The third revolution of the internet is heralded to create a more intelligent and connected world. And with its acceleration in the banking and finance sector, Web3 is becoming a buzzword among financial services providers.
While it is too early to predict the shape Web3 will eventually take. If the past iterations of the web were any indicator, it takes time to bring about a paradigm shift, although when it does, everything will move forward at an exponential pace. Can financial services providers afford to wait for that eventuality?
What is Web3?
The first generation of the world wide web came online in the mid-1990s. It was essentially a static content delivery network that allowed people to share information, almost like an online shop front or brochure.
As the technology evolved and broadband speeds increased, Web2 arrived a decade later, providing a much more interactive, social internet where businesses and individuals were able to generate and share their own content.
The tech behind Web1 and Web2 relied on centralised databases to deliver and enable functionality.
Conversely, Web3 makes use of a decentralised blockchain where there is no arbitrary central authority, but instead a form of distributed consensus. Conceptually, Web3 will be a unified universe where communication and data sharing occurs in a decentralised space. Depending on what technology it integrates with, Web3 can evolve how the web can be used for that technology.
With Web3, the focus is now on the backend, specifically to manage and understand data. Using AI, machine learning and the semantic web will deliver more relevant information, faster. Anyone and any machine in this Internet of Things (IoT) age can contribute and gain access to this global data, but no one will own the database.
Web3’s integration with blockchain technology, for example, can create a database that is impossible to hack. This is a smart contract that transmits information under the mutual consensus of involved parties. And it is one of the premises behind decentralised finance (DeFi), which aims to cut transaction times and gain access to more financial services.
According to Investopedia, DeFi is an emerging financial technology based on secure distributed ledgers like those used by cryptocurrencies. Consumers and businesses can lend, trade, and borrow by using technology rather than intermediaries to record and verify financial actions in distributed financial databases.
Also Read: Why the Web3-enabled gaming world still has hope
However, just like Web3, DeFi’s evolution is still in its infancy, so regulators and traditional payment players are still trying to figure out how DeFi would eventually shape up.
The need for regulation
With DeFi and cryptocurrencies being Web3’s early use cases, there are concerns that the new web could lead to a financial Wild West. Rationally though, the situation is not likely to get that out of hand.
Cryptocurrencies such as Bitcoin or Ethereum are presently not used for much more than being an asset to invest in, which makes them very volatile and inappropriate for use as payment. South America, Mexico and other regions are trying to get Bitcoin recognised as legal tender. This move, however, is unsupported by the International Monetary Fund (IMF) due to its volatility.
That is why institutional intermediaries like banks must navigate the host of digital identity issues and overcome contractual and regulatory obstacles, including agreements for cross-border money movement.
Some regulatory bodies are independently preparing for an acceptable DeFi future. Project Dunbar is a technical experiment by the Bank for International Settlements (BIS) Innovation Hub and central bank partners. The objective is to study how international settlements can be made using multiple Central Bank Digital Currencies (CBDCs) over a common platform, considering the catalytic effect of the emergent Web3.
The Monetary Authority of Singapore’s new guidelines on tokenisation and Dubai’s recent regulation are cases in point. In addition, Australia is exploring a Digital Services Act (DSA) legislative package that seeks reforms in crypto market licencing, custody, decentralised autonomous organisations (DAOs), debanking and taxes.
Web3 opportunities in the finance industry
As the capabilities of Web3 become more understood and ubiquitous, sentiments about its use will undoubtedly change and evolve.
Some early moving banks are already leveraging the early capabilities of Web 3.0 in legitimate use cases. An S&P Global Market Intelligence report revealed that HSBC Holdings in Hong Kong had enabled hyper-personalised insights into its wealth management, courtesy of Web3. The bank estimated this could lead to 10 times more conversations between their relationship managers and clients.
Such positive business models of Web3 will continue to emerge to disrupt markets in positive ways, keeping market interest buoyant and allowing stakeholders time to iron out teething problems with progressively feasible and accessible solutions.
Undoubtedly, the vision of Web3 in the future of finance is still hazy. There is still much to be done to secure and build the properties of Web3 for financial services. But as early adopters and techies foray to bridge these two worlds, new asset classes and technologies will be created.
So, no matter how the integration eventually shapes up, witnessing the possibilities thrown up in the process is exciting indeed.
–
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic
Join our e27 Telegram group, FB community, or like the e27 Facebook page
Image credit: Canva Pro
The post Are we prepared to embrace the possibilities of Web3 beyond crypto? appeared first on e27.