Alex Tapscott is a venture capitalist, co-author (with Don Tapscott) of Blockchain revolution: how the technology behind bitcoin and other cryptocurrencies is changing the world and co-founder of the Blockchain Research Institute in Toronto. The following excerpt, written by Alex Tapscott, is from his new book Financial services revolution, available in all good stores now.
Facebook’s foray into cryptocurrencies shouldn’t surprise any tech student. After all, the digital revolution has transformed almost every aspect of our life, with the exception of banking. Financial intermediaries depend more or less on pre-internet technologies. Libra is simply the latest innovation to drill holes in the old model, establishing the battle lines for the future of our digital economy.
The stakes are high: the next era of trade, economic activity and money is uncertain. Computer scientists rewire the economic power grid, and software engineers re-order human affairs, revealing our lack of understanding of fundamental concepts like privacy, freedom of expression, and the role of big business in our lives. As the digital owners of this new economy – Facebook, Google and others – question the supremacy of the big banks, decentralized cryptocurrencies like bitcoin force us to confront our understanding of money, value and value. a stronghold of regulations built around these concepts, originally to protect those who used the system, and now to preserve the status quo. It is ultimately a struggle for control, as many parties – totalitarian governments in China and elsewhere, legacy financial institutions, large social media companies and other digital conglomerates, technology pioneers and other stakeholders – compete for even greater influence.
Human beings have become increasingly comfortable with the software and technologies replacing human actors in many industries and many facets of everyday life. Finance is the most important industry, the most consistent and so far the most irremovable of all. The legacy banking system, digital conglomerates like Facebook, free and open cryptocurrency platforms such as bitcoin and, of course, governments are inexorably heading for a collision of historic proportions. The crash will be cataclysmic. Prepare for impact.
Cryptographic assets and open funding
“They say that software eats the world. Soon the tokens will eat the world, ”said Tyler Winklevoss. He is right. The blockchain is the first native digital with added value: we can use it to program practically all the assets under the sun. In the latest edition of Blockchain Revolution, we have provided a taxonomy of these assets to help the reader understand their many differences. These were cryptocurrencies (bitcoin, Zcash, litecoin), platform tokens (ether, ATOMs, EOS), utility tokens (REP from Augur), securities tokens (theDAO, Munchee’s MUN , Vocean crypto bond), natural asset tokens (carbon, water, air), cryptographic collectibles, stable coins and fiat cryptocurrencies (Petro, the future Chinese crypto yuan).
In this section, we will focus on digitizing existing financial assets in the form of securities tokens and stable coins backed by trusts. It is the world of open finance, which differs from decentralized finance, which we will discuss below. Open finance refers to the opening of traditionally closed, analog and proprietary systems to blockchain and digital assets. Open financing will prove to be an opportunity and a challenge for incumbents, regulators and market players all over the world.
Consider the actions. The global “stock market” is actually a loosely woven mosaic of local and regional exchanges, banks, brokers, depositaries, clearing houses, regulators, asset managers, fund administrators and ‘other market players and intermediaries. Although order books and market making are largely digitized, the underlying function of how these different parties compensate, settle, maintain and record ownership of assets is outdated.
Blythe Masters, former CEO of J.P. Morgan, the investment bank, and former CEO of Digital Asset, told us:
Keep in mind that the financial infrastructure has not changed in decades. The front has evolved but not the rear. It is an arms race in technological investments to accelerate the execution of transactions so that, today, competitive advantages are measured in nanoseconds.
She was referring to high frequency trading. “The irony is that the post-trade infrastructure hasn’t really changed at all.” Blockchain has the potential to drastically reduce cost, complexity and friction in the markets by allowing market players to connect, empty and settle instantly with peers.
0x, an open protocol that allows P2P exchange of assets on the Ethereum blockchain, is a pioneer in this regard. While not all of the assets traded on this exchange are financial, some are. To date, 0x has made more than 713,000 transactions worth $ 750 million [as of 9/2019]. As the underlying platforms like Ethereum, Cosmos, Polkadot, EOS and others evolve, so will the capacity of the applications and financial use cases that use them. tZERO, a publicly traded Overstock subsidiary, has also made great strides in this area. In the summer of 2019, Overstock announced that the shareholders of the listed company would receive dividends in the form of a digital token listed on tZERO. Patrick Byrne, former CEO of Overstock, said of the decision: “Five years ago, we decided to create a parallel universe: a legal capital market based on blockchain. We have succeeded. “Byrne has reason to be optimistic that this parallel universe of digital assets will create challenges and opportunities for new entrants and incumbents.
Security tokens not only reduce friction, cost and complexity. They also allow broader participation in capital markets, as they lower barriers and allow us to imagine building liquid markets for a wide variety of assets, from real estate to private equity and venture capital ( VC). Greater transparency, market depth and liquidity should improve prices, access and the general functioning of the markets.
Not all assets will function as tokens. But we see tokenization working when several conditions are met:
1. Is there an established or unexploited asset demand?
2. Do people or institutions want to buy the asset but cannot currently?
3. Are there significant barriers to the transferability or liquidity of an asset?
4. Are transaction costs high, spread too widely, or are other barriers so prohibitive that market participants choose to avoid the asset class entirely?
5. Is blockchain required to digitize the asset – that is, the asset simply cannot be used in a traditional system?
6. Is the industry strongly consolidated or very fragmented?
If the answer is yes to most of these questions, then the asset is a likely candidate for securities tokens, and a highly fragmented market should facilitate experimentation or innovation. The symbolized equity, debt and real estate already exist. We might eventually see symbolized sports teams, music catalogs, wine portfolios, fine art and event tickets, to name a few. Securities tokens can help improve access to wealth creation for the average person by lowering barriers to entry and expanding investment options.
This opportunity is not without challenges: it lacks technology, enterprise, market and regulatory infrastructure. Anthony Pompliano, co-founder and partner of Morgan Creek Digital, believes that securities regulators “enriched the idea of the wealthy and… enshrined it in law. They took the best performing assets with the best returns and put them behind a firewall. He was referring to the Securities and Exchange Act of 1933, which limited many investment opportunities to wealthy individuals. He called it a “violation of the American dream”. While these types of investment opportunities remain limited to the wealthiest of the wealthy, we have not really democratized the benefits of blockchain-based financial innovation.
Consider the accessories. Props is a native digital token created by the popular video application YouNow, although it can work in any application. YouNow received special authorization from the SEC to make a settlement offer for its token, approved in July and already launched. Think of props as stock options for the concert economy, for people like Uber drivers, homeowners who rent their homes on Airbnb, or content creators. On YouNow, these people can make money by sharing something on the platform. Otherwise, they cannot directly participate in creating value from the growth of currently popular platforms such as Uber or Airbnb. Likewise, Uber drivers can be paid for completing a trip, but they don’t get a share of the $ 75 billion Uber worth. The so-called “sharing economy” is actually an “aggregation economy”, where powerful platforms capture most of the value and where contributors get the crumbs.
With Props, contributors to platforms like YouNow, and soon maybe Uber, Airbnb and others, can be paid for their contributions and earn Props tokens. The supply of Props is limited and growing at a predictable rate, therefore, the more applications use the native token, and the more people earn and hold them, the higher the value of Props. Any application can connect to the Props application programming interface (API) and allow contributors to start gaining real value in Props. Founders and investors will no longer be the only beneficiaries of the platform’s growth. In the context of financial services, we can consider accessories both as a new payment rail to organize contributors in a network and as an incentive mechanism, like equity, to stay on the platform and add to it. the value. Already, 200,000 people use Props on YouNow with 100,000 Props transactions per day. The plan is to add more apps over time. As Props becomes ubiquitous, other apps may be forced to offer it to contributors – and voila, a new digital economy is born.
This new cornucopia of digital tokens will require common standards, with groups like the Enterprise Ethereum Alliance (EEA) helping to lead the charge. Marley Gray of Microsoft, who is a key contributor to the EEA Token Alliance, told us that common standards “remove the barriers to defining assets.” Blockchain should be like using the payment network today. People should just use it. “He added,” You don’t have to understand blockchain to use tokens. Let’s get to the point where we actually generate business value. Let’s put that aside, let’s make it common. Convenience tokens so that any industry or business can create them. “
If there are different assets inside silos that do not speak, tokenization will have a limited impact. It is only through common standards and interoperability that tokenization can reach its full potential. Stable parts supported by Fiat, such as Tether, USDC and Libra are other examples of open funding. Not all stable pieces are backed dollar for dollar by reserves; and some, such as DAI created by MakerDao, exist entirely in the world of crypto assets. Already, stablecoins have exploded in value, and for good reason. They offer an easy way to instantly move peer-to-peer value at a fraction of the cost of traditional payment systems like Venmo. Consider the findings of TradeBlock, a provider of digital currency trading tools for institutional investors:
[T]he total chain transfer volume on the largest stable coins has now exceeded Venmo’s total payment volume. … [F]The costs associated with sending stable parts over the Ethereum network were overshadowed by merchant fees and associated Venmo service fees. Of the five largest ERC-20 tokens, customers spent only $ 827,000 on Ethereum network fees to transfer more than $ 37 billion. During that same period, fees and charges for associated services paid to Venmo are expected to reach $ 150 million.
Given this explosive growth, Facebook, Walmart and JPMorgan – and perhaps Google and Amazon – are including stable parts in their growth plans.
Cameron Winkelvoss said: “We are going to see many companies issuing coins”, adding that “a company like Facebook with its size and stature is very encouraging to validate the general idea of new and better payment rails powered by crypto . Whether Libra or not [that succeeds], time will tell. “Consider Amazon:” You can pretty much get a package anywhere in the world. What you can’t do is get paid for this product. Amazon Coin could create the possibility of extend the payment system to the ends of the earth. ”Without a doubt, Libra is just the first end of this new competition among the world’s tech giants.
Pompliano believes that Libra is a positive development but that it is also good for bitcoin and other cryptocurrencies. He said, “It’s the symbolic density theory – if you set up a restaurant across from another restaurant, the traffic in the two restaurants usually increases. Everyone’s pedestrian traffic increases as you increase density. So with every legitimate crypto that is created and added, it increases the overall value proposition of bitcoin. Ryan Selkis, founder of Messari, summed it up simply by saying that Libra will act as a “lead blocker” for other crypto assets.
Not everyone is as optimistic about corporate coins. “I am not afraid of nuclear collapses or terrorist attacks. The only thing I’m afraid of is Facebook’s cryptocurrency, “said Ethan Buchman, co-creator of Cosmos. “Facebook perfected digital colonialism. While the first colonialist societies enslaved the bodies, Facebook enslaved the minds. It will be [its] historical heritage. “With Facebook setting up with the United States Federal Trade Commission for $ 5 billion and with the SEC for $ 100 million, while being burned out by lawmakers, his road to launching Libra will be difficult, and the leaders of Facebook will have to regain the trust of those they drop. This is a daunting challenge.
Yet the technology has its own dynamics, making it unlikely to derail at this point. The financial markets – from stocks to bonds and everything in between – will not be recognizable. The incumbent operators who rely heavily on the blockchain will survive this coming revolution.
Financialization and digitization of everything
If land was the most important asset of the agrarian era and oil was the most important asset of the industrial era, data was the most important asset of the digital era. Information is the foundation of our digital economy and the cornerstone of some of the world’s largest and most profitable businesses, such as Facebook and Google. Think of the reorganization of the world’s largest companies in the past 20 years (see below). During this period, data has replaced oil as the primary driver of commercial value worldwide, and information giants have supplanted industrial giants.
We create all of this data, but we don’t own it – the digital owners do. This is problematic because it means that we cannot use this data to better organize our lives, we cannot monetize it and it can fall into the wrong hands.
Information is an example of an asset that does not have an open and transparent market where stakeholders can discover the price or exchange its value. This is part of a much larger problem that the digital age has exacerbated. Many assets have been outside market forces and may be overexploited or captured by large intermediaries. Like water, air or oceans, powerful companies exploit the data and, in turn, the people who created it.
In a major research report for the Blockchain Research Institute, technology theorist [and CoinDesk’s very own] Michael Casey suggested that tokenization and digital scarcity caused by cryptographic assets represent a solution:
Blockchain technology and the cryptocurrencies, tokens and other digital assets it has spawned could point us towards a programmable money model that integrates automated internal governance of common resources and encourages collaboration between communities. Digital scarcity, when applied to these tokens, treats our increasingly digital world differently from the pre-digital world. This raises the possibility that our money itself becomes the tool for achieving common results.
The developers of new decentralized applications symbolize all kinds of resources – electricity and bandwidth for example, but also human qualities such as public attention for online content or honest fact checkers. … Once a community associates rare tokens with rights to these resources, it can develop controls on the use of tokens that help manage public goods. It is dynamic money whose role goes beyond that of a unit of exchange, money which is a direct tool for achieving the objectives of the community.
In his report, Casey presents a new taxonomy for these tokens and suggests at least five different types: media, identity, honesty, decentralized computing and the environment.
The potential of these tokens is very important to allow new savings around assets that were previously in the commons (like the environment) or captured asymmetrically (like our identities) by some big technological intermediaries. In addition, we can symbolize anything of value to ensure that creators receive fair compensation. Now, individuals can capture the value of the data they produce on their own online site, by choosing to keep it confidential or to provide informed consent for its use, which makes them money. Individual artists can receive a fair payment for the music they create while their songs are browsing the Internet by collecting royalties. People can enter into agreements enforced by smart contracts and verified by oracles in the prediction markets. These capacities will undoubtedly extend from the trivial (sports betting) to more significant markets such as the derivatives markets.
The lines defining “financial services” will begin to fade as everything becomes an asset and everyone becomes a player in the market.
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