Blockchain-based payments are showing some promise in their ability to deliver seamless payments for all. So now, as the space evolves and matures, what can we expect in terms of mass adoption?

Web3 and blockchain expert, author and thought leader Rita Martins recently wrote the book on the subject, Web3 in Financial Services. Martins also publishes Web3 Crossroads, a weekly newsletter. She is the former Global Head of FinTech Partnerships, Global Functions for HSBC.

Martins shared her insights with Converge live from Money20/20, covering the technological shifts Web3 and blockchain present, their potential in payments and other financial services, plus the hurdles faced for greater Web3 adoption and compliance.

Web3 in financial services and crypto payments: Ready for prime time?

“When you look at the news, you still see just the bad side of [blockchain technology in financial services],” says Martins.

“You see the big collapses, the FTX problems and so on. So I wanted to write a book that really explains some of the use cases, what it means for someone working within financial services. It’s still an evolving space, so what are some of the changes or things that need to change within the ecosystem for it to really be mass-adopted by financial services?”

Martins recalls her time at HSBC and trying to bring in blockchain technologies to partner with the bank. “When I started looking, it was too early; the technology was too early.”

However, the author says times have changed, and uptake is beginning to increase in the legacy banking world.

“Given some of the things that are happening around regulation, banks have already really tested this technology. They see the value, and you have big names like BlackRock, for example, really going for it. It’s definitely a change in the blockchain environment, and I think it’s really showing the benefits,” she says.

According to Martins, Web3 has now moved “beyond centralization and data ownership to seek balance between ownership and centralization with protection and security to the client’s financial services. The decentralized nature of blockchain technology is crucial in providing security and transparency, despite the trade-offs involved in deploying tokenized assets on permissioned blockchains.”

Stablecoins and emerging markets

The use of stablecoins in emerging markets is one area that Martins gives special attention to in her book, and in her appearance on Converge.

She notes that stablecoins are being used for cross-border remittances, highlighting the technology’s usage in the Philippines.

“Many people go live and work abroad, but then they send money home to their families, and they are using stablecoins to send that faster, but also much cheaper for them.”

In emerging markets, where the financial system is not as developed as it is in Europe, the UK or the US, there’s a unique opportunity for these technologies to have a serious impact in the short and long term.

Tokenization of real-world assets and a new form of collateral

Martins also points to Goldfinch Finance, which uses real-world assets (RWA) as collateral to provide loans to companies in emerging markets.

This is part of a broader trend in which real-world assets such as real estate, stocks, corporate and government bonds, currencies and other securities will be increasingly tokenized — then traded and borrowed against on a blockchain.

Major global financial players, including BlackRock, are putting money to work. BlackRock, the largest asset manager in the world with $10.5 trillion in assets under management, issued a Bitcoin ETF earlier this year and recently announced the company’s “first tokenized fund issued on a public blockchain” — the BlackRock USD Institutional Digital Liquidity Fund (BUIDL).

Martins asks, “The big value of tokenization is not just tokenizing an asset, but it’s what can you do afterward? Can you use some of those assets for collateral? JP Morgan and Euronext have done some repo agreements where you can have more liquidity and you reduce costs.”

Tokenization is just one step. The key is to use this advancement to create new solutions across different asset classes.

Central bank digital currencies: Transparency, trust troubles

Central bank digital currencies (CBDCs) are gaining traction but developing differently around the globe.

One of the biggest sticking points is privacy. Consumers and companies are unlikely to want to share their spending and payments data. Some governments, such as China, are aggressively collecting data, while the European Union doesn’t collect any data.

Martins says one of the biggest challenges for CBDCs will be educating the consumer. She adds that many central banks are looking into a privacy layer, given that most people don’t want the central banks to see all their data. Additionally, adoption and usage face unusual hurdles with international operations.

“If we’re talking about cross-border payments, you have the whole interoperability issue or challenge, but you also have the whole governance and regulation space,” Martins outlines. “Different countries are going to have different regulations, and they’re going to have different governance. How do you bring all those countries together to make sure that you have one set of rules?”

Challenges facing financial institutions implementing Web3 technologies

Uncertainty and a lack of clarity around regulations have hamstrung the industry for years. Martins says most traditional banks will only go fully into the space once more regulations are in place for asset management.

She adds, “We still need to have some developments in the technology for it to be used within financial services. So if you think about public blockchain, one of the key features of it is transparency, and that is great for some use cases, but for financial services … you need to have privacy of clients’ information.”

Transparency is also an issue, as companies don’t want competitors to see this data. While a public blockchain is a key piece of a globally interoperable financial system, would financial services firms be open to using one that connects closed systems?

Martins says yes, but a public blockchain will likely evolve and differ from what’s in use right now.

“It’s going to have the privacy layers and the compliance layers and so on. But before we get there, we’re probably going to have this mesh of different blockchains. They are connecting together. And the key thing is interoperability between the different blockchains, but also between the blockchain and the legacy systems, leveraging distributed ledger technology.”

ISO 20022: Regulations, controls and protection

Many fintech companies are preparing for greater interoperability and building out compliance into their ledgers to make sure they are ISO 20022 compliant.

Martin says that even within DeFi, projects with a decentralized autonomous organization (DAO) governance structure are looking to register as an entity.

After that, they can “connect with, and they can partner with, traditional finance [and] they want to tap into that liquidity. And to be able to do that, they need to have the compliance, the privacy layer and all the layers to be able to actually even start having a conversation with traditional companies.”

The future of blockchain technology and decentralized finance in financial services

As the technology evolves, Martins says consumers won’t know whether they’re using blockchain or financial services. She likens this to not knowing whether their bank uses the cloud or on-premise solutions.

“I think we are going to stop talking about the technology and actually start talking about what it means. Blockchain and all the tools within this work will just be part of the tools that a bank and the financial services company will have.”

Want more insights on the topics shaping the future of cross-border payments? Tune in to Converge, with new episodes every Wednesday.

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