Without Uber, would many taxi services have developed their own ride-sharing apps or started accepting credit cards by this time?
In static industries with little competition, new competitors and new technologies are needed to drive change. And, if managed well, this change need not even threaten incumbents, as they can embrace new technologies and business models to keep pace with what consumers expect from new entrants.
These same forces confront banking and financial services. Just as Uber and Lyft built a new model of on-demand consumer mobility, the emerging world of blockchain-based financial services has propelled mobile-centric banking and payments as well as mobile-powered capital markets. software. While mobile and electronic banking has been around for a while, the emergence of crypto is enabling new levels of user control and access with little more than a personal digital wallet.
Ultimately, consumers win where there is more choice. When traditional taxis had a monopoly, they would often drive past megaphones of a certain complexion or refuse to drive in areas “on the wrong side of the lane”. Had the new challengers not expanded access to mobility and financial services, these practices would have remained the norm.
Similarly, banking deserts have long existed in areas that lacked population density or household incomes high enough to be served by traditional bank branches. For many people, even the mundane activity of cashing a check would still incur costs without the advent of mobile deposit apps, showing how, over time, emerging technologies and established business models are eventually converging. .
As fast-growing fintech companies have blurred the lines between the end of bricks and mortar and the beginning of financial services, many commentators have framed this convergence as a zero-sum game, in which even central banks are likely to be dethroned by new forms of digital. silver. Still, the Cambrian explosion of cryptocurrencies, blockchain-based transactions, and fintech should be seen more as an opportunity than a threat.
Currently, at least 105 central banks, representing 95% of global GDP, are considering the merits and risks of creating central bank digital currencies or CBDCs. But the global race for the digital currency that matters is not about the values that are transferred; they are the rails that will convey these values between parties, especially across borders. Introducing a CBDC without considering these rails would be like designing a high-speed train without building the tracks or the network of stations.
Even in the age of widespread smartphone connectivity, interbank payments and transfers (the train) will still need to make regular stops to account for counterparty risk, to confirm transaction settlement, and so on. Without planning for these intermediary roles, CBDCs would simply be accelerating the elimination of mid-sized banks – which would become totally redundant – doing nothing to close the yawning financial inclusion gap around the world. This is where the blockchain-based bank could leave its mark.
As things stand, banks are often subject to vendor capture by a small number of “accredited” technology vendors who handle back-office, middle-office and front-office operations. Many banks thus operate at the mercy of systemically important institutions hidden in plain sight. In the United States, payroll providers fall into this category. It is the dependence of small and medium banks on these proprietary, analog and vulnerable technologies that puts them in a losing position vis-à-vis the larger banks, making their business models look like unevolved taxis after the arrival of the ride- hailing applications.
JPMorgan Chase, on the other hand, has a digital transformation budget of US$12 billion and a highly capable blockchain team (Onyx) that has already processed earth-to-satellite payments using contract technology. smart – a feat that highlights the importance of the underlying transfer rails. Once one of crypto’s biggest critics, JPMorgan has recognized how perilous it would be to avoid a potentially transformative new technology.
But many questions remain. Can less financially and technologically endowed institutions keep pace? How will banks and banking services adapt to a future of instant cross-border transfers, all facilitated by a trusted code? Will the emergence of open source financial market infrastructure be an all-consuming source of disruption and disintermediation, or will these technologies simply level the playing field?
Undoubtedly, crypto and blockchain have a branding issue, not least because they are associated with a highly technical lexicon and inscrutable jargon. But one day soon, the underlying technology will move into the background, where it will power a system-wide upgrade of the rails that move value around the world. The change will relate to the optionality of the payment and the banking system, and not to the substitution.
Personal checks have not replaced paper money. Rather, they added value by giving people the ability to set an expiration date for payments with greater security than carrying cash. Perhaps most importantly, they also improve financial system interoperability through routing and account number standards.
Likewise, future routing and account numbers will reside on digital wallets with near-ubiquitous global access to well-regulated, always-available financial services. Some call it an Internet of value; others call it the third generation of the Internet, or Web3. Whatever the nickname and whatever the ups and downs of the market, breakthrough innovation is here to stay.
Such innovation should be encouraged, developed and exploited, including by financial services companies and mainstream governments around the world, lest they find themselves consigned to history when the Amazons of Web3 emerge.
– Dante Alighieri Disparte, Director of Strategy and Head of Global Policy at Circle, is a Fellow of the Council on Foreign Relations and sits on the World Economic Forum’s Digital Currency Governance Consortium.© Project Syndicate 2022www.project-syndicate.org