The Digitalization of Money is a Question of Trust
The ARYZE team had the great pleasure of sitting down with the Copenhagen Institute for Futures Studies, for an intellectual discussion on the digitalization of money and how trust in centralized institutions is gradually shifting.
The following writeup is an elaboration of the topics covered during the session.
As a company that has taken great measures to build the bridge between traditional finance and digital money, we often examine the relationship between societies and centralized institutions.
This is an exercise in understanding the needs of the market, in order to develop fintech products that will be used in the future.
One such relationship is a fundamental cornerstone of modern business: trust. Specifically, the trust between consumers and financial institutions, and how the needs and expectations of society are shifting away from a centralized model towards a democratized and decentralized method for banking services.
Despite the power that the image of a bank holds, with its high powered profiles in mainstream media, promises of big bonuses, and conviction towards financial propriety, we should continuously remind ourselves of the role of the bank in society.
What was once thought of as a safe haven for one’s accrued assets, has shifted in the minds of many, as understanding of real banking has become established. Banks no longer hold massive cash reserves, and instead lenders, that unfortunately have the ability to drastically extend credit, can ultimately have catastrophic effects on the global economy.
The way that money moves is now more or less purely digital between banks, where international balances of debit and credit have established relationships that hold economies in check.
Modern retail banking revolves heavily upon understanding the customer's needs. Data and technology are rapidly becoming a focus for banks, as they strive to deliver better services.
The democratization of financial services is a topic on the mind of many people working both in and out of the financial sector. Traditionally, banks have held majority control over financial services. In the past, this has been because banks served as institutions that facilitated trust. This trust is a necessary link of the societal contracts that we rely on for economic growth and to keep the world spinning.
In recent years, this trust has been breached on many occasions. Whether it is the recent money laundering scandal that left confidence in Danske Bank fundamentally shaken, or if it's HSBC's involvement in the billions laundered on behalf of Mexican cartels, it would seem that public approval of the banking sector is at an all time low.
The percentage of Danes who say they would never dream of becoming customers in Danske Bank has risen to 45 percent from 31.5 percent… — Source: Reuters
Although the degradation of trust in all manners of public institutions is evident across the board, as seen in the 2018 Gallup Polls, emerging technologies offer a glimpse of hope.
Banking is changing
Bill Gates once said, “the world needs banking, not banks.” It is true, in part, that banking services can be provided by others than banks — often in more effective terms. However, banks still serve the purpose of being stores of value, licensed by government and held to high standards of service quality and accountability. As technology develops, even this is something that will likely change over time.
Banks have often acted as “gatekeepers”, making the final decision on whether or not a person may invest based on their own requisites. Many times, this is for good reason, as they can cross-check with global databases for trustworthiness. However, it can also be an arbitrary decision that is based on competitive advantage and maintaining customer relationships.
Conversely, with blockchain technology, it becomes possible to invest globally, with added trustworthiness, democracy, and transparency throughout the entire process. For example, a Danish neurologist can invest in a crowdfunding campaign from a Japanese doctor, seeking to cure a rare disease, without pre-approval from his bank. The implications of this is an acceleration of innovation on a massive scale…
By using distributed ledgers to absorb the mantle that banks and payment processors historically have taken upon themselves — often with increased prices, obstacles and arbitrary regulation — payments, settlement, and banking services that require full knowledge of individuals can be improved by immutable databases, with increased efficiencies, decreased costs and global reach.
"I’m not one of those who believe that blockchain and other DLTs will just overthrow the traditional trusted third parties like banks, but they’ll likely be forced to reinvent themselves to stay relevant. The way the banking system works today will undoubtedly be reappraised when alternatives arise that offer a more transparent and secure, and in many cases cheaper and faster way of establishing trust." — Simon Fuglsang Østergaard, CIFS
One such example of banks moving into the realms of cryptocurrency to fully utilize the benefits of distributed ledgers, JP Morgan, showcases the ability of traditional institutions to adapt to evolving technologies and offer customers improved services. As JP Morgan announced JPM Coin, a statement was inevitably and subconsciously pronounced: that cryptocurrency has developed to a point where one of the world's financial powerhouses feels comfortable in issuing their own digital token.
In the years to come, more and more stable digital tokens will be offered for a variety of purposes. Whether it is cross-border settlement, remittances, banking KYC/AML, or simply hedging against volatility, it is not a foreign concept to imagine banking services provided in increasingly decentralized manners and to consumers that could not afford to be a part of the financial ecosystem.
“The unexpected tragedy of our current financial system is that those who have the least money have to pay the most to ship it,” says Joyce Kim, CEO of the Stellar Foundation.
At ARYZE, we propose banking services and cross-border payments conducted on distributed ledgers, in a transparent, compliant manner. We focus on providing stability and low-cost transactions for individuals previously excluded from the banking world: those without enough capital to get started, or remotely inaccessible, the Unbanked. Furthermore, we aim to gradually decrease the need for trust in the system by establishing corporate governance through technology.
We are on the cusp of a financial technology revolution that will serve to remind consumers that their money is in their hands. All we can do is give them better tools to imagine the possibilities of a digital tomorrow.
Article written by Carl Jenster
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of ARYZE.