New deal promises democratization of financial services and access to capital across developing countries
At first glance, the deal between Cardano and Oasis Pro Markets announced at the Cardano Summit may sound like a specialist application of blockchain technology to the rarefied world of finance – of interest to bankers, perhaps, but not to the person on the street. But it could turn out to be a game changer for millions of people throughout the world.
Many countries struggle to fund large infrastructure projects such as bridges, dams, and rail networks, while their best and brightest citizens go and live elsewhere, their only contribution to their home country now the monthly cheques they send back home.
If you know anyone who sends money to their family in another country, then you have encountered the world of remittances. Although made up of small sums, it amounts to a huge well of money. Whole nations are kept afloat in this way, with remittances accounting for well over 30% of GDP in some cases.
Since 2020, as countries such as the UK have cut back their aid budgets, global remittances have actually exceeded the value of foreign direct investment (excluding China) and government aid from richer countries combined. It is a situation that Nick Cafaro, IOHK product manager, describes as ‘pretty astonishing’.
‘This means, for the first time in the 21st century, foreign workers abroad are sending money back home in amounts greater than all the investment coming from countries and corporations into those lower and middle-income countries – as well as the total amount of official aid.’
Yet that huge sum of money, much needed as it is, can only do so much good back home. ‘The government is unable to pool all that capital and put it towards big infrastructure projects that might benefit wider sections of the population,’ Cafaro said. ‘And the money coming in is not distributed evenly and so can actually increase inequality within countries.’
A third downside to this situation, Cafaro added, was that for remittances to continue people had to keep moving abroad to work, abandoning their family and wider community, ‘something that none of us really want to happen’.
A better way
Imagine a way of harnessing these funds so that they make the biggest impact where they are needed. A way that could actually raise the standard of living in the target country, and potentially stem the ‘brain drain’ of talented people from poorer to richer countries. Imagine that your solution also provides a return on investment for the person working overseas.
Blockchain can make this possible.
Countries typically fund infrastructure projects by issuing debt – sovereign bonds, as they are known. Sovereign debt is one of the bigger, more intimidating beasts in the capital markets zoo, and it is not one that most retail investors would be comfortable approaching. When a bond is issued by a sovereign nation, banks often form syndicates to buy up the entire issue. They want it for themselves because sovereign debt provides a fixed income at a low risk. Also it’s a regulation-heavy area of investment, so you need a huge amount of expertise to take part. It’s nice work if you can get it.
In the increasingly decentralized financial future, this massive class of debt and the huge pot of remittance money will be brought together. The relationship between Cardano and Oasis Pro Markets is a big step in that direction.
Cardano had wanted to form such an alliance for some time, and chose Oasis Pro because of its blockchain-first platform and regulatory expertise, said Cafaro, announcing the deal at the Cardano Summit last month.
‘The networks that are run by these syndicates of banks... are not capable of handling that type of deal flow, so you need to figure out how to connect those tens of thousands of individuals to the issuer through a single platform. The good news is that the Cardano blockchain is a great tool to solve this type of problem.
As Nick Cafaro, Product Manager at IOHK said:
We just had to find a partner to bring this “real fi” product to the Cardano blockchain. It had to be a company with expertise in capital markets and blockchain, and with all the right regulatory permissions in place.
Enter Oasis Pro Markets, Pat Lavecchia, the financial company’s chief executive, said: ‘We’re very much looking forward to a long-term partnership with Cardano and IOHK, providing democratization of financial services to a variety of countries utilizing our best-in-class technology – our matching engine or exchange, depending on the country and regulatory environment.’
He added that as well as providing greater access to the sovereign bond market for small investors – ‘the citizenry and diaspora of these countries’ – the initiative would provide ‘efficiencies and cost savings’ to the issuing governments.
Lavecchia described the Oasis Pro approach as ‘digital cash for digital securities’, which in effect meant using stablecoins and also potentially CBDCs, depending on different countries’ regulations.
‘Sovereign debt is a security that in the blockchain area could actually be fractionalized, and that fractionalization is tied very much to its democratization. It helps risk management for the issuer [and] increases the investor base, which in turn should improve liquidity as well, seamlessly. The digital exchange trading systems and order-matching engines that we’ve developed are the transition point from the legacy solutions . . . to the blockchain, and the benefits are enormous.’
According to Lavecchia, the issuer benefits in several ways. Because of anti-money laundering provisions, the issuer can ‘know at any time what institutions or individuals own their sovereign debt’. Governments no longer have to track down investors’ addresses and mail out their interest payments. ‘All that asset servicing is a tremendous time waste and unnecessary. The blockchain solves that issue. We estimate that the savings are anywhere between 25 and 50 basis points [0.25-.5%] of the issue amount.’
The issuing country can also benefit from smart contract innovations. ‘The smart contracts are embedded in the security itself and contain the terms of the security – for instance the principal and interest payments, the default provisions, if any, or any other actions or protections that are incorporated, not only for the investor but also for the issuer, the sovereign nation. It eliminates poor documentation and also reduces settlement times, which are currently between two and 10 days. Utilizing the blockchain and digital cash, that settlement time is reduced to almost zero.’
Once a country is set up with the Cardano/Oasis Pro system, it can expand its financial dealings to other asset classes such as equities, asset-backed securities, and other kinds of project finance, said Lavecchia. ‘This technology is available today and we have it with IOG ready to launch across the spectrum. In five to ten years this is going to be ubiquitous, so the sovereign nations that work with us today are going to be significantly ahead of the curve.’