How blockchain is changing fintech

As you may have read in our State of Startups report, last year was historic for tech investment, with blockchain-focused fintech startups seeing greater interest than many subsectors. With NFT market growth taking the world by storm, the massive boom in cryptocurrency values, and increased interest in web3, blockchain in fintech had a banner year in 2021.

Emphasis, of course, on “had.” In early 2022, as we all know, cryptocurrencies took a major dive in value, to the point that it now looks like the digital currency craze and blockchain fever are giving way to a more linear trajectory for emerging tech.

When you look closely at the numbers, what at first appeared to be a falling off for blockchain markets is more accurately characterized as regrouping. While the number of funding rounds and the amount of money going into blockchain startups overall decreased in the first quarter of 2022, things shifted dramatically in Q2, to the point that on the strength of the second quarter, H1 2022 was ultimately a stronger H1 than 2021.

That does still leave one quarter unaddressed though, and if you’ve been following crypto this year, it’s a doozy. Q3 saw a giant drop in VC funding, chopping in half the Q2’s $6.6 billion with Q3 topping out at $3.3 billion. With such a precipitous drop in venture capital, it’s understandable that some would see this as a sign of dire times ahead for blockchain.

But venture funds are only one part of the startup ecosystem. To get the most informed view, we have to look at that ecosystem in its entirety. From that vantage point, some very important details come into focus.

In a study analyzing the top 100 public companies investing in blockchain from Q3 of 2021 through the end of Q2 2022, tech analysis firm BlockData found that forty major corporations invested a combined total of more than $6 billion across 71 investment rounds by the end of June 2022. Among the companies in the report, some of the biggest investors were industry giants Samsung, Microsoft, Google’s parent company Alphabet, Goldman Sachs, Morgan Stanley, and BlackRock.

Andrew Haines, Global Head of Fintech at Vention, suggests that those big names mean a lot when it comes to the big picture. “While investment by VC firms has dropped, corporations are continuing to invest in the area,” he said, adding that the bitcoin market is the most affected, yet “the technology being deployed to create it doesn’t seem to be slowing down.”

This ongoing series of investments, starting at the end of last year and continuing throughout 2022, from major tech and financial institutions makes one element of blockchain technology very clear: It isn’t going anywhere. Sure, some VCs hoping for more immediate short-term returns decided to clear out given the volatile year, but massive multinationals are committed to blockchain integration; seven of the companies listed above now offer blockchain services, and dozens continue to fund accelerators and incubators dedicated to developing blockchain startups for the future.

So while it’s hard to make an argument that a (comparatively) weak quarter is a good thing, in the case of fintech blockchain startups, it’s at least not necessarily a bad one. Blockchain companies have weathered and continue to weather substantial difficulties, with volatile cryptocurrencies, security breaches, NFT bubbles, and crypto exchange insolvencies grabbing global headlines. But established investor institutions haven’t lost faith, including household names like Morgan Stanley and Goldman Sachs.

While crypto has been an investment option since the early 2010s, it’s only within the last few years that cryptocurrencies have managed to inch their way from an obscure com-sci project to a measure of legitimacy within digital finance.

Andrew Haines explains: “As a decentralized ledger for transactions, blockchain technology could mean not only faster payment processing,” referring to blockchain infrastructure’s ability to provide faster processing speeds by virtue of being a more efficient technology. But the benefit of it extends further, he says, by “significantly lowering the cost of every transaction by eliminating the need for the multiple intermediaries that traditional finance requires.”

While individual cryptocurrencies may experience devastating instability and some crypto exchanges collapse, as a subset of fintech, cryptocurrency has managed to carve out a colossal foothold in the financial world, netting billions in investment from banking and investment firms.

Cryptocurrency’s continued presence in the global market has led governments around the world to explore the viability of creating their own digitized national currencies; known as Central Bank Digital Currencies, or CBDCs. Currently, nine countries offer active CBDCs as a financial instrument. Adoption of CBDCs is still in its earliest stages, but it’s promising, asour analysis of CBDCs provides an overview of the CBDC state-of-play at the moment.

The growing environmental, social, and governance movement (ESG) is an attempt among venture capitalists to view investment opportunities through a lens that focuses on sustainability and ethical practices.

One of the earliest and longest-running criticisms of blockchain technology is its environmental transaction cost: namely, the enormous amount of energy required to create the encryption needed for blockchain functionality. In response, some fintechs have begun offering what’s known as green finance — investment in environmentally beneficial ventures to normalize and incentivize sustainable corporate conduct while continuing to see returns — a kind of counterbalance to blockchain’s environmental impact.

With major banks investing heavily in cryptocurrency, the focus on ensuring environmental sustainability and financial viability has brought green finance into the mainstream, as well as leading to new, sustainable blockchain innovations, so one could argue that it’s wound up being a win for the environment.

One of the long-held security concerns about crypto is whether decentralized payments and digital currency will be a boon to criminal activity. Last year, that concern was put to the test.

And it turns out the answer is a resounding “Nope.”

A number of high-profile law enforcement operations aimed at stopping criminal activities in which cryptocurrency payments were involved wound up showing that using blockchain technology is just as traceable as using traditional money — and possibly more so.

The legal drama doesn’t end there, however, despite the evidence. In March, President Biden issued an executive order to explore the creation of domestic and international financial legislation regarding the usage and security of cryptocurrency.

While we’re still in the assessment phase, this is a monumental signifier of blockchain technology’s new role in global money markets. When the world’s largest economic power seeks to determine and codify protocols for new methods of payment made possible with blockchain, other economic powers of all sizes stand at attention.

With its current investment landscape still looking strong, blockchain’s role in guiding the course of fintech is only set to grow from here. While VCs steer clear amidst heightened volatility, global enterprise commitments to expanding blockchain infrastructure and services guarantee an enduring presence. Though, whether that presence will regain the flash and pizazz of its 2021 rush is less certain.

Where the most subtle but most powerful impact on fintech is likely to be seen, though, will be through the blockchain’s effect on everyday people. In driving cultural shifts like ESG and CBDCs, through the legislation it’s inspiring and new markets it’s opening up, blockchain technology’s reach is already extending through fintech, beyond finance in general and into the world at large.