The Past, Present, and Future of Fintech

Any respectable cryptocurrency institution (blog, company, or leader) needs a solid theory on the Origins of Money. While perhaps no metaphor relates the future of finance better than gargantuan rocks with holes as tribal currency, it’s time to posit another idea. (Original credit goes to Xapo’s history of money thesis, the same company building models of Fort Knox across the world for bitcoin billionaires.)

While certainly amusing to explain the future of money with giant rocks, the most universal money (and relatable metaphor) across time and space is gold. So in attempt to build another theory on the origin of money, let’s stick with gold, and consider its place in the story of civilization:

Farming is the foundation of civilization, and farming is a fickle business. Each tribe, every city, farms a certain amount of food per year to feed its population. However, black swan events (bad weather, administrative mismanagement, environmental harm, etc.) regularly decimate one tribe or another’s harvest, perpetually, across the world.

After a failed harvest, an ancient tribe typically had only two options: starvation, or steal from a tribe that had a successful one. Yet, with the emergence of money, gold (and in some cases huge stones), began to present a third option: a unit of account to manage surplus/deficit across a network of human groups.

As in, if one tribe’s harvest failed due to torrential flooding, citizens could trade gold for food from the nearest unaffected group. Gold‘s innovation became a grand method of societal insurance across human networks. Because the next year the tides could turn, a different city’s harvest would fail, and gold reserves could then exchange as supply and demand required.

Eventually tribes became cities, cities formed countries, and human networks spanned entire hemispheres. The eternal problem, however, is that huge swathes of the global network are constantly fragmented by political animosity. During the Cold War, for example, the Western network of the world had a veritable surplus of food. The East, on the other side, had a continuous deficit of food. And in spite of the surplus in the West, countless millions of people died of starvation in the East.

Political dysfunction often makes it impossible for citizens to freely exchange surplus/deficit across borders. Tribalism has a frequent tendency to break apart networks and to isolate certain nodes.

Furthermore and regardless of political fragmentation, a trade network can become imbalanced in and of itself, resulting in catastrophe. John F. Kennedy, at the height of the Cold War was obsessed with this notion called the “balance of payments,” as he declared in speeches:

“American industry will also be in a better position to compete on the world market — increasing the volume of our exports, shifting the balance of payments, halting the drain on our gold reserves, and, thus insuring the soundness of the dollar.”

JFK was also concerned that the “balance of payments” across the world could be financially manipulated by a few bad actors:

“For the rise in the price of gold reflected the hope of a small number of speculators operating in a very thin market that the dollar will one day be devalued.”

Back to our tribal metaphor, this was essentially the question of ‘what happens if my tribe runs out of gold reserves before a famine grips?’ On the scale of modern civilization, it was a looming possibility that America’s enemies, reckless financial speculators, or exorbitant spending could cause gold reserves to become severely imbalanced. Thus threatening the balance of civilization itself.

To make a long story short, the dollar was soon declared as no longer convertible to fixed ounces of gold, thanks to the ominous “imbalance of payments.” Instead, the dollar then became backed only by a more intangible faith in its value- albeit faith in the most powerful country in the world. However, this faith-based unit of account can still be threatened today, whether by political dysfunction or irresponsible inflation. Even worse, billions of people around the world are restricted from accessing the U.S. dollar, and instead rely on the whims of local, often corrupt central banks. Which brings us to today, and the question:

What happens if we can create a form of money that in many ways operates outside of the realm of political animosity, red tape, dictatorship, and geopolitical dysfunction?

Cryptographically secured, globally distributed assets like Bitcoin and Ethereum may present the answer. Or, as in the more eloquent language of the International Monetary Fund’s recent report on the future of finance:

There are ~180 central bank currencies across the world, each subject to endless labyrinths of regulation, corruption, sanctions, and friction. That means if one central bank currency fails, lives of innocent citizens are irreparably destroyed (see: Venezuela, Greece, Zimbabwe, Ukraine, Iran, Turkey, Argentina, etc.). As for the International Monetary Fund cited above, this is the global organization responsible for managing failing countries across the human network. Which is interesting because today, the front page of the IMF website, shows the following graphic:

Bitcoin, a mathematically metered, distributed, and decentrally governed protocol, could potentially become the digital gold for the future of the world’s “balance of payments.” Whereas the existing exchange of gold or dollars can be broken down, isolated, and restricted by political meltdown or regulatory red tape, Bitcoin operates regardless of these omnipresent geopolitical dysfunctions (although it has political problems of its own).

Still, let’s not get too far ahead of ourselves. Before the final step to the future of money as presented in the graphic above, we see the smartphone with a screen full of apps. In other words, symbolizing the amazing innovation of fintech applications of the present day: Visa, Venmo, Apple Pay, GoFundMe, etc.

Yet unfortunately, access to fintech apps is even more heavily restricted by geopolitics than the central bank currencies they transact in.

As in, Apple Pay users in the U.S. cannot exchange money with WeChat users in China. Western apps are firewalled in dictatorships across the world, and companies have to deal with an labyrinth of international, national, and local laws. If a fintech company successfully rolls out in the U.S., they have to navigate the rules of fifty different states, on top of federal laws, in order to comply with strict money transmission laws. Going further across the international sphere is a nearly impossible task, most especially for small startups.

However, these tangled webs of money transmission laws that restrict the best fintech applications of the world today, only apply when dealing with central bank money.

A fintech application that deals only with decentralized currency, can operate above the global labyrinth of money transmission laws that would have otherwise made its mission impossible. Sure, exchanges will need to compete to provide compliant on-ramps in the beginning, but after enough time this parallel system could potentially sustain itself. On-ramps focus on compliance, and the fintech app organizations focus on what they know best: building.

This is where Ethereum comes in. Whereas Bitcoin is focused on being the digital gold to literally replace the central banks “balance of payments”, the Ethereum community seems to be focused on building the user-friendly applications for this new future of money. So that when Bitcoin ushers an economy that is immune to many of the typical dangers of geopolitical dysfunction, there will be financial apps for any person, across every border. Apps that are decentralized, and immune to geopolitical censorship in a similar way as Bitcoin’s “digital gold.” Applications for payments, lending, crowdfunding, charity, peer-to-peer lending, and beyond.

Unfortunately, there are many obstacles that make this future far from certain. Volatility, scalability, and regulatory uncertainty are some of cryptocurrency’s biggest obstacles. The U.S. especially, needs to clarify its regulatory maze, in order for the idealistic vision of an open access global economy to be realized. So that innovation does not flee elsewhere, and so that teams in the U.S. can focus on building what really matters: usable and freely accessible fintech applications.

In order to build a truly open financial system for the human network.

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