Fiat currencies have been around for over half a millennium – succeeding items such as stones, shells, and animal teeth used in the barter system. The use of paper money as a universal form of currency came as a precursor to the First Industrial Revolution. Four generations later, the entire world now revolves around technology; and this has been seen to extend to the manner in which financial transactions take place with the development of digital assets.
The London Stock Exchange Group (LSEG) is a global company based in the UK that provides the necessary infrastructure for financial market platforms. Their technology subsidiary, LSEG Technology leverages the latest from the rapidly growing sphere of Financial Technology (Fintech) to develop and commission digital exchange platforms across the world, one of which includes the Colombo Stock Exchange. In a discussion with one of their Senior Business Analysts, Dumindu Senanayake, LSEG Technology Sri Lanka has provided the local audience with an introduction to the future of Fintech.
How has Blockchain Technology been used to revolutionize Fintech?
“Blockchain is the talk of the digital world these days. It is defined as a digital ledger for transactions that can be used to record the authenticity of an asset through a unique series of blocks, making it impossible to tamper with or duplicate,” explained Dumindu. A number of concepts have stemmed forth with the development of blockchain technology, leading to the creation of what is now known as digital assets:
- Cryptocurrencies – Blockchain technology has been used most commonly in the development of encrypted strings of data to signify units of currency. The process of adding blocks added to the ledger is known as ‘mining’ and is extremely energy-intensive. Hence, similar to money in the fiat sense, the technology functions on community belief in its value. “Bitcoin was the world’s first cryptocurrency, and many of the digital tokens created since then follow its major market trends,” conveyed Dumindu. Other tokens include platform tokens created as a result of Smart Contracts (discussed below), stable coins pegged to real-world currency such as the US Dollar, and utility tokens built on various platforms.
- Smart Contracts are self-executing pieces of code that carry the terms of agreement of a transaction. There have been several benefits discovered with the use of Smart Contracts, such as its irreversible and centralized nature, trustless attributes (the trusted robustness of the system eliminates the need for trust in the opposite party), security, and minimum transaction fees.
- Non-fungible tokens (NFTs) are gaining rapid popularity in the entertainment industry as a token of verification and authenticity that can be attached to metadata on digital artwork. Much like collectibles in the real world, connoisseurs of digital art pay extravagant amounts of money for these masterpieces to be showcased virtually. NFTs may also be attached to music, books, and even videos. “The popular video of Charlie bit my finger (linked here) was recently sold at an NFT auction for US$ 760,000,” Dumindu highlighted.
What is Decentralized Finance (DeFi)?
Centralized finance, encompassing banks and other financial institutions, regulates transactions with the imposing of taxes, transaction limits, and credit risk factors. Digital currencies are an example of DeFi, and overcome such hindrances with the absence of a central regulatory authority. “To guarantee secure, faster, and more cost-efficient transactions, there are bodies known as Decentralized Autonomous Organizations (DAOs) that use Smart Contracts for financial operations that are otherwise available through conventional banks,” Dumindu elaborated.
Basic payment infrastructure such as the custodial storing of currencies and fund transfers (local and overseas) may now be carried out efficiently and without geographical or legal restrictions. Furthermore, crypto lending pools may be used for borrowing and lending services with no bias based on risk profiles. This has been fairly attractive to crypto investors, as it enables them to earn interest with their digital wealth, despite the inherent safety risks present. In addition to this, financial instruments such as Investment and Fund Management and Insurance have also been developed on DAOs with the use of blockchain.
Decentralized exchanges (DEX) have optimized trading on crypto platforms like UNISWAP without the need for personal information or wallets on the exchange. Dumindu explained that “Liquidity for digital assets is provided through algorithms present in liquidity pools which continuously monitor the market.” With this, he expressed that DEX has also been the primary marketplace for new concepts such as Initial Exchange Offerings (IEOs) and Initial DEX Offerings (IDOs).
Regulations for Crypto and DeFi Systems
Contrary to its name, all decentralized platforms have a minimum of 5% centralization for the regulation of stable coins. Stable coins are pegged to fiat currencies, and therefore act as a bridge between fiat and the crypto world. “Companies such as Tether (USDT) have claimed that for every dollar in circulation as a USDT token, it has an equivalent amount in value in fiat reserves and physical assets,” he further conveyed. As a result, there have been attempts by governments to regulate stable coins with no success to date. “Even in Sri Lanka, there has not been a tax profile defined for crypto assets as of yet.”
When it comes to trading on digital assets, Dumindu expressed that market manipulations that take place on conventional platforms like spoofing, wash trades, and pump-and-dump actions still exist on crypto marketplaces as well. “However, there have been some illegal movements unique to the DeFi space, such as Flash Attacks brought about by the exploitation of Smart Contracts,” he stated. To mitigate such attacks, there are surveillance methods in place, but can only be fully overcome with new regulatory requirements specific to DeFi markets.
How would the growth of Digital Assets shape the future of LSEG?
As per Dumindu, “At the moment, the world of digital assets is still primitive, and LSEG is currently observing how it is developing into a regulated space.” However, he stated that even though the company is not looking at creating asset classes just yet, they have developed a crypto trading platform named Atom for the AAX Exchange that is operating in Hong Kong today. Tech teams from LSEG subsidiaries across the globe are currently experimenting with the technology to identify how upcoming platforms would benefit through its adoption. In his final remarks, Dumindu stated that “Only time will tell if cryptocurrencies are the future of finance, but LSEG will not risk getting left behind by waiting to find out. The company has been a leader to the global finance sector, and will keep up with the world in trying to perfect blockchain technology for the Fintech sector.”