Fear and loathing in financial services

The notorious Gonzo journalist would have loved the world of crypto and DeFi the global financial system is entering.

Rife with schemers, scammers, visionaries, villains, chancers and cheerleaders, the chaos of the digital era would have been perfect fodder for Thompson. Yet it is not so much his vivid, hallucinogenic descriptions but his insight that even the most bizarre can become mainstream that resonates today.

“It is not so much his vivid, hallucinogenic descriptions but his insight that even the most bizarre can become mainstream that resonates today.”

In his 2013 book, The Bite in the Apple: A Memoir of My Life with Steve Jobs, Chrisann Brennan argued Jobs epitomised Thompson’s rallying cry because anyone was qualified to make a difference if they had the heart, mind, and will to do so.

Apple had its foundation in a period of chaos. As did Microsoft, Amazon and many others. Today they are fixtures in the modern economy.

What is remarkable in finance though is how rapidly the truly weird are turning Pro. Blockchain, the platform underpinning cryptocurrencies, is now being used for even the most mundane of transactions while supporting emerging, digital classes like digital art via Non-Fungible Tokens (NFTs).

Meanwhile, less than a year after the prevailing view among central bankers was crypto was interesting but hardly significant, major projects are under way to adopt CBDCs – central bank digital currencies.

One of the world’s most powerful private sector bankers, JP Morgan Chase’s Jamie Dimon, still thinks cryptos are a dodge but his bank is prepared to facilitate transactions because customers want it.

The pace of disruption is growing and one time leaders in the upending stakes, such as Buy Now, Pay Later groups, are seeing the need to add crypto and other new technologies lest they are left behind in marketing terms.

Even established banks are adding crypto to their everyday banking apps.

Becoming mainstream

ANZ’s New Zealand chairman John Key noted recently both retail and central banks need to seize the opportunities presented by cryptocurrencies or risk being left behind.

At an event hosted by the think tank NZ Initiative he said cryptocurrencies can make the payments system more efficient.

“I can’t tell you where Amazon and Facebook and these guys are going to end up,” Key said, “but what I can tell you is they could easily become part of a very globally integrated system - not only just for purchasing goods and services, but within the payments for that.

“There’s a lot of money there and a huge amount of volume and I just think over time that space is going to change dramatically and banks are going to have to adapt. If they don’t adapt, their income streams are going to fall.”

Key makes a critical point: cyber finance is going to become mainstream – with or without incumbent players.

There’s no doubt the rules of battle will be determined by regulation and national jurisdictions but that will be to restrain illegal activity, money laundering and tax avoidance while maintaining power for national governments.

Within those constraints, regulators, supervisors and the market recognise the opportunity new technologies are bringing for new products and services and greater efficiency with existing ones.

Crytpocurrencies like Bitcoin are again at or near record highs on stock markets – and, in another sign of mainstreaming, are being analysed by investors using well established fundamental analysis applied to many volatile commodities.

Ethereum, another crypto near record highs, is also benefiting from its role supporting decentralised finance – DeFi.

DeFi refers to blockchain-based services that don’t rely on financial intermediaries including banks, brokerages and stock exchanges. DeFi applications are typically built on the Ethereum blockchain.

Critical requirements

As The Financial Revolutionist explains “ethereum also underlies many non-fungible tokens, which function as a type of digital proof of ownership for online artifacts. Non-crypto-native fintechs are also tapping DeFi applications to introduce customers to blockchain-backed financial products.”

A new report from Juniper Research argues using blockchain for cross-border settlement will drive significant cost savings for banks, rising from $US301 million in 2021 to $US10 billion in 2030.

The report, Blockchain in Financial Services: Key Opportunities, Vendor Strategies & Market Forecasts 2021-2030, found large trading nations, such as the US and China, will see the biggest cost savings from blockchain use, “aided by high remittance volumes and increasingly favourable regulatory environments. In these high-value remittance markets, potential for blockchain to meet critical requirements of fast, reliable, and transparent payments will be a key driver of adoption”.

While many of these developments have been on the horizon for some time the pace at which we’ve reached the horizon has been spectacular, leaving many stakeholders, particularly governments and regulators, to fast track plans.

Pros and cons

The recent Sibos conference on global payments was dominated by cryptic debate.

Celent principle Alenka Grealish was an attendee and took away three key themes:

1. Increasingly financial institutions recognise banking and payment systems have not kept up with the pace of advancements in the digital economy and trading. Notably ecommerce is always on, fast and automated while banks rely on batch processing and messaging, clearing, settlement can take days. In response, a growing number of FIs and FI-back consortiums are harnessing blockchain, smart contracts, and digital assets to align the performance of banking/payments systems with those of the digital economy.
2. The Internet of Value is beginning to crystallise. The introduction of CBDCs will accelerate the mainstreaming of digital assets.
3. Cryptocurrencies are gaining legitimacy as a new asset class. When Bitcoin failed to gain traction as a medium of exchange for legal activities, the pivot was blockchain will be the great disrupter. Now Bitcoin is leading as a new asset class, initially driven by retail investors, followed by institutional investors. Institutional investors translate into more sophisticated demand which in turn, accelerates DeFi growth.

Paradoxically, it is the participation of the established and official sectors which have fuelled the acceleration of the weird into the professional ranks. As a critical mass of consumers become involved, these sectors can’t stand by and do nothing. Once they enter, a new wave of disruption is fuelled.

Where once crypto was viewed with fear and loathing, today the tone has shifted to caution and interrogation.

Macroeconomic implications

The Bank of International Settlements (BIS), the global banking regulator, has been coordinating an increasing amount of work.

Its latest review, Central bank digital currencies: motives, economic implications and the research frontier, finds central banks, by issuing CBDCs, will aim to improve the current two-tier payment system.

“The policy goals include payments inclusion and efficiency, as well as safeguarding competition, data privacy and payment system integrity. In this way, CBDCs respond to the digitalisation of the economy and the key role of data in the monetary system.”

Nevertheless, the BIS finds important questions remain, notably regarding macroeconomic implications and the coordination of cross-border payments.

In Australia, these sentiments were evident in the latest annual report of the Reserve Bank (RBA).

The RBA has updated it strategic priorities for payments policy and will focus on the shift to digital payments, research CBDCs and other innovations, and understand the impact of new tech and players while identifying and resolving any competition and efficiency issues associated with new technologies and new players in the payments system.

Even the Pros are entertaining the weird.

Andrew Cornell is Managing Editor of bluenotes