark innovation in the field while attracting new investors and enthusiasts. Smart contracts enforceability and tax implications are few of the aspects that need to be considered in the process of creating a blockchain friendly framework.

In conclusion, blockchain technology offers a wide range of applications that will not replace but develop the traditional financial sector. Cyprus, as a member of the European Union and a country well known for the quality of financial services offered, can potentially act as the crossroad for ideas and project developments in relation to blockchain, provided that a robust legal, regulatory and tax framework is established.

Charalambos Sergiou (blockchain and tax advisory) is a partner at PwC Cyprus. Alexandros Vacanas (blockchain) and Nikolas Stratis (blockchain) are senior associates at PwC Cyprus