Yannis Bakos is a professor at New York University’s Stern School of Business and a research fellow at MIT’s Initiative on the digital economy. He recently spoke at our NYC hub about financial applications of cryptocurrency and blockchain today and in the future.
Q: What are businesses doing with blockchain technology?
A: It varies. Mostly they are exploring it. This is an area where more research is needed to understand how blockchain technology is being deployed.
“In terms of real applications, some leading areas seem to be money transfer, especially for international transfers, and supply chain management for certifying and tracking goods.”
There are also some secured lending applications, offering loans with tracked inventory, cryptocurrencies or other assets as collateral.
Q: When does it make sense to build an application using blockchain as opposed to traditional technology?
A: Let’s take an example of a supply chain management. You have the suppliers, the transportation companies, the final customer and the financing parties, and they don’t necessarily trust each other and may also have conflicting interests. They would be willing to participate, however, in a system that is run by trusted technology intermediaries, and appropriately validates and protects transaction data.
“Blockchain technology can help when many parties or corporate entities need to coordinate to make an application work, especially when these entities do not trust each other.”
In theory they could use traditional distributed databases, but it is usually easier to implement this functionality with blockchain technology.
Q: Are we going to see cryptocurrencies used for payments? Could they replace cash or credit cards?
A: I think the jury is out on this. Cryptocurrencies like bitcoin are not likely to become commonly used for payments because of their volatility, their technical limitations such as the number of transactions they can handle, and their high transaction costs once you take into account the total cost of running the system.
“Stable coins like Libra designed for value stability and efficient transactions could gain traction, especially in international money transfers.”
For consumer use, it is hard to see how cryptocurrencies would offer more value than existing applications, such as Apple Pay or WeChat Pay, or even traditional credit and debit cards. Payment systems have strong network effects and well-established incumbents, thus it is likely that new payment systems will be limited to niche applications, such as payments that require strong anonymity, or are triggered by automatically executed smart contracts. That said, there could turn out to be sizable niches of this kind.
Q: Do blockchain applications require a cryptocurrency?
A: Typically, they do not, even when they run on public blockchains like Ethereum, which has an associated cryptocurrency. A cryptocurrency can be useful for applications that involve payments or fund transfers. For instance, Ripple participants have the option to use its XRP cryptocurrency to facilitate transfers across currencies, or supply chain applications can be designed to automatically trigger payments upon delivery.
“Some blockchain platforms use cryptographic tokens, which are similar to a special purpose cryptocurrency but most do not require it.”
These are the means to obtain services and the reward for providing services. Thus, there are applications where a cryptocurrency can be useful, but it is not required.
Principal Consultant, Infosys Consulting
Since joining our firm in 2015, Constantine has been a key advisor to some of our top clients in the banking and financial services space. He has over 13 years of experience in the financial services industry including 8 years as a financial advisor and an analyst in the wealth management division of a major international bank. He has worked with several global financial firms in the areas of customer strategy, product envisioning, experience redesign, process redefinition and design thinking. Constantine graduated from the NYU Stern School of Business with an MBA in finance.