Depending on your perspective an evolution or revolution in personal finance is just around the corner… (Hint: It’s crypto.)
Unlike the informational revolution the Internet created, the costs are relatively low considering most of the infrastructure of the World Wide Web has been established and maintained successfully. Most of the groundwork has already been made for this new type of progress. Its infrastructure exists and works relatively well today as people use smartphones, other mobile devices, and personal computers daily to connect to the Internet and communicate with one another practically anywhere in the world. Changing consumer behavior, tastes, and preferences have shifted away from traditional financial services to the more vogue fintech service providers as internet access has risen dramatically. The impact of mobile and digital payments has become more evident as organizations and governments are working towards developing growth in emerging economies by driving financial inclusion and creating more tailored products and services in developed markets .
By observing recent trends and technological developments, it seems that the future of money and banking will consist of mega-funded disruptors and startups that will revolutionize the landscape. They need to develop a functional framework of standards and protocols before making any waves in the financial services industry. Much of fintech investments, estimated about 73%, have gone into efforts to disrupt the personal finance industry seeking to capture market share specifically from the half of the population (3.5 billion people) with limited access to the financial system. Not to mention that at the current stage, 95% of small and medium sized businesses have insufficient access to the financial system (roughly estimated at 245 million businesses). Technologies such as blockchain and mobile devices can be used to solve the problem of providing access to services to those who were previously unserved and undeserved in emerging markets, and have the potential to drive economic growth. The organizations and people that can address the main challenges of scaling the infrastructure, security, and pricing will be the next behemoths in money and banking for this next generation of finance.
The first step will be the establishing the rules of the road by making laws, contracts, and regulations prior to the infrastructure being adopted and made mainstream. Though, it will be tricky as it needs to be within a fine equilibrium. Regulations need to keep pace with the technology to protect consumers, but not be too tight to stifle growth and innovation and not too loose to assist or increase high risk behavior. Generally, regulation tends to be reactionary and slow to respond to new advancements and does more to hinder modernization than support it. Next, coded mechanisms for decision support will be key for consumers before any of the users begin paying for goods or services, moving money for saving or investing, accessing credit, and managing risk. This applies to cryptoassets, distributed ledger technology, peer-to-peer transfer technology, and mobile banking. These trends are very difficult to predict and imagine, though from a high level perspective, their potential and logical progression can be analyzed.
Having been mostly disregarded by many large institutions and financial authorities, they are no longer being ignored as the themes around money and banking are changing from its value to how people are thinking about it now. New services enabling users to easily transfer, convert, and send their money at higher speeds and at lower rates compared to traditional financial services are emerging in the mobile payment space. Taking these services and combining them with cryptoassets, a new paradigm for financial services emerges that allows consumers far more flexibility and security across a broad spectrum of applications such as open application program interfaces (APIs), digital wallets, cold storage, in-app payments, two-factor authentication (2FA) and biometrics. These applications and use case solutions exist or are being developed with some of the most lucrative tech players and VC’s in Silicon Valley backing them. There’s a few impediments in the way of the evolution of cryptoassets and their influence over the future of personal finance and payments: volatility, the digital identity problem, and their crossover from the “Wild West” to Wall Street.
Investors see the robustness and inclusiveness for users and consumers who previously could not access financial services, as well as the opportunities to capitalize on the emerging markets of Africa, Asia, and South America that may very well increase their viability for increased adoption and take demand to the next level for blockchain technologies and cryptoassets. Over the past decade as more users have begun to participate and transact over the various blockchain networks and hold cryptoassets, it has been clear that pricing is something that has a high degree of fluctuation and unpredictability. As a hedge against fiat hyperinflation, cryptoassets offer an alternative to government currency but lack safety as a haven from a risk management standpoint. The VC firms and other investors know that volatility is not everybody’s friend, so naturally it occurred to them to create a product that can act as a store of value and offers stability. That’s where stablecoins come into the picture, peace of mind. In their most ideal form, they are simply cryptoassets with a stable value for a medium of exchange and unit of account. There’s a number of competing projects whose various use cases aim to address this specific problem like Basis (algorithmically-collateralized), MakerDao (crypto-collateralized), and Tether (fiat-collateralized) each wanting to be the quintessential “dry powder” for the cryptoasset universe being the global, fiat-free, digital cash reserve.
The next obstacle is the self-sovereign identity issue, which will be a major the key for large advancements and institutional interest in blockchain technology and cryptoassets. With the physical world around us becoming more and more digital each day, it raises questions around the concept of identity and the rules and rulers of it. Translating people’s autonomy and control over personal identification in the physical world over to the digital world is tricky and a muddling business. In our modern society, nations and corporations have amalgamated identity with driver’s licenses, social security cards and other state-issued credentials. It is complex because this current situation indicates that a person can lose their identity by a state revoking his or her credentials or if they simply cross state borders. Digital identity is multiple times more complicated because it too is very balkanized across one Internet domain to another and its control to a large extent is also centralized. User-centric customization and consent systems within interoperable federated identities are likely going to be the future by requiring the users to be central to the administration of their personal identity. People and organizations storing their identities and its related data on their own devices and managing the validation of their own identifying data is most probable. It presents a unique crossroads to the question of what identity means and if it should be redefined to see that individuals are allowed to have more autonomy over their own identities (and data) in the digital world. This topic specifically is relevant to new platforms and exchanges and their ability to identify, facilitate, and process accredited investors as well as be compliant with Anti-Money Laundering (AML) and Know Your Customer (KYC) policies.
Lastly, the hurdle that blockchain and cryptoassets need to fully take it over the edge is the movement from the “Wild West” to Wall Street and eventually to Main Street. In order to do this successfully, it will need support from lobbyists and representatives in Washington along with the legislators there to help spur institutional interest and investment. The Federal Reserve chairman, Jerome Powell, in his testimony this week before the Financial Service Committee of the United States House of Representatives (“The House”) outlined his thinking on cryptoassets stating,
“… I think the question I was asked that you are referring to was ‘Do cryptocurrencies currently present a serious financial stability threat?’, and my answer was ‘They are not big enough to do that yet.’ That’s what I was saying, not that they are not a longer term thing… They are very challenging because, you know, cryptocurrencies are great if you’re trying to hide money or if you’re tying to launder money… So we have to be very conscious of that. There are also significant investor risks. Investors, relatively unsophisticated investors, see the asset going up in price, and they think ‘This is great! I will buy this.’… In fact, there is no promise behind that. It’s not really a currency… It doesn’t have any intrinsic value. So, I think there are investor and consumer protection issues as well. Another thing I’ll say is that we are not looking at this at the Fed as something that we should be doing, that the Fed would do a digital currency. That’s not something we are looking at. So, mainly, I have concerns. I mean, if you think about what currencies do, they’re supposed to be a means of payment and a store of value, basically, and cryptocurrencies are not really used very much in payment. Typically, people sell their cryptocurrencies, and then pay in dollars… In terms of a store of value, look at the volatility, and it’s just not there.”
His comments were made prior to a hearing called “The Future of Money: Digital Currency” held before a Subcommittee on Monetary Policy and Trade of the House Financial Services Committee. The purpose of the hearing was for the Subcommittee to “evaluate the merits of any uses by central banks of cryptocurrencies, and discuss the future of both cryptocurrencies and physical cash.” Powell has maintained his stance since his confirmation hearing as the central bank’s top executive where to the Senate Banking Committee he expressed,
“They don’t really matter today; they’re just not big enough. There isn’t close enough volume to matter… in the long, long run, cryptocurrencies and things of that nature could matter.”
It is interesting that despite the undeniably bearish perspective for crypto markets during this year that there has been a “counterintuitive” pace of investment that has accelerated to unprecedented levels. According to Grayscale Investments (a firm overseeing investments into cryptoassets for over five years) and its first ever digital asset report released this week, it revealed that the majority of capital inflow (56% of all new investments) during the first half of 2018 was institutional capital. Grayscale’s report also suggests that major investors potentially see this year’s drawdown as a prime “buy the dip” opportunity to enter the crypto markets just as the infrastructure to facilitate institutional entry is materializing. Other significant news this week came from the $6.3 trillion asset management giant BlackRock – the world’s largest provider of exchange traded funds (ETFs) – saying that they were beginning to explore Bitcoin.
At a time when fear, uncertainty, and doubt is high in the markets, the financial watchdogs in the United States are increasing their scrutiny over cryptoassets and blockchain projects, especially initial coin offerings (ICOs). This comes after the SEC has said it is currently investigating dozens of token projects, and its chairman Jay Clayton recently said in a public hearing that he believes every ICO he has seen is a security. The SEC chairman after expressing his distaste that people were conducting them when they should know they ought to follow the private placement rules in the same hearing remarked from a regulatory perspective,
“I want to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story.”
Pending that cryptoasset platforms and exchanges get the SEC’s approval, they may be able as federally regulated venues for listing and trading digital tokens and coins deemed to be securities. Coinbase, who has predominantly regulated by a patchwork of state authorities, made news this week regarding a trio of acquisitions saying it got the nod from the SEC. In reality, it did not as that authority was not involved in the approval process. Although FINRA also seemingly granted its approval, one of their spokesmen declined to comment to Bloomberg. Work still needs to be done before they can allow clients to trade security tokens (or participate in Securitized Token Offerings) and the company provided an update indicating that they will be in ongoing talks with regulators. Circle Internet Financial Ltd., one of its competitors, plans on seeking a federal banking license to provide more services to customers as well as pursuing registration as a brokerage and trading venue with the SEC. It is very clear at this time that there are many more steps before the journey is complete and investors can buy and sell tokens deemed to be securities.
Over the next year, these topics and trends will likely be the primary focus as the blockchain and cryptoasset space experiences expansion and maturation. Decoupling governments and money may provide a remedy to hyperinflation, politically driven economic controls, and other damaging policies that result from mismanagement of national economies. New doors and possibilities open up for decentralized applications, especially insurance, prediction markets, savings accounts, trading pairs, credit and debt markets, remittances, and much more. If it continues down the road that its heading on, very soon individuals and institutions will be able to utilize platforms and exchanges to issue and invest in tokenized assets whether they are bonds, equities, funds, companies, real estate investment trusts, fine art pieces, antiques, or collectibles. These trading platforms and exchanges hold the potential to handle billions to trillions of dollars eventually in tokens sold by companies in securitized token offerings. So long as progress is made towards making these hurdles, the demand for the blockchain technology and cryptoassets so too will increase for the foreseeable future. These are important precedents in the crypto universe and community making it a stronger ecosystem for more users, better applications, and an enhanced suite of financial services and investment grade products available to accredited investors and institutions.
Do you think the crypto (r)evolution will be tokenized?