Four Fundamental Reasons There Is More To Crypto Than Its Price: Part 4— Automation
In part four of this series I am going to cover how crypto will accelerate automation. If you would like to read the other three parts you can do so here, here and here.
Over the last several years, we have become increasingly comfortable with software running a greater portion of our daily lives. We trust software to match us with romantic partners (dating apps), we trust software to direct us where to go (Google Maps & Waze), and we trust software to invest our money (robo advisors). But that’s just the tip of the iceberg. Soon, much of the financial, legal and regulatory industry will be turned over to software to run as well.
Crypto introduces a capability never before possible, programmable money. Because cryptocurrencies are digital, it’s now possible to embed code into money in order to enforce who has access to the money, what the money can be used for and if certain criteria are met, execute transactions or instructions autonomously. Said another way, cryptocurrencies allow computers and code to natively custody money. This means I can pay a piece of code to run an application or execute a command. It also means computers can pay other computers to perform actions.
What’s unique here is that you don’t necessarily need a human to be involved in these transactions once it is set up and the code is written. The counter party is a computer, not a corporation or a human. This functionality can be applied to wills, trusts, escrow, real estate, mortgages, derivatives, securities, and much more. It will be applied to central bank issued digital currencies (aka CBDCs) giving governments much more precise tools to carry out fiscal and monetary policies (I will go over this in a lot more detail in a future post). If we ever have self-driving cars, one car could “pay” another car to move out of its way so it can go faster. Essentially, programmable money provides the ability to remove middlemen and replace manual execution with autonomous code. The possibilities of programmable money are only limited to one’s imagination.
But programmable money, as amazing as that concept is, is only half the story to this move towards increased automation. Earlier in this post I wrote about how anything in the real world could be digitized through tokens and NFTs. It’s possible that every asset, including stocks, bonds, currencies, and physical assets will become digitized (aka tokenized) over time. Once digitized, these assets can now start transacting with themselves through smart contracts and programmable money.
It wouldn’t be difficult to then build algorithms that trigger the exchange of these digitized assets based on any number of factors. High frequency trading algorithms have become very popular in the stock market. In time there will be high frequency trading algorithms for every asset.
Programmable money doesn’t just unlock new opportunities for Wall Street, it’s provides a much better paradigm for regulators as well. By enabling code to be embedded into the transaction, it allows regulators, for the first time ever, to be proactive rather than reactive. Today, regulators and enforcement agencies typically only step in after something has gone wrong. But with programmable money and automated transactions, developers could literally write the legislation into the code so that transactions only occur when specific criteria are met thus preventing bad actors from even having an opportunity to skirt the law. I wouldn’t be surprised to see in the near future, the SEC mandate the use of security tokens for this very reason.
Programable money and the digitization of every asset will lead to most of the financial industry becoming autonomous. Contracts will be verified, enforced and executed by code, not lawyers or courts. Regulation will be baked into the transaction before the transaction closes thereby automating regulatory oversight, compliance and auditing. Smart contracts will automate insurance claim processing with parameterized contracts that autonomously pay out upon occurrence of certain risk.
“Imagine if you had a financial internet and every app on it could send and receive money to every other app natively. They could all just trade back and forth with each other. An automated Wall Street.”
- Balaji Srinivasan, Interview with Ryan Selkis December 11, 2020
If this all sounds crazy and futuristic to you, the automation of the finance industry is already underway. Since 1971, money supply in the US have been controlled by the central bank. Bitcoin has automated those functions as its supply schedule is carried out autonomously by code. DeFi companies are beginning to decentralize core traditional financial use cases like trading, lending, investment, wealth management, payment and insurance on the blockchain without the need for a trusted intermediary. These companies already enable the pooling of risks and matching maturities to be automated and executed on a blockchain. The largest HELOC-backed bond in a decade was recently settled over a blockchain by a company called Figure Technologies. Nine countries, including France, China, and Singapore, have already launched or announced they will launch a central bank digital currency.
This is just the start. Crypto and blockchain companies will automate the financial backend of numerous industries in the coming years.
