Finances are a major issue of our time, especially for emerging and underdeveloped countries, start-ups, small businesses and individuals. Turkiye also suffers from a lack of access to low-cost, long-term financial capital. Business life, the real sector and the labor market are all extensively affected by these credit crunches. However, this issue may receive more attention in the future. Expectations of a recession in the West, as well as monetary and monetary tightening, could potentially exacerbate these financial problems.
In particular, small and medium enterprises (SMEs) rely almost more than 90% on Turkish bank financing. This is definitely stressful and can lead to even more financial hardship, especially during financial turmoil. So now is the time to think beyond traditional methods of financing. For example, rising financial costs (especially after a period of monetary tightening) and the issue of extended deadlines (for example, during the 2022 tightening cycle) have turned into a nightmare for many companies. Public banks and public institutions must step in each time to find new tools or initiate new measures to support the economy.
This is a reality (even in Turkey), but I recall a newscaster responding to my comment (with a touch of anger) in a TV interview in late 2022. That means he didn’t know of any other attractive funding opportunities. The reality is that even today there are many outdated, new-generation alternative financing or funding schemes. waiting for corporations and national economies to exploit. Some of these options are equity-based, while others are non-equity crowdfunding platforms.
Alternative funding scheme
Thankfully, there are actually many alternative sources today. Blockchain technology is even opening up opportunities for wider new horizons and more efficient alternatives. As an example, crowdfunding platforms such as Kickstarter and GoFundMe help startups and new ideas get funding from the public. And blockchain is further facilitating, speeding up, and increasing the efficiency of these types of new-generation alternatives.
Recently, new options related to Islamic finance and new blockchain-based financing models have also been popular in Turkey. These new options will allow even smaller investors to actively participate in financing production and growth. And both are asset-based (tangible or intangible) funding models, as opposed to traditional liability-based funding vehicles. Access to financing is a bigger issue in developing countries, but much more important, especially for small businesses and individuals who don’t have easy access to the stock market. In that sense, blockchain also allows us to overcome the issue of trust and reliability.
Some of the alternative funding schemes (to banks) include DeFi tokens, flash loans (DeFi unsecured lending), direct peer-to-peer lending and borrowing, by eliminating intermediaries. (which lowers the cost of financial services), low-cost of capital through B2B (business-to-business), crowdfunding, and other public funding schemes such as initial coin offerings (ICOs).
Blockchain, in particular, enables safe and simple, yet fast and low-cost alternative funding. It can be effectively used in peer-to-peer (P2P) and business-to-business (B2B) platforms. His P2P platforms such as Prosper and LendingClub make it easy for individuals to lend money. A new generation of crowdfunding fundraising tools is an important alternative that is used more frequently in parallel with today’s technological developments. Microcredit and initial public offerings (IPOs) are popular alternatives to traditional bank-based financing.
All these new technologies, along with the rediscovery of some old-fashioned and efficient methods, along with growing interest in alternatives to costly and bureaucratic traditional bank funding, have brought us back to today’s new alternatives. Refocusing. New digital tokens, coins, or other forms of crowdfunding tools could disrupt and transform all these funding instruments in the coming years.
Technological innovation is going well. For example, the 27 member states of the European Union recently agreed to form the European Blockchain Partnership to facilitate, enhance and protect intra-European and international trade and financial transactions. On the other hand, these efforts aim to lead (from current currencies and trade unions) to the European Digital Single Market (eIDAS) in the medium term. Contracts and funding documents traded on the blockchain network can also easily have a secondary market, resulting in high liquidity. Ethereum blockchain is actively used for this purpose.
Low-cost capital via B2B can also be easily achieved with the help of blockchain technology. One question she has at this point is whether borrowers can use blockchain-based credit scores to obtain loans. Could blockchain replace credit scores as the new mechanism of proof of trust by increasing transparency and reducing lending risk? Building trust is certainly a key part of blockchain technology. a great contribution. The rest have not yet been verified.
Blockchain also makes it possible to sell rights to access the final product, much like salam contracts (prepaid forward contracts) in Islamic finance. These contracts and the funds they generate are fundamentally strong contracts that can compensate for many of the weaknesses of modern banking or financial systems. They can even easily replace traditional futures and forward contracts.
ICOs, on the other hand, are a new type of crowdsourcing vehicle that is starting to gain popularity in the cryptocurrency world. The tool funds projects by selling access to the products produced and is a funding model that runs on the Ethereum platform. This is a new type of public offering and a fundamentally new form of funding.
ICOs differ from traditional IPOs and venture capital investments in that they do not offer investors shares of any kind of company. The coin owner uses these digital his coins to purchase the final goods. In a sense, the product is bought and used for trading rather than the company’s stock. Additionally, in contrast to IPOs, ICOs are used by relatively small, new startups or ventures for early-stage funding. IPOs, on the other hand, are used by large, trustworthy companies that have a history of good trust.
Digitization of finance progresses
Blockchain-based CBDCs and digital tokens representing tangible or intangible assets, rather than the modern Tulip cryptocurrency, are the future of digital technology and more digitalized finance. It is expected to increase the effectiveness of monetary policy, improve central bank power, and even promote financial inclusion. Benefits of CBDC and related blockchain technology include, but are not limited to:
– Improving financial inclusion in countries where large populations do not have access to bank accounts or financial services.
– Direct peer-to-peer lending by eliminating intermediaries.
– Increase and facilitate international remittance (remittance).
– Increased transparency, formality and traceability. Therefore, informal transactions that could lead to increased tax revenues have decreased.
– Social and welfare transfers are also facilitated.
– Economic activity is recorded and formalized (better calculated for accounting purposes).
– Significantly improve business efficiency as transaction costs and risks are reduced.
– Make your transactions safer and more secure.
-Blockchain-based supply chains increase transparency, making unfair and unequal revenue sharing across the supply chain impossible, increasing sustainability.
On the other hand, in the case of CBDC financial innovation, attention should also be paid to the following disadvantages and weaknesses.
– Too many transfers to digital wallets can undermine traditional banking and financial systems.
– Stronger identity verification mechanisms are needed to prevent money laundering and other illegal or illicit activities.
– A limit control of the maximum amount a user can hold should be considered.
It should be noted the widespread use of blockchain in finance, payment and settlement systems. Meanwhile, its widespread use in finance, banking, cybersecurity, payments, and smart contracts has led to more investment and venture capital in this technology.
Blockchain technology is also an important opportunity in terms of trading with the local currency. New technologies such as blockchain aim to end the negative effects of traditional instruments such as the dollar and the global monetary system based on it. Islamic financial options and blockchain-based new financing models, which are also asset-based financing models, can work together to increase efficiency and spread the new financing sector.
Debt or credit is an integral part of modern economy, business life and financial system. As long as the profit and profit are higher than the cost of acquiring that debt, it usually doesn’t matter. It allows you to take advantage of higher returns on stocks. However, this credit is often mistaken for income, thus creating an ever-increasing and excessive debt burden.
The liberal Western economy is totally dependent on these credit growth cycles. The economy, for the most part, is built on a credit growth cycle. Therefore, public and private debt will overhang and rise. Just like it is in the US today. The credit market will also be too complex and opaque. So loans and even mortgages can pose a serious threat to Western economies and financial markets.
*Economist, Sabanche University academic, SETA Foundation researcher