Financial Systems Innovation
I Nance. Is part of almost every endeavor, in the modern world from. Choosing where to go on holiday to. What job to take to, where we do our daily shopping little. In our modern world would, be possible, without finance no, functioning, companies no, shops no factories. No products. One. Just has to look at a nation with hyperinflation, to, see that without finance, much, of human coordination, dries up and ceases to exist. The course of thousands, of years our global financial system has evolved, to become an extraordinarily complex. System, a multiplicity. Of overlapping, networks that move trillions, of dollars a day and serve, billions, of people, enabling. Them to make purchases, invest. Their savings and trade, with each other. But for all of its great achievements, behind the scenes our Industrial Age financial, system is not feeling so well it's a machine of incredible, complexity, that makes it slow expensive. Lacking. In transparency and, is thus prone to fraud it, promotes. Speculation. And instability, and it, seems to create dangerous, concentrations. Of wealth that, leave societies, divided, it. Begs the question, what would a functional, financial, system look like that, is normalized, for an age of information. Globalization. And works, for the economy, and society in our. Paper on financial, systems innovation, we, trace out the past present. And future of, the financial, system in an attempt to answer this question. Financial. Systems. Information, layer that records, and mediates economic, activity, finance. Serves the function of accounting, for and exchanging, economic, value, financial. Systems allow funds to be stored and moved between economic. Actors they, enable individuals, and organizations. To share and, exchange ownership. With the associated, risks and returns. Over the course of history, the specific, financial institutions, through which this has being realized, have taken many forms in the, past centuries, the world has gone from a pre-modern. Community-based, financial, system to an industrial age, centralized. System to, today where, we are building new forms, of global financial institutions based. Wholly upon, information. Technology. Our modern, financial, systems, were born out of the coalescence, of new innovations, in record-keeping, in the, form of double entry accounting the. Formation, of the new political unit, of the nation-state and their, single common, economic, systems that spanned. Over a relatively, large geographic, area the. New economic, model of capitalism that, was specifically, designed to create large financial, accumulations. While, large investments. In industrial, infrastructure, required ever greater and more, sophisticated, institutions. For, the amassing, storing. Investment. And exchange, of financial, assets, with. Industrialization. Our, systems, of organization went. From the local and regional level to, the national level in this, context, small, local, community, banks no longer sufficed, as a centralized, national banking, system came, to dominate as, large. Industrial, installations require, the concentration. Of large capital, investment. Centralized. National banks, were really driving forces, in expansion. Of capitalist, economies, over, the course of the past centuries. During, the 20th century the. Banking system made many innovations, to serve customers better and move money more efficiently, from, the Swift interbank exchange, system to ATMs, credit, cards and online banking huge. Improvements, in financial, services were made with. The confluence, of major trends, in the late 20th century from. Financial deregulation, and, globalization, to the rise of information, technology, and financialization. The, financial, system changed, hugely within, the space of a few decades, it. Expanded, to become a global system managing. Vast flows of capital, organizing. The cross linkages, of assets, and liabilities that, interconnect, people and organizations. Around the planet it is, now difficult for, us to imagine that as little as 40 years ago banks. Were just banks as within, the space of these years fuelled, by information, technology. Financialization. Has become an all pervasive force, in our world although. With. Globalization, and information, technology, the system has expanded, in scope as more, and more spheres of economy, in society, have become financialized. Through a veritable explosion of. Financial, instruments the. System is today prevalent, with issues that create many, negative, externalities. For society, and economy. Information. Technology, has worked to make the system increasingly. Abstract through. The creation of ever more complex, derivatives, and structured, products, with, a growing disconnect between finance.
And Economy, and society today. Only, a small fraction of financial, flows coming out of the largest financial institutions. Are going back for investment, in real economic activity. The end. Of industrialization. And the expansion of financial, products, makes, simply, much more lucrative to create new kinds of financial products and speculate, than, invest, in the real economy this. Disconnect, in speculation, makes the system inherently unstable. And, prone to collapse which, is externally. Highly, costly to the economy, at large Bart. Ehrman and Baudin are estimated. The financial, crisis, destroyed, asset, values equal to 50% of, world GDP at, that time. The system has scaled it's, centralized, architecture has, worked to make it overbearingly. Complicated. Internally, behind. The digital facade of online banking and mobile apps banks. And insurance companies are, overloaded, in paperwork while. Layers of intermediaries. Each charging, their own transaction. Fees make, it cost ineffective. These. High overhead costs, make the system exclusionary, denying, billions, of people access, to basic, financial tools. The. Inherent, closed and centralized, nature to the system means, that it lacks transparency. Which. Breeds crime and abuse of trust as, PwC. Reports. 45%. Of financial, services, suffer, from economic, crimes every year, since. The financial crisis. The banking industry, has largely declared. Ethical, bankruptcy, at the expense of a huge loss of societal, trust and the many billions, of dollars paid. Each year, for misconduct. Today, the world is in an unparalleled, technological. Revolution, question. Is could such world moving transformations. In society, economy, and technology largely. Leave the financial, system unchanged, structurally. It seems unlikely, historically. As technology, evolved, the financial, industry has been reasonably, good at integrating, those new technologies, in order, to better serve customers but. This changed, during the financial crisis, as banks, were busy dealing with the numerous, new rules and regulations, given, the rapid rise of the web at that time there came to form a gap between what banks were offering, and what users came to expect, especially. From the user experience perspective. Technology. Companies started to jump in and try to capture this opportunity, the world of thin tech was born. The combination, of information technology. And finance has given us FinTech new. Technology, companies have popped up all along the value chain some, have even grown huge such as ant financial, that, now manages, the largest, money fund in the world at the, moment there has been the emergence of many new startups, and services, providing.
Specific Products, along the value chain but. There is not being one that, is being able to connect all the dots to deliver the full services, that the universal, banks can as, a. Consequence, the evolution, in FinTech has not been quite as revolutionary. As hoped as people. Have often opted, to stay with the general Universal, offering, of the traditional, bank this. Is because of the semi monopolies, that banks, have had and high switching costs. Large. Financial institutions. Have in general dodged, or absorbed, the sort of creative destruction that, while, disruptive, and messy is critical, to economic vitality and, the evolution, of finance. But. Today with a relentless revolution. In information, technology, the Internet is evolving, into a new decentralized. Model where, finance, and technology merge. In surprising, new ways with, blockchains. Distributed. Ledger's and the new financial, innovation, of tokens, we, can see the potential, for a very different, kind of financial system, to the one we know today as new, forms of decentralized, financial. Systems are being born which, are native to the Internet. Historically, we, have created, a centralized, model to finance consisting, of many closed organizations. Because, that was the only way we could ensure trust, in the system we. Created trust by all of us trusting, in a government and that government outsourcing. It to the nation's institutions. That it regulated, by ensuring, they complied with requirements. The result of this though is that all the resources in the system have to flow through those limited, sets of centralized, institutions. A centralized. Model has advantages, but, it also has, disadvantages, particularly. When the system becomes complex, in, simpler. Systems it is, an effective method but. As the system becomes, more complex, it results, in sprawl. Redundancies. Compartmentalization. Bottlenecks. And overly. Complicated processes. That, render the system inert and non-responsive. To user needs, but. Just as the first generation, of web technologies, radically, changed the face of communication. Through email and the. Second generation changed, the face of media, taking, us from a world of few centralized, channels and newspapers to, a world where everyone, had their own channel, on social media blogs so. To the third generation web, will soon offer the software solutions, and connectivity, to do the same to finance, the. Internet of tomorrow will, be a global services, infrastructure, for, the building of services, and exchange of value with, distributed, ledger technology, and token economies, finance. And the Internet are now converging, so that the Internet has built-in, capabilities, to record store. And exchange. Value independent. From the centralized, institutional. Architecture that, we know so well the. Very way that we record, an account for value is changing, as a, new set of information technologies. Provides, the infrastructure, for a globally, distributed network, of computers, to, maintain secure, and shared records, of value this. Distributed, technology, allows, us to remove a massive, amount of administration. And transaction, cost and regulation. By having an economy-wide, accounting, system that is secure and transparent. Such. A system for coordination, and via distributed, Ledger's would have many advantages it would, drastically reduce the cost of recording and thus, make it possible for us to expand formal, financial systems, to, the billions, that are currently outside of it the.
Third Generation web may, well have native capacities, to do what currently cost financial, institutions. Billions. Of dollars in IT infrastructure. Which. Means that the financial industry. Will not be disrupted by the FinTech startups of, today it, would be more accurate to say that it will be disrupted by the internet, itself. This, new computing, infrastructure, running distributed, ledger technology now, offers, us a new way to define and quantify, units of value which, are represented, by digital, tokens, thus. Minting. Currencies, is an activity that is no longer restricted to banks anymore we, saw this first with Bitcoin but now digital, tokens are emerging, as a more general financial, instrument, that can be created by anyone and used to define any unit of value in a. World of distributed, ledger technology, we, can now create and design tokens, to meet the needs and requirements of any economy, by. Using programmable, tokens, we can create units of value which, are stored on a blockchain to, represent anything that people value. This. Enables, us to capture and define the things we value in, an almost infinite number of ways and create. Financial systems, from the ground up we. Can now literally, create whole monetary, systems, that sit on top of microeconomics, all of, which are tracked securely, on a blockchain with. Digital tokens we have an almost complete capacity, to define any form of monetary system, we, can create a finite amount of tokens or stay, adding new ones at certain intervals define. How they can be exchanged, how long they last whether, they are fungible, or how they are differentiated. How, divisible, the token is etc, we. Can now almost, design in or out any property. To a financial system the limit, is just our imagination, knowledge. And design, capacity. To. Actually build a stable and robust system requires, integrating. It with economy. Environment, and society, so that metrics, are not just an account of a single subjective, assessment, of utility, function, but. Reflect a more comprehensive and integrated, measure of value within, the multiple contexts, that constitute, the real world and this. Is for example what. Programmable, tokens now allow us to do. In a, decentralized. System the, centralized, component, is no longer present by connecting, people directly, and automating, the coordination. Of processes, and services, on the network, this. Results in a model where coordination. Capabilities. And control, are taken out of the centralized, closed organization. And both embedded, within the network and pushed, out to the end-user in a, world of distributed, financial, networks people, have become their own banks and owned, their own data by holding their own wallets a distributed. Financial, system is a peer-to-peer system. People. Own their own data and records of value and give them to others directly under, their own control, and discretion. People. Can truly be their own banks as they can also create their own credit by securitizing. Their own assets. Given. An asset like a house or watch one could use it as collateral for, the network to create tokens, and credit, them to the users wallet. A decentralized. Model could see a radical jump, in our capacity, for financial, inclusion by. Redirecting the flow of resources, so that they do not have to be routed controlled, and managed, by centralized, institutions. We can reduce the barriers to entry and create systems that innately, push outwards, to the majority of the people instead, of always closing, inwards to the minority with, a widespread, adoption of, mobile computing, approximately.
Five Billion mobile users, we, now have the potential to create truly globally. Distributed financial. Systems that reach people when, and where they are with low barriers, to entry when, we add distributed. Ledger technology and, token finance on top of this telecommunication. Infrastructure, building. Protocols, for people to exchange peer-to-peer, they. Can then set up their own networks, for what they value and exchange, it almost anywhere. These, secure, distributed. Networks strengthen, inter organizational, capacities. By. Enabling much greater trust coordination. And interoperability. Across, whole industries, and economies, they enable, the emergence, of massive, interaural, and. Peer-to-peer networks, where previously, no formal, coordination, existed. This. Will have a very profound effect on the overall structure, of our economies, and financial, systems as they, go from many closed organizations. Competing, within markets, to the emergence, of large ecosystems. Of collaboration. Forming, complex service, systems it. Is these very large, automated, financial, service networks that will be the core infrastructure. Of tomorrow's, financial, system as, the. Strength of these open, trusted networks grows and connectivity, proliferate. The centralized, organization, will become unbundled. Along many dimensions, and the product based push, model, of the corporations, of the past will, evolve into a dynamic networked. Model, that works to aggregate modular. On-demand, services, around, the needs of end-users, over, time those service-oriented. Blockchain, based networks, will become increasingly automated. Through, the development of smart contracts, and decentralized. Applications. Next generation, of financial, services, will be integrated, into the everyday lives of end-users, no, longer a separate, thing finance. Will be there when you need it and not when you don't winning. In this kind of world will, be all about networks, and protocols, that connect up different automated, services, and integrate. Them around the end-users, needs as dr.. Christian Grove puts it observe. Over the next 10 years or, 15 years in banking at those banks those, old banks will, survive who are the ones that open up their IT connections, to all those thin tech players because. As I said FinTech. Players don't do everything well they, are just specialists. For one segment so, the bank that will manage to combine them all in an open IT infrastructure. These. Will be the most successful. Data, and analytics, will play a key role in this next generation financial.
System Vast. Financial networks running, through the internet will require a much higher level of automation, to enable real-time, flexible. Process, oriented financial. Services with. Data and analytics, finance, will be able to evolve towards a much more event-driven, architecture. Financial. Institutions, will be service, networks and the capacities, and competitive, advantage, of those networks will be largely in their protocols, data, and analytics. That coordinate, the network and the intelligence, of their people that model, and design the system. For, financial services to be a seamless part of people's everyday lives requires, the use of unstructured. Data, big. Data is the key to financial services becoming, predictive, flexible. Integrated, and context, aware just. Like GPS has automated, the process of getting from one place to another through algorithms, running in the cloud so. To an algorithmic, financial. Adviser will automate the process, of getting from one financial place to, another, so. That more people can find the best route to their financial, aspirations. Easier, and faster. This. Will again shift the focus of the system to the end user their. Automated, assistance, will be making a lot of the decisions, in the system at the. End of the day these, changes, will work to turn the system into one that is less based around the products, of the financial, institutions, and more, centered around the various processes, that the end user is trying to accomplish. The future will not be like that of the past those. Who managed to adapt will evolve to become networked, platforms, they, will be the trusted advisors, to their clients needs on the front end but, on the back end they will be connecting, a myriad, of services integrating. Them through analytics, the, essence of the organization. Will be its protocols, that integrate, different services, and it will be in the models that go into the analytics making. The operational, decisions, for integrating, services and end-user needs it, will. Be a world of commodity, product providers, integrated. Through massive networks running through an updated, set of protocols on the third generation web, this. Will be a radically, more efficient, system than that of today that decentralized. Web will commoditize, financial. Transactions, making, profit margins low the, few financial institutions. Of today that survived to see that world will, have evolve to such an extent that they will be almost, unrecognizable. From what they are today. The. Idea that you can set up an Innovation, Lab with. All sorts of new technologies, and pour money in one end and hope to get revolutionary. Innovations, at the other end that will ensure your survival is delusionary. It. Is not really about block chains or analytics, the, only thing that can ensure the possibility, of existence will, be changing, the paradigm for, the whole organization to understand, that the rules of the game are changing, and they, are changing very fast as, the. Financial, Times notes, technology. Is a tsunami that will radically change the face of financial, services. Finance. The world's biggest cryptocurrency, exchange, that was non-existent merely, eight months ago is now more profitable, than Deutsche Bank one, of the world's leading banks, that was established. 148. Years ago a, start-up. With 200, employees overtook. A banking, giant with 100 thousand employees within. A few months of its existence. According. To CNN by. Nantz has been able to surpass Germany's, biggest bank in less, than eight months of existence it is, possible, that cryptocurrency. Businesses. Take over the global finance industry in the, next decade or two.