Photo by Reuters/Scanpix.
Would many taxi companies have created their own hailing apps or started accepting credit cards if not for Uber? In static sectors of activity with little competition, it is precisely new competitors and technologies that are needed to drive change. Moreover, if properly managed, such changes do not necessarily threaten incumbents, as they too can introduce new technologies and business models to satisfy the consumer expectations that newcomers satisfy.
The same forces are at work in the banking and financial sector. Just as Uber and Lyft created a new model for on-demand consumer mobility, the emerging world of blockchain-based financial services has fueled mobile banking and payments, as well as software-powered capital markets. If mobile and electronic banking have been used for some time, the emergence of cryptocurrencies provides opportunities for new levels of user control and access, which even a personal digital wallet is sufficient for.
Ultimately, where there is more choice, consumers win. When traditional taxis had a monopoly, they often simply passed passengers of a certain body type who stopped their cars, refusing to go to poor or dangerous areas. Had the new competitors not expanded access to mobility and financial services, this practice would have continued.
Similarly, areas where the population density is too low or household incomes are not high enough to justify building traditional brick-and-mortar bank branches have long existed as banking deserts. For many, even an everyday activity like cashing a check would still cost money if it weren’t for the advent of mobile deposit apps. This shows how emerging technologies and established business models converge over time.
As fast-growing fintech companies blur the lines between where physical buildings end and financial services begin, many commentators have described the merger as a zero-sum game where even central banks are at risk of being dethroned by the new digital money. However, the Cambrian explosion of cryptocurrencies, blockchain-based transactions and financial technology should be seen more as an opportunity than a threat.
Currently, at least 105 central banks, representing countries with a GDP of 95% of global GDP, are reviewing the benefits and risks of developing central bank digital currencies (CBDCs). However, what matters in the global digital currency race is not the value transferred, but the “rails” – the means by which that value will be transferred between countries, especially across national borders. Introducing CBSV without these measures would mean building a high-speed train without laying tracks or creating a network of stations.
Even with widespread smartphone connectivity, payments and interbank transfers (the train) will still need to stop regularly to assess counterparty risk, confirm transaction completion, etc. i.e. Without providing for these intermediary roles, CBSVs would simply accelerate the elimination of mid-sized banks (which would become completely redundant), but would do nothing to close the gaping financial inclusion gap in the world. This is where blockchain-based banking could make its mark.
In this situation, banks often fall into the trap of having a small number of “approved” technology providers that handle indirect servicing, orchestration and control and direct servicing operations. This is how many banks operate at the mercy of systemically important and hide-in-plain-sight institutions (in the United States, payroll providers fall into this category). It is the reliance of small and medium-sized banks on these proprietary, analog and vulnerable technologies that puts them in a losing position against the biggest banks, and their business models then look like imperfect taxis with the advent of ride-hailing apps.
JPMorgan Chase, by contrast, has $12 billion. USD digital transformation budget and a highly skilled team of blockchain specialists (Onyx), which has already managed to process payments between satellites orbiting the earth using smart contract technology. This achievement highlights the importance of transfer instruments. JPMorgan, once one of the biggest bettors of cryptocurrencies, realized how risky it would be to abandon a potentially transformative new technology.
However, many questions remain unanswered. Will institutions with less financial and technological capacity be able to keep up? How will banks and banking adapt to a future of instant cross-border transfers using a trusted code? Will the emergence of open-source financial market infrastructure become an all-encompassing disruptor and driver of financial disintermediation, or will these technologies just level the playing field?
To be sure, cryptocurrencies and blockchains face a branding problem, due in no small part to their association with highly technical lexicon and incomprehensible jargon. But one day soon, the core technology will take a back seat, where it will simply enable a system-wide upgrade of the “rails” on which value moves around the world. This change will be about the free choice of the payment and banking system, not a change.
Personal checks didn’t replace paper money, but rather added value by giving people a more secure way to set a payment expiration date instead of carrying cash around. Perhaps more importantly, they also improve interoperability within the financial system through standards for routing and account numbers.
Similarly, in the future, routes and account numbers will be stored in digital wallets with near-total global access to well-regulated and always-available financial services. Some call it the Internet of Value, others the third generation of the Internet, or Web3. Whatever we call it, whatever the ups and downs of the market, this breakthrough innovation is not going away.
Such innovations should be encouraged, developed and adapted. This is what the world’s traditional financial services companies and governments should do, so that when the new Amazons of Web3 emerge, they are not a thing of the past.
Commentary by Dante Alighieri Disparte, Chief Strategy Officer and Head of Global Policy at Circle
Copyright: 2022 Project Syndicate.
The opinion of the author does not necessarily coincide with the editorial position.
Choose the companies and topics you are interested in – we will inform you in a personal newsletter as soon as they are mentioned in “Verslo žinija”, “Sodra”, “Registrų centura”, etc. in the sources.