The next FinTech: Global “Open Finance” Infrastructure

“Open Finance “ — open-source financial services infrastructure built on public blockchains — may be the next major digitization narrative after Fintech. Driven by the transformation of analog liquidity (deposits in a bank account) to digital liquidity (tokens in digital wallets), the playing field can be leveled for offering financial services. As a result, new profit motives are introduced encouraging innovations not previously feasible.

Andrew Wong
Feb 11 · 9 min read

Technology disrupting finance is a narrative that’s existed for a long time. The dream has always been for tech to digitize financial services, increase competition/access, reduce concentration risks, and improve customer experience. Many sales-pitches have tried to achieve this: from FinTechs, TechFins, API / Open Banking, to Permissioned Blockchains.

Incumbent Financial Services Narratives — 2009 to present

While this decade-long lineage of innovation was transformative, it has not been disruptive. The playbook lacks imagination: copy and paste a financial system that’s been designed for the analog world, and then overlay digital interfaces to make it more accessible. As a result, it’s 2019, and while there has been progress, nothing really has fundamentally changed. Our attempts at customer-centric banking remain clunky, the unbanked are still unbanked, and we still have a system that is highly concentrated and not modular.

This article proposes that the more interesting innovation of the past decade has actually been developing right under our noses — hidden in plain sight. Public blockchains like the Bitcoin and Ethereum networks, have been progressively installed to challenge past narratives — starting with the availability of new open-source, public, self-governing, and globally accessible financial settlement infrastructure— aka “Open Finance”.

A wise person once said: “Insanity Is Doing the Same Thing Over and Over Again and Expecting Different Results”.

For this reason, it shouldn’t be surprising that previous digitization narratives have resulted in incremental but not disruptive changes. Once market participants expand their tunnel vision focus beyond the price of digital value issued on these blockchains (e.g. Tokens) it becomes possible to imagine a new financial services economy based on new constraints.

The focus of this article is to begin exploring very early innovations emerging that are only now possible — painting a picture for why Open Finance may eventually be the new FinTech.

The article is split into three sections:

  • Section 1: Evolution of Banking and Liquidity in Open Finance

Evolution of Banking and Liquidity in Open Finance

In the traditional financial system, banks are granted a special role in the transmission mechanisms of money (liquidity) through the economy.

How does the money transmission mechanism work today?

Simplified schematic of value transmission mechanisms in the current financial services system
  • Central banks moderate a nation (or set of nations’) money supply to achieve inflation (and sometimes employment) objectives. To do so, they use tools like setting interest rates, conducting open market operations and prescribing bank capital & liquidity regulations.

How does the bank transmission mechanism change in Open Finance ecosystems?

In a world where money transmission is not controlled by a network of banks, value can be transmitted in new ways not as constrained by physical borders. With Open Finance infrastructure, it is possible to design a system where money aggregates and flows in different ways.

  • Fiat-crypto exchanges become the on-ramps that transform analog liquidity (e.g. fiat money sitting in a bank account) into digital liquidity (e.g. tokens sitting in a digital wallet). New entrants like Coinbase, or individuals themselves, become the de-facto banks in these new ecosystems. On the more conservative end, fiat can be converted into fiat-backed stablecoins (e.g. USDC, TrueUSD, etc.). In more novel approaches, fiat can be converted into digital non-sovereign cryptocurrencies (e.g. Bitcoin/BTC, Ether/ETH, Maker DAI stablecoin etc).

What are the implications of Open Finance?

For the first time, there is the possibility to move liquidity from an analog world into a digital world, with minimal reliance on existing FS infrastructure (e.g. banks). Liquidity can pool and aggregate in different ways not constrained by physical commercial bank footprints and distribution networks (e.g. branches/ATMs). This erodes a long-term advantage that commercial banks have long held: a monopoly on cheap funding vis-a-vis deposits.

By attempting to re-define financial services from the core, longstanding conventional wisdoms about “how banking works” will change. The result is the possibility for something fundamentally new to emerge. This is why Open Finance may turn out to be a more disruptive digitization narrative than we’ve seen in the past.

A Case Study of Open Decentralized Financial Services on Ethereum

To get a glimpse into one possible future of digital financial services, an interesting place to look is the Decentralied Finance ecosystem (#DeFi) being built out on the Ethereum blockchain.

Decentralized financial services applications built on top of Ethereum use it’s blockchain as a global, universally accessible, open-source and 24/7 accounting ledger. Entries on the ledger (e.g. who owns what, at any given point in time) are maintained through the use of a Proof-of-Work (PoW) consensus mechanism similar to Bitcoin’s (at least for the moment).

A walkthrough of the DeFi ecosystem on Ethereum

Ethereum’s DeFi ecosystem starts with a traditional bank account. Fiat money (e.g. USD) is exchanged for the corresponding currency used in the “Ethereum economy” (e.g. Ether / ETH). Conceptually, this is not different to any other form of foreign exchange. In the analog economies of the world, when someone travels from one country to another, they too need to exchange their home currency for their destination currency. In digital economies , the destination is not a physical country, but a digital one.

Ethereum’s DeFi ecosystem / economy

Entry into this digital world / jurisdiction is made possible through blockchain interfaces and the internet (e.g. Metamask browser). From here, consumers can directly access financial services without ever touching a bank. Some real-live examples are described below.

  • Exchanges: a consumer can self-access global marketplaces (liquidity pools) to exchange tokens representing claims to different types of currencies and assets. Examples include: 0x, Kyber Network, Loopring.

Likely Beneficiaries of Open Finance

The ultimate beneficiaries in the world of Open Finance will likely be consumers, and by extension, the financial services providers who choose to adapt to this new paradigm. However, the sustainability and degree of success for new business models will be predicated on continued maturity of two nascent Open Finance-enabled paradigms:

  1. Leveled playing field and lowered barriers to entry for financial services. In a world with Open Finance, anybody with an internet connection can theoretically plug into an ecosystem of open financial services protocols (e.g. DeFi), built on public global settlement infrastructure. As long as this remains true, anyone can extend their business offerings to include financial services without much fixed cost investment — just OpEx to use the protocols.
In the above hypothetical example, Open Finance offers the possibility to use shared infrastructure to dramatically lower technology and operation costs. Furthermore, with liquidity being digital, costs associated with physical distribution (e.g. branches, ATMs) can also be lessened. This creates the possibility for modular financial services offerings to focus on high-value activities (e.g. underwriting) while passing along all cost savings to savers in the form of higher interest rates.

In conclusion

In practice, trying to guess exactly which new players and business models emerge, and win, will be difficult. It is very possible for innovative business models to come from both incumbents (banks, wealth & asset managers), through to new startups and non-banks. The underlying drivers of change are the same.

As both incumbents and startups become increasingly comfortable with the new paradigm, along with regulators and policymakers who begin to grasp the economic game theory associated with public blockchains, the conditions for Open Finance inspired innovation will flourish.

Reminding ourselves of the above quote: only by by doing something different, can one expect a different result. It will be exciting to see the new innovations — many of which we can’t even imagine — built on this new world of Open Finance.

For those interested more content that takes a macro-strategic view of the digital asset ecosystem, please follow the publication: “Macro Narratives in Blockchain”. Have a question you’d like answered? Comment in the article below!

The views and opinions expressed in this article are those of the authors. and do not necessarily reflect the official policy or position of any other institution or entity.

Macro Narratives in Blockchain

Exploring the role of blockchain-based digital economies, digital assets, and cryptocurrencies, in the context of global macro strategy.

Andrew Wong

Written by

Macro Narratives in Blockchain

Exploring the role of blockchain-based digital economies, digital assets, and cryptocurrencies, in the context of global macro strategy.

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