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Blockchain and cryptocurrencies are laying the foundation of a new financial system. They together challenge the status quo of the traditional world of finance and its highly centralized infrastructure.
Many blockchain and cryptocurrency projects have developed payment solutions that may one day outdo the present payment system.
Digitalization has indeed taken over the world, but the level of digitalization where we solely rely on decentralized cryptocurrency payment solutions is a bit of a far stretch at this time.
No matter how promising and technologically advanced a new form of currency is, it would be extremely difficult for it to totally replace fiat currencies.
Even if we cannot completely replace today’s financial system at once with blockchain, it is possible to integrate blockchain into existing systems as a step toward a better financial system.
This is what blockchain-based mobile wallets and payment applications can do. They can bring the best of both worlds and create a better payment system for today.
Use of Blockchain in Mobile Wallets
Although blockchain and cryptocurrencies are often seen as an inseparable pair, there’s far more to blockchain than just digital currencies.
They have the potential to streamline various industrial processes, increase the security of online applications, save cost and time of documentation, make monetary and data transactions real-time, and so on.
We may use these and other features of blockchain technology even in fiat currency mobile wallets.
Lon Wong, the CEO and Founder of the Singapore-based blockchain platform ProximaX and mobile wallet application mWallet, says that ensuring the safety of databases of traditional mobile payment (TMP) applications is a cost and time-intensive process.
On the contrary, blockchain-powered mobile payment (BMP) applications have high inherent security. By design, the transactions recorded on a blockchain are immutable and easily traceable, making it difficult to hack the records or tamper with them.
As TMPs do not have an inherent security protocol framework, they require external security measures while BMPs are a security system in themselves. This not only adds the highest levels of security to transaction records but also cuts down the cost of security.
Faster, Cheaper, and Transparent Fiat Transactions
The legacy payment and banking infrastructure is based on multiple frameworks patched together over time to act as a cohesive system for financial services.
For example, an international payment made from a local bank passes through several of these layers that include SWIFT for messaging, local payment provider, the settlement infrastructure, and the receiver’s payment and settlement provider.
Even though this system has effectively handled transactions for decades, they cost tens of billions of dollars to develop and maintain, resulting in long transaction settlement time and cost.
This calls for a less-complicated, transparent, and cost-efficient system; one that is backed by blockchain technology, said Wong. He explained saying:
“In a utopian state, BMPs already have a very comprehensive ledger that can act as a core banking solution. The advantage is, not only is it way less expensive, but it also has settlement and messaging (instead of SWIFT infrastructure) functions built-in.
It allows direct settlement between two BMPs within a country. Further, with proper correspondent banking arrangements, it also allows BMPs from two different countries to do cross-border payments.”
The BMP solution would therefore allow users to transact fiat currencies smoothly and across borders without paying hefty fees or waiting long for transaction settlement.
In addition, these applications can easily use blockchain-based digital identities to easily identify the person behind each transaction. And with transparent and immutable transaction records stored on the blockchain, authorities may easily detect fraudulent transactions and investigate money laundering.
One of the biggest challenges faced by blockchains today is the lack of interoperability, and the inability to control transactions easily and effectively. But Wong says that cross-chain transactions are starting to see progress and these payment applications may soon become blockchain protocol agnostic.
Ready for New Financial Products
With the onset of the coronavirus, governments worldwide realized the importance of a state-backed digital currency that imitates the national fiat currency. In addition, other new financial products keep coming into the market.
According to Wong, the protocol framework of BMP would make it a credible platform for central banks to deploy CBDCs. It will also act as a potential solution for digital banks, aka neo-bank.
He further explained that the BMP solution can help deploy new financial products almost instantly as it would not require many changes to the core.
Some of these financial products or services could be multi-currency support in the BMP wallet, precious metal account, fixed deposit account, et cetera. The only criteria for the deployment will be that the payment service provider should be licensed to do so.
TMP solutions, on the other hand, will require more extensive planning and testing when a new financial product is introduced. Therefore, the time to launch the product in the market can stretch a good 6 months or more as compared to BMP solutions.
Blockchain still awaits mainstream adoption. But with the potential it has, it may soon become a technology that powers a considerable portion of the technological solutions in one way or the other.
For one, blockchain-powered mobile payment solutions are an effective alternative to the traditional mobile payment applications we use today. They make the payment system not only less expensive but also less complicated, more secure, and transparent.