Brave New Financial Web

Why isn’t sending money as easy as sending an email? Why are there so many disparate and non-integrated payment systems available? Why is paying on the Internet so inconvenient?

Some merchants accept only internationally recognized credit cards such as Visa and Mastercard. Some only accept locally-issued credit cards. Vending machines may accept only small banknotes or coins. The minimum size of a credit card transaction may be 10 euro. It is impossible to send money from a bank account to a credit card. This all leads to wasted time and money.

We have gotten used to the world in which we are living. We can’t even imagine that this world could be different. But, payments will at some point be as simple as Internet communications now are. When was the last time you wrote a letter with a pen because it was “necessary”?

Here is an incomplete list of “problems” that everyone agrees are actually problems:

• there are many payment systems but only a few of them interact with each other seamlessly
• consumers can’t predict the time when a payment will arrive and the related fee
• money can be lost when being transmitted or transferred between parties
• consumers don’t know upfront whether the payment is in compliance or not
• payment and exchange fees are high, especially when transfers are cross-border

• the payment processing market is monopolized by Visa, MasterCard, Alipay, Paypal, Swift and others. Integration takes a lot of time, money and resources

• closed proprietary infrastructure doesn’t allow for the or consistent spreading of innovation

• monopolies and proprietary software limit limit the interaction between organizations

• regulators struggle to get real time information from the market
• the fraud level is high
• and we haven’t even touched the topic of what’s going on in other industries like stock exchanges

How everything should work:

First of all, everything that can be digitized — should be digitized. Of course, many assets are already stored in a digital manner. But, there exists a variety of proprietary digital formats and closed systems. As a result, the owners of the assets can’t really use them outside of the system in which they are situated. Here we talk about accounting systems. Ideally, all assets should be in the same form and all asset management system should have a uniform API. Access to the asset should be done by a cryptographic key.

Main types of assets:

• money
• securities
• deeds
• reputation (credit score)

Principles of the financial web:

1. All accounting systems should communicate using a uniform protocol — like a common language to speak to each other.
2. Base applications, components, libraries should be open-source and license free.
3. Networks from all the organizations that use this software should be a “public good” — commonly owned or without owners. There should not even be a process of “connection” to the network, just as there is no “connection” to the internet for a new website.
4. Relationships between organizations should be created on the basis of mutual trust.
5. Owners should have full control over their assets, secured based upon cryptographic principles.
6. There should be many payment channels, and the one selected at any particular time would be based upon its current fees and speed.

Consequences:

1. Even though big processing centers continue to exist, they can’t force market participants to limit connections amongst each other. Fair competition is guaranteed.
2. Many processing centers appear, and their roles are a mix of collateral holding, risk analysis, compliance and clearing.
3. Each set of organizations can form decentralized exchanges, wherein the orderbook will be executed without third-party risk.
4. Smart contracts will appear which can assume control over the assets and issue other derivatives, based upon rules agreed to by all involved parties.
5. Any computer or smartphone with a wallet will become PoS. Credit cards will not be needed.
6. Users will receive proof that their funds are real and regulators will receive an instant understanding of what is transpiring.

Industries that will be influenced the most:

• trade finance
• factoring
• stock exchange market
• investment banking
• law enforcement

In distant future all assets will exist in a single digital form. Central bank deposits or corresponding accounts won’t be needed because each participant in the network will be able to check the authenticity of the asset which is being transferred. However, this does not imply the presence of a single blockchain or the absence of privacy.

What financial web means for financial institutions:

The role of banks and banking will be transformed. Transaction fees and businesses which exist merely to hold assets, titles and accounts (and accounting) will be taken over by technology. Their primary functions will evolve into management, compliance, and IT.

What financial web means for a consumer:

Businesses will be much quicker to start. Transactions will be much faster to execute. Let’s assume the process of buying a stock. Currently it is a cumbersome process for an individual. One has to deal with brokers, open an account, wire money, learn how particular software works, wait for weeks until the transaction is settled with a CSD. Under the new paradigm, it will be so easy to buy a stock using a smartphone — a few transactions performed atomically and all parties will update their records immediately.

Who will lose when it happens?

Companies that restrict their customers’ financial freedom by placing their customers’ assets into proprietary systems and thereby extract high fees for transactions.

What should be done:

Technology stack and components for a financial system — a financial web — should be built — consumer apps, banking, exchange, depositary, processing systems as well as other accounting software. It should be open-source and free.

This is Distributed Lab’s mission.