Fintech and Blockchain: the Next Generation of Innovation

27 Febbraio 2023 - 13:06

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Fintech and blockchain can work together to innovate the banking sector. However, it is essential to try to limit the risks associated with these technologies in order to exploit their potential.

Fintech and Blockchain: the Next Generation of Innovation

Fintech and blockchain are two of the technological areas that have attracted the most interest from entrepreneurs and aspiring entrepreneurs, given all the innovation opportunities they have created and can still create.

What makes them so popular are their main features: with the arrival of PSD2 and open banking, the fintech sector has been able to provide more open and integrated solutions thanks to APIs, which will allow users to experience a better and more integrated customer experience.

In the world of blockchain, on the other hand, it was precisely this, thanks to its characteristics, that enabled a revolution. By exploiting it, people have at their disposal a technology that can offer benefits such as decentralization, transparency and verifiability, resistance to censorship, transaction logging, privacy and security and smart contracts.

Fintech companies are taking advantage of the blockchain to create value and solve some problems in the sector. According to the Fintech Waves 2023 report, produced by EY in collaboration with the Fintech District, the above issues concern:

  • intermediation of financial services;
  • the need to facilitate access to the cryptocurrency markets
  • ensure security for market operators;
  • the improvement of the technology stack underlying the blockchain
  • compliance with international laws and regulations, mainly in the context of FinCrime.

Fintech and blockchain: will it be the year of records?

According to data collected by CBInsights and analyzed in the report, 2022 was a good year for fintech solutions based on the blockchain. The report highlights how, at the time of the surveys, investments of $21.7 billion had already been raised in 2022 and approximately 1,380 deals had been closed.

Since the data refer to the third quarter of 2022, the graph also presents an estimate of the total investments that will be recorded in 2022, i.e. $28.9 billion and 1,840 agreements ; far higher numbers if compared to those of 2020 (3.2 billion collected, 907 agreements closed), and those of 2021 (26.1 billion collected, 1,386 agreements closed).

According to data provided by CBInsights, since 2018, the majority of investments from the venture capital sector have gone to projects related to Web3, NFTs, gaming and the metaverse.

In 2022, considering the first 9 months, the sector where the most money has been invested (63%), is Web3. At the same time, projects related to DeFi and crypto custody have been less successful, having peaked in the first quarter.

Fintech and blockchain, the privacy issue takes the form of DeFi

One of the most successful products of the collaboration between fintech and blockchain is the so-called DeFI, i.e. decentralized finance, which offers great advantages and opportunities compared to the traditional one, as well as risks. According to the report, the benefits offered by this technology can be summarized in four points:

  • ease of access to financial services for those who do not have a bank account or have few resources;
  • much faster execution of transactions compared to traditional clearing and settlement processes;
  • no time limit to carry out transactions, unlike traditional services;
  • anonymity and no disclosure of personal data.

Especially the last factor, namely that linked to anonymity, arouses conflicting opinions: for operators in the DeFi sector it represents a great benefit, however international regulators have underlined that this represents a potential danger, since anonymity does not allows you to implement the necessary security measures relating to KYC or AML.

However, what might seem like a solution has recently emerged, namely CeDeFi, a DeFi solution to which AML practices are integrated, in particular KYC, which would make it possible to avoid scams and thefts.

Among the regulators who expressed themselves on the risks present in the use of DeFi, there was the European Commission, which in particular cited:

  • fraud and scams (conduct risk);
  • security of smart contracts or bugs (operational risk);
  • execution of settlement during severe market conditions;
  • potential spillover effects on financial stability as DeFi-related volumes increase.

Fintech and blockchain: the Italian situation

In Italy, the encounter between fintech and blockchain has led to the birth of innovative solutions. The main solutions offered by our country concern:

  • custody services for cryptocurrencies
  • peer-to-peer payments
  • trading.

The most revolutionary startups in the sector have leveraged partnerships with other financial institutions to offer their customers access to the cryptocurrency market. Similarly, traditional players, as stated in the report made by EY and the Fintech District, in this way have the possibility to offer their customers innovative solutions such as services related to cryptocurrencies.

According to an analysis carried out by Chainalysis, a company that deals with blockchain analysis, Italy is one of the European countries which has grown the most from the point of view of the volume of cryptocurrency transactions between June 2021 and June 2022.

In recent years, the sector of fintech solutions based on the blockchain has rapidly evolved, becoming a real ecosystem which - despite its modest size - has the potential to transform the financial services traditional significantly in the coming years.

Original article published on Italy 2023-02-27 10:00:00. Original title: Fintech e blockchain: la prossima generazione di innovazione


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