COVID-19: Financial infrastructure opportunities
In order to prevent the COVID-19 pandemic turning into a deep economic crisis, governments from around the world have committed to unprecedented amounts of monetary and fiscal stimulus, ‘printing’ money as never seen before. This has brought to light big inequalities in the access to financial services between big corporations and small and medium enterprises (“SMEs”), especially in emerging markets.
Access to credit lines by SMEs was already challenging in most emerging countries, and financial aid promised by governments to SMEs now is even more constrained by the increase in financing costs, inefficiency of distribution channels (banks and intermediaries), desegregation of data sources, and lack of standardization across financial information. Due to these constraints, SMEs face a tough reality when seeking financial aid, even though it was promised by governments. These difficulties will likely result in systematic insolvencies across vast amounts of affected SMEs, which will contribute to unforeseen levels of unemployment and worsen inequality across societies.
One of the main sources of this inequality is related to the state of financial infrastructure across countries. The quality of the financial infrastructure will dictate the capacity of governments to transmit financial aid across market structures. Sadly, the plumbing of today’s financial infrastructure in most countries remains largely unchanged for the past decades, causing huge operational inefficiencies for governments and other financial participants to reach those SMEs which need financial aid the most.
Whilst the digital asset movement is largely associated with the creation of bitcoin, we believe digital assets can solve structural problems encountered by current financial infrastructure.
Digital asset infrastructure provides equal access to financial services through the standardization of financial information and processes. Protocols such as Ethereum and Corda from R3, have been built to support account structures, representation of assets and automated programmable contracts (“Smart Contracts”). The current state of blockchain technology can be used to replicate payment and settlement systems, where assets and liabilities can be traded instantly without settlement risk, instead of waiting for days in the current market configuration. We believe the adoption of digital asset infrastructure will improve access to financial services and help reduce costs and risks of the banking system.
The digital asset movement is creating innovative financial infrastructure at an unprecedented pace. Numerous projects worldwide, ranging from private and public initiatives, are researching and deploying new financial infrastructure, which will result in improved access to financial products and services across all market participants.
The innovation caused by the digital asset movement is the single biggest advance in financial infrastructure since the creation of credit card networks in the 1960s. The strength of the movement has been confirmed by wide interest across public and private spheres. Central banks from around the world have started exploring Central Bank Digital Currencies, and in the private world Facebook is working on a global payment network called Libra based on blockchain technology. These events have contributed to cement the digital asset movement beyond the creation of bitcoin.
The COVID-19 crisis has shown us the importance of the digital transformation and brought to light enormous opportunities in financial infrastructure worldwide. We hope that governments understand the challenge ahead of us and provide a clear regulatory path to improve the financial infrastructure in order to provide fair access across all market participants.
At Parfin we are building the services and infrastructure needed to unlock the digital asset revolution.
