Financial expert, Vincent Launay from the World Bank, recently gave his predictions about the major changes brought on by Ethereum to the financial system. In particular, he explains why big banks do not have any other choice but to eventually adopt the cryptocurrency.
In terms of market capitalization, Ethereum comes in at number 2 on the list. Its exchange platform is open source and is the most used of all the “newer” cryptocurrencies. There are about 475 cryptocurrencies available on their platform, as opposed to 580 cryptocurrencies used by their competitors. Ethereum’s success is mainly due to its integration of smart contracts. These contracts allow companies to carry out ICOs and other fundraising campaigns.
Launay said, “Linking capital managers with companies and governments that are wanting to issue bonds has long been a lucrative business for Wall Street. And, now we are at a point where it is no longer possible to do so without them”
By removing all other intermediaries and providing capital for startup companies, Ethereum makes investment banks obsolete. They may not feel it quite yet, but venture capital funding companies already do and it’s not uncommon to see them as part of pre-ICO campaigns.
A Step Above Uber
Launay believes that the services formerly offered by banks, lending finance to entrepreneur, is like the economic model created by Uber, a San Francisco company which connects regular drivers with passengers who need rides from one location to another.
Ethereum’s smart contracts go a step beyond this simple relationship. In fact, they connect the two parties and then ensure that both sides honor their commitments without the need of an intermediary.
In 2017, companies have issued roughly $3.5 trillion US dollars in bonds to banks for them to sell pension funds and manage their finances.
So, how do ICOs work to replace the traditional borrowing system?
Smart Contracts and Bonds:
Vincent Launay gives us a few examples of how these smart contracts work.
-A company first creates a smart contract on Ethereum’s blockchain which replicates bonds. (Which are semi-annual payments, plus the repayment of the loan at maturity.)
– Investors who wish to participate will then issue ETH (Ethereum Tokens) to the contract’s address. They will also specify the size of the smallest coupon they would like to receive. (The coupon being the calculated interest that is paid periodically.)
– Once the bond is closed, the contracts are automatically established between both the investor and the company, starting with the smallest, until all contracts are satisfied.
-Any investor who was not automatically counted in once the program is complete, will be fully reimbursed for their tokens.
The Repayment of Debt:
-Investors collect their payments at regular intervals as stipulated by the smart contract (Typically, every six months.)
All payments are disbursed in ETH tokens. The company, in the event of rising prices, has the possibility of adjusting the coupons by calculating Ethereum’s price in dollar value. It is the smart contracts that automatically retrieves the value and then readjusts them. Therefore, payment can either be in cash or in ETH tokens and both can be audited by financial institutions.
– When complete, the contract will fully reimburse the loan.
The traditional bond market excludes a certain part of the population, since bonds typically start at $5,000 US. However, Ethereum’s smart contracts, which are more flexible, make themselves available to a much larger population since they start as low as $10 US.