“It sounds like pretty soon we won’t need banks” is the fearful comment I hear from finance professionals when we talk about cryptofinance technologies. The nascent cryptofinance industry is off to a slightly confusing start, and I think these type of comments are a symptom of that. You probably arrived here thanks to the term “blockchain”, which is what most people think of when they hear about cryptofinance and fintech. Let’s address that first.
“Blockchain”, or the even more verbose and politically correct term “distributed ledger technology”, is Bitcoin. Bitcoin was created to be a transparent, scarce, fungible, censorship-resistant tool of exchange. I think a true story might help to clarify Bitcoin’s value proposition.
For about 70 years, a small family ran a leather shoe making and repair business. Their close attention to detail, friendly customer service, and reasonable prices kept their business growing. But over the years, economic conditions around them deteriorated, and their customers started shopping elsewhere. They knew they had to get up to speed with the rest of the world and start offering their products online.
This boring story ends “so they started selling their shoes online and lived happily ever after”, right? Sure, some people can just create an eBay store and call it a day. But this family business happens to be in Iran, and for a long time the banks in Iran couldn’t do business with the rest of the world. There was no PayPal, no eBay, no Western Union that could come to the rescue. There was simply no company that could help these entrepreneurs get paid for their products. So what could they do? Interestingly enough, they learned about Bitcoin and started accepting it as a payment method. They built a solid reputation for themselves online and started shipping their products worldwide. Today Bitcoin remains that business’s sole payment method.
Bitcoin’s success has brought a lot of interest to cryptofinance, and Bitcoin is certainly valuable in a number of ways. But it’s like gold, in that you don’t want to carry it around with you all the time and try to use it for all of your business needs. So what’s the right cryptofinance “thing” for your business application? The answer of course, is that it depends on your application. But realistically, the answer is probably digital contracting.
Digital contracting comes after Bitcoin, and borrows and improves upon some of its technology. It is not a “blockchain”, but you can certainly move between the two technologies with ease. Digital contracting provides the things that satisfy business needs:
- Everyday currencies can be used
- Easy to be in compliance or regulate
- Unique units can be used based on need, like healthcare or education credits. Because it’s a digital contract, it can’t be spent in the wrong place
- Contracts written in plain english, in case there’s a dispute
- Distributed proof of ownership, in case there’s a dispute. Some might call this “distributed ledger technology”
- Very low cost transfers, so everyone can use it in perpetuity
- Instant “settlement”, meaning the transaction can’t be reversed in any way and there’s never any doubt as to who the owner of a thing is
- Instant exchange for digital assets, currencies, physical cash, or anything else
- Your activities are private; it would be nearly impossible for almost anyone except for yourself and law enforcement to see your financial history
- 24/7/365 transfers, with no respect to timezones or geography
What’s the big catch with digital contracting? The catch is that it doesn’t do the things that Bitcoin sets out to do. It’s not designed to be censorship resistant, because it’s a business tool. It’s not designed to be completely trustless (read: slow); it’s designed to provide complete certainty in the event of a contractual dispute. It’s open just enough to be completely legal and accepted in all jurisdictions, but at the same time it’s private and protects you fully against your competitors seeing how much you pay your employees, or your siblings from seeing how much money your grandma sent you for your birthday.
There are a lot of industries that will benefit from digital contracting and there are already a lot of solutions being built. Here are a few notable applications for digital contracting:
- Merchant processing, bill payment and remittance
- Commercial payments, such as pensions and salaries
- Trading and registration systems, such as stock and commodities exchanges
- Coupons, tokens or other digitally scarce assets, that could be used for customer retention, offers of discounts or other promotions
- Voting systems, where a limited number of voting tokens are created, distributed, and redeemed
There’s really only one unfortunate thing about digital contracting, and it’s that at the moment there’s only one company that is offering solutions in this space (Monetas). On the bright side, I think it’s a very good company! (Disclaimer: I work there!) But the way technology is moving and the amount of talent I see heading in this direction I expect many more to join in the next few years. So, getting back to that troubling question from the beginning: will banks still exist in the future?
I think yes, but I also think that they will start to look like very much like cryptofinance software companies.
Disclaimer: Blog posts reflect the views of the respective authors, and do not necessarily represent the official view of Monetas.