When people think of the technologies that support cryptocurrency, the first one that usually comes to mind is blockchain, the immutable ledger that makes it easier to buy, sell, and track digital transactions.
But the reality is that crypto relies on a broad set of solutions, many of which can be applied to traditional sovereign currencies and even transactions outside the financial realm entirely.
In fact, the crypto ecosystem is already making its presence known in the commercial world, even as cryptocurrency struggles to find its own place.
According to Tobias Adrian and Tommaso Mancini-Griffoli of the International Monetary Fund, emerging payment technologies like tokenization, encryption, and programmability are already making their way into more traditional markets, including stocks, bonds, and other assets. Not only do they streamline the exchange process, but they can also reduce the risk and complexity of cross-border transactions.
Central banks, in fact, could see tremendous gains in liquidity by tokenizing their own currencies and automating transactions on digital ledgers.
These tools can also be used to track and verify the volumes of ancillary data needed to keep financial markets stable and secure. For example, a robust encryption platform will be able to ensure that participants are complying with anti-money-laundering requirements while still preserving their anonymity.
Contracts can also be more easily monitored and even automated to better manage capital flows that could otherwise destabilize national currencies.
Asset tokenization and programmable ledgers also have enormous potential to bring much-needed financial support to third-world nations, which have long struggled under the rules of traditional financing. Coinbase’s Noelle Acheson sees a world of expanding economic opportunity and individual empowerment with the growing acceptance of a more transparent, decentralized monetary structure.
Acheson imagines a world where regional banks can tokenize tranches of loans to start-ups looking to build up ports, mines, and other critical assets, simultaneously increasing liquidity and reducing risk. National and even multinational exchanges can also be set up to raise tokenized funds for improved healthcare and educational services without sacrificing government oversight and disclosure requirements.
Not all ventures will be successful, of course, but those that meet critical needs will find it far easier and less costly to draw seed capital from this less-burdensome financial structure, and that will undoubtedly draw greater investment from both traditional and newly digitized currencies.
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Even blockchain has evolved beyond a crypto solution to support a wide range of non-financial applications. Investopedia’s Adam Hayes notes that leading enterprises like Walmart and Pfizer are using blockchain in their supply chains to protect products against contamination and misuse.
Healthcare providers have found that it helps them track patient data to reduce misdiagnoses and potentially catastrophic drug interactions.
Blockchain can also be used to manage real estate transactions and probate resolutions, reducing paperwork and lowering costs both for public and private entities and, by extension, the public.
Some states are also looking into blockchain’s applications in the electoral process, expecting it to help improve voter participation and detect fraud.
Even the environment stands to benefit from crypto, Web3, and other emerging technologies. Last fall, the World Economic Forum launched the Crypto Sustainability Forum to investigate how the tools developed for the digital currency market can be leveraged for positive climate action.
Proposals currently being evaluated by the group run the gamut from how cryptomining can be tailored for off-peak energy consumption to how the exchange of carbon credits can be enhanced through tokenization and other measures.
Ultimately, the forum expects to see digital technologies support the emergence of green-powered microgrids and extend a wide range of conservation and land-use initiatives to small farmers and businesses, forest stewards, and indigenous communities around the world.
Despite these and other efforts to broaden the scope of tokens, digital ledgers, and transactional automation, significant hurdles remain. The foundational technologies behind all of these applications are still very new, and expertise is both hard to come by and expensive.
And as with most emerging markets, the practices that enable a quick launch and rapid uptake often start to falter when environments scale up, not to mention the expanding costs associated with voluminous resource consumption and increasingly complex management stacks.
There is also the specter of impending regulations as nations around the world seek to reign in some of the riskier behavior of the digital currency market. Ideally, this will happen without choking off innovation in other areas, but this is usually a pretty tough needle to thread.
One thing is clear – today’s digital currency market is a product of the private sector, which has both the means and the motivation to maintain continuous development and innovation. That means we can expect to see steady progress toward increased performance and flexibility, which should apply to all forms of exchange going forward.
After all, economic growth depends largely on the ease at which money and resources circulate from one entity to another. Lessening both the time and cost of this process should be a net gain for producers, consumers, and everyone in between.