Recent technological progress has allowed DeFi and fintech to emerge as a way to break down barriers and positively impact the world, by facilitating payments and financial transactions. DeFi is based on the blockchain, a technology that has been revolutionizing the world.
Blockchain is a decentralized, immutable database that makes it easier to track assets and record transactions in a specific network. It improves the traceability, security, trustworthiness, and transparency of data shared across this network while generating new efficiencies that save costs. Because of its characteristics, blockchain allows financial services to be delivered over the internet by replacing trust, which has been a key component of the financial system for centuries, with transparency. Not surprisingly, it is the underlying principle behind crypto. A cryptocurrency any form of currency that exists digitally or virtually and verifies transactions with cryptography, hence the name.
Most cryptocurrencies don't have a central issuing or regulating authority, instead relying solely on the blockchain to record transactions and issue new units, a peer-to-peer system that can enable anyone anywhere to send and receive payments. However, several governments, realizing the potential of these technologies, have created further interest in cashless societies and digital currencies. Thus, governments and central banks worldwide are exploring the possibility of using government-backed digital currencies (CBDCs). When, and if, they are implemented, these currencies would have the full faith and backing of the government that issued them, just like fiat money.
Globally, the need for CBDCs is being driven by the push for faster payments, rapid digitization, better mitigation for clearing and settlement risk. There is also a demand for more efficient domestic and cross-border value transfers and financial inclusion. The market pool is clear - a 2021 BIS survey of Central Banks found that 86% have been actively researching the potential for CBDCs, 60% have been experimenting with the technology, and 14% have been deploying pilot projects.
And one amazing thing that is coming out of these policy pivots and pilot projects is the extended possibility for international cooperation. Earlier this month, the central banks of Israel, Norway and Sweden announced they have teamed up with the Bank for International Settlements (BIS) to explore how central bank digital currencies can be used for international retail and remittance payments. The BIS is an association of 61 central banks from around the world and has innovation hubs set up in multiple locations focused on exploring the applications of new financial technologies including CBDCs. The new collaboration, called Project Icebreaker, involves the BIS Innovation Hub's Nordic Centre, and it will test key functions and technical aspects of interlinking different domestic CBDC systems. It is mainly testing how near-instant retail CBDC payments could cut costs for international payments. The future is looking interesting for blockchain, digital currencies and cross-border cooperation.
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