Markets
The banking and cryptocurrency markets may be more symbiotic than you think
Many assumed that the advent of cryptocurrencies heralded a revolution in finance. The truth may be that cryptocurrencies’ overall impact on the financial services industry is more evolutionary than revolutionary, writes Circle’s Dante Disparte.
bychykhin – stock.adobe.com
The promise of cryptocurrency is to democratize financial services that would otherwise be captured by brick-and-mortar banks or product classes that require money to make money. The promise of blockchain it’s a third generation of the Internet, what can it be called Web3, that allows people to read, write and own digitally scarce content and resources. Cryptocurrency advocates argue that this amounts to nothing less than an anti-establishment revolution that allows people to forego traditional political economy and opt for technology-based economic self-sovereignty. As the market losses and enforcement actions As the last two years have shown, the durable parts of cryptocurrencies (no more monolithic than banking) may be more evolutionary than revolutionary in financial services. This is a good thing for markets and players looking to revolutionize financial services with new technologies.
Having a forward-looking view of evolutionary innovations in the banking sector is significant. For example, far from a world of always-on financial services, banks have had to undergo profound business model innovations that have broadened their reach while reducing the cost of being a bank – a segment of the economy that enjoys the necessary public support, thus imposing conservative prudential and risk management standards. As the economy has changed over the last 100 years, consumers have demanded access to their money beyond the 9-to-5 banking hours, with a variety of holidays in between. Arguably the combination of labor laws, efficiency and cost reduction resulting from the move from a human teller to the automated teller machine, invented in the late 1960s, is an example of evolution rather than revolution.
With the proliferation of ATMs, the ability of banks to meet their increasingly dynamic customers wherever they were – at a petrol station, traveling abroad or at the oddest hours of the day – was a game changer. The turning point lies in the evolution of the physics of banking and money, while respecting a rules-based economy. The subsequent extension of this model has seen the rise of e-commerce force banks to face a potential “adapt or die” moment, as the growth of internet-scale economic activity has triggered a wave of fraud has metastasized into today’s virulent version of cybercrime. Banks and financial services companies faced a difficult choice: absorb fraud risks by offering customers a zero-liability proposition, or miss out on a permanent transition of the economy to an Internet-based services sector and rise of globalization.
Evolution, not revolution, followed, and in the meantime the number of banks in the United States began to decline from beyond From 14,000 in the 1930s to around 4,100 today, the banking sector is not dead, it has evolved. This evolution required moving towards an ever-active and more open banking environment, powered by the Internet, as part of the technological base that would not only power the economy, but also the banking sector. Insidiously, not all banks, even surviving ones, can keep pace with digital transformation and the cybersecurity arms race, and a bank failure undermines trust in the banking sector. Today, not only is it normal in banking to have account access via the Internet, but also the ability to make transfers, move money between accounts, check balances or apply for a loan, among other integrated services, is the basis of survival.
While many banks are keeping up with the evolution of internet banking, much of the core of banking remains unchanged. Even in the most technologically advanced bank, making a wire transfer is still similar to the landline era. The longer the call travels over the fixed infrastructure, the higher the costs. In banking, the faster a customer needs a payment, in no small measure because the speed in today’s banking system requires staff and overhead, the higher the cost. These activities are further hampered by antiquated or proprietary technologies, which conspire to create a veritable walled garden in financial services. This walled garden imposes the highest costs on the people who can least afford it, even for basic financial services. As an example of legacy technology debt, ACH, Swift, and other interbank payment networks were born in the 1970s. For example, most of these networks and even their public alternatives such as FedNow, launched with a pilot group in July 2023, still propose closed value transfer networks.
It would stand to reason that the advent of mobile-enabled digital wallets and open blockchain ledgers would be seen as revolutionary and potentially anathema to the security and soundness of the banking industry. But, as 2022 has taught us, perhaps cryptocurrencies and banking are not pitted in a vicious deathmatch, but rather present a symbiotic business upgrade as the internet and ATMs did in the past, and as banking services do now mobile. In fact, cryptocurrencies may need banks more than banks need cryptocurrencies; However, in order for the world to make material progress where banking and financial services currently fall short, discouraging responsible technological innovation, especially in areas that can clearly extend the perimeter of the formal economy, it would be short-sighted not only for banks and their regulators, but for the economy in general.
Emerging technologies can often be scary and unsustainable, especially for an industry that must be risk averse by design and regulation. The migration from proprietary server farms to cloud computing was also terrifying. Today, however, cloud computing and all the related tech jargon have faded into the background, and banks, businesses, markets and consumers are better off. The same transition is underway with blockchain-based financial services, as a wave of institutional adoption gains speed. Just like the dawn of the Internet or Wall Street’s continually checkered scorecard, normalizing and managing new technological risks requires banks and non-banks to innovate, collaborate and compete. Indeed, considering the technology and vendors with which most US banks operate, the advent of open source systems should be welcome, even if the first waves of development of the so-called Internet of Value left much to be expected.