04
Innovative blockchain-based solutions
04
Innovative blockchain-based solutions
While the number of mobile payment solutions has increased over time, other digital financial services have also continued to develop. Blockchain-based solutions leveraging digital assets have become more sophisticated and more prominent.51 These have made traditional services like payments, lending, money and remittance transfers, cheaper and more accessible due to wider distribution of these services through digital and mobile channels.52
Bitcoin and stablecoins are digital assets issued on a blockchain, a digital infrastructure that is used to deliver a broader range of decentralised applications.53 These applications, known as DeFi, differ from traditional financial services in that they remove the need for many intermediaries (and the associated fees) and run on independent, alternative rails.54
The regulatory landscape around payments, digital assets, blockchain and DeFi is fragmented with a range of different approaches and outright gaps in some jurisdictions. International standard-setting bodies like the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are actively looking into ways to coordinate the regulation of digital assets and to enhance efficiency and address challenges. A few leading jurisdictions and the standard-setters are currently exploring how to first define and then regulate DeFi. While lacking in comprehensive legislation, some of the use cases of blockchain infrastructure and DeFi applications, are covered by existing legislation.
While the number of mobile payment solutions has increased over time, other digital financial services have also continued to develop. Blockchain-based solutions leveraging digital assets have become more sophisticated and more prominent.51 These have made traditional services like payments, lending, money and remittance transfers, cheaper and more accessible due to wider distribution of these services through digital and mobile channels.52
Bitcoin and stablecoins are digital assets issued on a blockchain, a digital infrastructure that is used to deliver a broader range of decentralised applications.53 These applications, known as DeFi, differ from traditional financial services in that they remove the need for many intermediaries (and the associated fees) and run on independent, alternative rails.54
The regulatory landscape around payments, digital assets, blockchain and DeFi is fragmented with a range of different approaches and outright gaps in some jurisdictions. International standard-setting bodies like the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are actively looking into ways to coordinate the regulation of digital assets and to enhance efficiency and address challenges. A few leading jurisdictions and the standard-setters are currently exploring how to first define and then regulate DeFi. While lacking in comprehensive legislation, some of the use cases of blockchain infrastructure and DeFi applications, are covered by existing legislation.
Blockchain-based financial services offer the following benefits:
Enhanced Financial Efficiency
Increased transparency for participants, with transactions recorded on an electronic ledger: a database held by all market participants, optimised to be widely accessible, synchronised, easily updatable, and tamper-proof.55
Expanded Market Reach
Increased opportunities for access to finance, allowing MSMEs to develop scale.56 For example, the global nature of some digital assets, in the context of displaced populations, makes it easier to transact online and offline fast, without the need to use the native currency of the host country or pay extremely high conversion or remittance fees.
Increased Resilience
The use of digital assets for transactions on the blockchain has the effect of minimising many of the risks associated with payments due to simultaneous exchange on a single ledger, such as those around currency exchange and liquidity management.57
Blockchain-based financial services offer the following benefits:
Enhanced Financial Efficiency
Increased transparency for participants, with transactions recorded on an electronic ledger: a database held by all market participants, optimised to be widely accessible, synchronised, easily updatable, and tamper-proof.55
Expanded Market Reach
Increased opportunities for access to finance, allowing MSMEs to develop scale.56 For example, the global nature of some digital assets, in the context of displaced populations, makes it easier to transact online and offline fast, without the need to use the native currency of the host country or pay extremely high conversion or remittance fees.
Increased Resilience
The use of digital assets for transactions on the blockchain has the effect of minimising many of the risks associated with payments due to simultaneous exchange on a single ledger, such as those around currency exchange and liquidity management.57
Bitcoin and stablecoins
Bitcoin, created in 2009, operates on a blockchain. It serves various purposes, including as an investment, a form of payment, and a means of transferring money globally without relying on third parties like banks. Bitcoin possesses valuable properties such as acceptability, divisibility, durability, fungibility, portability, and scarcity.
Bitcoin’s decentralisation means that it operates independently of traditional banking systems and involves significantly lower fees. The global average cross-border remittance fee is between 6-7%.58 In some regions, foreign exchange bank fees can exceed 50% (for instance, sending funds from Türkiye to Bulgaria).59 This amounts to billions of dollars a year spent globally on cross border remittance fees that could essentially be eliminated through the use of Bitcoin or stablecoins.60 Some countries such as El Salvador and the Central African Republic have already adopted Bitcoin as legal tender, which has opened up foreign investment opportunities and created a micro-tourism industry based on Bitcoin.61
Additional benefits of Bitcoin are relatively low barriers to entry.62 In the past, despite not having a regulatory framework in place and the central bank banning Bitcoin, Nigerians had the world’s third-largest uptake in Bitcoin, underscoring the attractiveness of such options to EMDEs. Recently, in December 2023 the Nigerian Central Bank lifted its ban on Bitcoin and outlined new guidelines for Virtual Asset Service Providers.63 A recent survey by Block further demonstrates that participants with a lower income more often use Bitcoin to buy goods than participants with a higher income.64
Stablecoins, introduced in 2014, provide a more reliable and faster interchange between fiat currencies and digital assets, being redeemable at 1:1 against USD or local currencies anytime by users.65 They hold stored value tied to real-world currencies like the U.S dollar,66 offering more stability than other digital assets. These digital assets have gained traction globally, particularly in emerging economies, due to their enhanced security compared to cash, lower transaction costs, real-time payments, and reduced reliance on formal bank accounts.67 Stablecoins are particularly effective in safeguarding savings and spending power in economies experiencing high inflation, where people traditionally exchange their money for U.S dollars to protect against inflation.
There is growing interest from merchants in accepting Bitcoin and stablecoins as a form of payment. Data from Deloitte reported that roughly 2000 US businesses accepted Bitcoin in late 2022 out of 15,000 worldwide – an increasing number of companies worldwide are using Bitcoin and other digital assets for a host of investment, operational and transactional purposes.68 A survey conducted by PayPal and Deloitte on merchant adoption of digital currency payments, such as stablecoins, found that 93% of merchants that currently accept digital assets as a payment instrument have already seen a positive impact on their business’ customer metrics and 87% of merchants see benefits such as immediate access to funds by accepting digital currency payments.69 There also appears to be a (renewed) interest from payment companies, in accepting payments in digital assets, aligning with the abovementioned will of merchants to transact in digital assets with their clients.70
Surveys of consumers suggest that people with below-average income more frequently use bitcoin to send money and buy goods and services than people with above-average incomes. The most common reason people have for buying Bitcoin is as a speculative investment, but if the reasons for purchase are broken down by income group, it appears that higher-income individuals drive this perception.71 Countries with lower per-capita GDP and higher shares of income from remittances have greater rates of people citing purchasing goods and services and sending money as good reasons to buy Bitcoin.72
Digital assets can be securely stored and transferred independently of traditional banking rails via self-custodial wallets. Unlike custodial wallets, where a centralised third party (like a bank or a cryptocurrency exchange) hold the assets, self-custody puts control back in the hands of users by ensuring they own the ‘keys’ required to manage, move, and use their digital assets. These wallets can take various forms, including a browser extension wallet, a desktop application, a mobile application, or a hardware wallet. Self-custodial wallets offer a secure way to store the keys to the blockchain network, which need to be kept private. They are similar to password managers, securing, encrypting, and enabling user-friendly access to a multitude of complex passwords, whilst ensuring the user retains control and responsibility. Self-custody also reduces counterparty and segregation risks, as customers no longer have to rely on a third-party custodian, who often holds multiple assets in centralised storages, and may be vulnerable to risks such as financial crises, bad governance, bankruptcy, or hacks.
Self-custodial wallets can also hold other documents, e.g., driver’s license as a form of identification. This is often more secure than the physical equivalent, which can be stolen or cloned and often underpins identity theft. This functionality is also important for displaced entrepreneurs to provide an alternative means of identification when being onboarded by financial services providers, installing POS software, verifying a client’s identity, etc.
2,000
US businesses accepted Bitcoin in late 2022 out of 15,000 worldwide
93%
of merchants that currently accept digital assets as a payment instrument have seen a positive impact on their business’ customer metrics
87%
of merchants see immediate access to funds by accepting digital currency payments
Bitcoin and stablecoins
Bitcoin, created in 2009, operates on a blockchain. It serves various purposes, including as an investment, a form of payment, and a means of transferring money globally without relying on third parties like banks. Bitcoin possesses valuable properties such as acceptability, divisibility, durability, fungibility, portability, and scarcity.
Bitcoin’s decentralisation means that it operates independently of traditional banking systems and involves significantly lower fees. The global average cross-border remittance fee is between 6-7%.58 In some regions, foreign exchange bank fees can exceed 50% (for instance, sending funds from Türkiye to Bulgaria).59 This amounts to billions of dollars a year spent globally on cross border remittance fees that could essentially be eliminated through the use of Bitcoin or stablecoins.60 Some countries such as El Salvador and the Central African Republic have already adopted Bitcoin as legal tender, which has opened up foreign investment opportunities and created a micro-tourism industry based on Bitcoin.61
Additional benefits of Bitcoin are relatively low barriers to entry.62 In the past, despite not having a regulatory framework in place and the central bank banning Bitcoin, Nigerians had the world’s third-largest uptake in Bitcoin, underscoring the attractiveness of such options to EMDEs. Recently, in December 2023 the Nigerian Central Bank lifted its ban on Bitcoin and outlined new guidelines for Virtual Asset Service Providers.63 A recent survey by Block further demonstrates that participants with a lower income more often use Bitcoin to buy goods than participants with a higher income.64
Stablecoins, introduced in 2014, provide a more reliable and faster interchange between fiat currencies and digital assets, being redeemable at 1:1 against USD or local currencies anytime by users.65 They hold stored value tied to real-world currencies like the U.S dollar,66 offering more stability than other digital assets. These digital assets have gained traction globally, particularly in emerging economies, due to their enhanced security compared to cash, lower transaction costs, real-time payments, and reduced reliance on formal bank accounts.67 Stablecoins are particularly effective in safeguarding savings and spending power in economies experiencing high inflation, where people traditionally exchange their money for U.S dollars to protect against inflation.
There is growing interest from merchants in accepting Bitcoin and stablecoins as a form of payment. Data from Deloitte reported that roughly 2000 US businesses accepted Bitcoin in late 2022 out of 15,000 worldwide – an increasing number of companies worldwide are using Bitcoin and other digital assets for a host of investment, operational and transactional purposes.68 A survey conducted by PayPal and Deloitte on merchant adoption of digital currency payments, such as stablecoins, found that 93% of merchants that currently accept digital assets as a payment instrument have already seen a positive impact on their business’ customer metrics and 87% of merchants see benefits such as immediate access to funds by accepting digital currency payments.69 There also appears to be a (renewed) interest from payment companies, in accepting payments in digital assets, aligning with the abovementioned will of merchants to transact in digital assets with their clients.70
Surveys of consumers suggest that people with below-average income more frequently use bitcoin to send money and buy goods and services than people with above-average incomes. The most common reason people have for buying Bitcoin is as a speculative investment, but if the reasons for purchase are broken down by income group, it appears that higher-income individuals drive this perception.71 Countries with lower per-capita GDP and higher shares of income from remittances have greater rates of people citing purchasing goods and services and sending money as good reasons to buy Bitcoin.72
Digital assets can be securely stored and transferred independently of traditional banking rails via self-custodial wallets. Unlike custodial wallets, where a centralised third party (like a bank or a cryptocurrency exchange) hold the assets, self-custody puts control back in the hands of users by ensuring they own the ‘keys’ required to manage, move, and use their digital assets. These wallets can take various forms, including a browser extension wallet, a desktop application, a mobile application, or a hardware wallet. Self-custodial wallets offer a secure way to store the keys to the blockchain network, which need to be kept private. They are similar to password managers, securing, encrypting, and enabling user-friendly access to a multitude of complex passwords, whilst ensuring the user retains control and responsibility. Self-custody also reduces counterparty and segregation risks, as customers no longer have to rely on a third-party custodian, who often holds multiple assets in centralised storages, and may be vulnerable to risks such as financial crises, bad governance, bankruptcy, or hacks.
Self-custodial wallets can also hold other documents, e.g., driver’s license as a form of identification. This is often more secure than the physical equivalent, which can be stolen or cloned and often underpins identity theft. This functionality is also important for displaced entrepreneurs to provide an alternative means of identification when being onboarded by financial services providers, installing POS software, verifying a client’s identity, etc.
2,000
US businesses accepted Bitcoin in late 2022 out of 15,000 worldwide
93%
of merchants that currently accept digital assets as a payment instrument have seen a positive impact on their business’ customer metrics
87%
of merchants see immediate access to funds by accepting digital currency payments
CASE STUDY
Bitkey – a secure solution to directly access digital assets (Bitcoin) in a hardware wallet.
Bitkey, built by Block, Inc., is a hardware self-custody wallet that brings together software, hardware, and advanced security to modernise Bitcoin ownership. As a 2-of-3 multi-signature wallet, Bitkey has three private keys protecting the users’ digital assets. Two out of three keys are required to sign a transaction, giving the user extra protection, and ensuring that users can always recover their funds if they lose a key.
CASE STUDY
Bitkey – a secure solution to directly access digital assets (Bitcoin) in a hardware wallet.
Bitkey, built by Block, Inc., is a hardware self-custody wallet that brings together software, hardware, and advanced security to modernise Bitcoin ownership. As a 2-of-3 multi-signature wallet, Bitkey has three private keys protecting the users’ digital assets. Two out of three keys are required to sign a transaction, giving the user extra protection, and ensuring that users can always recover their funds if they lose a key.