Bringing money into the digital age
Mankind created software and technologies reducing every distance, border, and difficulty, pulling the world instantly closer together. But what about finance? Wall Street and financial services have not fundamentally changed in the past fifty years. This thirteen trillion dollar industry relies on services and fee structures from a bygone era. Online financial offerings pale in comparison to our other digital experiences. Technology makes it possible for instantaneous payments, except that right now it takes days, or even weeks to make basic transactions. All this begs the question: why can’t money be digital too?
Ten years ago, people were using Kodak film to develop photos, going to Blockbuster to rent movies, and heading to the local bookstore to pick up the latest bestseller. No one had heard of of the iPhone (because it hadn’t been invented yet) and Instagram, and companies like Netflix were unknown or not yet in existence. The digital world is part of our DNA now, it’s how we consume our entertainment, share our experiences and stay in touch with our loved ones. We are now seeing the emergence of FinTech challenging one of the most entrenched and consolidated industry in existence – finance. FinTech questions the wisdom of the traditional financial sector providing consumers and business more choice, freedom, and access to financial services than ever before.
Today it should be easy for someone based in Berlin to do business with someone in Paraguay; but it’s not. Borders continue to hinder people’s ability to do business globally. While billions of people around the world have no access to financial services whatsoever, many others are dramatically underserved by traditional banks. In 2015, banks in the US alone took in over $31,000,000,000 in overdraft fees. Think about that for just a moment. $31 billion in fees from people who didn’t have any money in the first place. According to recent data from Goldman Sachs, 33% of people who identified themselves as Millennials do not expect to even have a traditional bank account in five years. Between the billions of people without access to financial services and the advent of software to digitize financial services — it is clear there is a seismic shift in both need and consumer expectations.
Things are changing though. Fast. For the first time, we have the technology to meet those needs in the financial sector. The blockchain, the technology that settles and clears transactions on the Bitcoin network, makes it possible to bring billions of people into the global financial economy for the first time.
But what is the blockchain?
The blockchain is a transaction network that uses a distributed ledger and digital currency to settle transactions with a high degree of certainty. The network is decentralized, just like the internet, which means it’s very durable. Anyone in the world can write to the blockchain database but no one can unwind the history.
Blockchains provides three very compelling value propositions for policy makers. They are far more cost-efficient, secure, and transparent. With distributed ledgers there is no need for a central third party to manage the process, ensure version control, or police participants. Despite the lack of a governing third party, blockchains are secure because the infrastructure and incentives built into the network make it virtually impossible to alter transactions after they are confirmed by the network. This makes them censorship proof and far more secure that centralized databases. Finally, blockchains provide complete transparency to participants and outsiders alike.
This technology can democratize access to financial services and enable people who do not know each other to faithfully complete economic transactions without relying on counterparties or intermediaries. To be clear, open source software can do what banks have done for thousands of years.
People are realizing the potential of the blockchain and the bitcoin network it supports. This is clear from the transaction growth in bitcoin over the last few years. The chart below shows the number of transactions on the bitcoin blockchain which is doubling every 12 months.
Now is the time to support the growth of such open and decentralized value transfer networks. Legacy systems are centralized proprietary cost centers. They rely on outdated settlement periods designed in the 1950’s. As consumers demand an increasingly digital experience, payment solutions designed by banks are band-aids which include fundamentally flawed security solutions. Such systems expose consumers to needless risk. According to one study by LexisNexis, fraud costs the U.S. economy more than $190B each year. In 2015, there was an increase in the number of large scale breaches of data. The number of incidents have continued to go up, increasing by more than 10% from 2014 according to a major cybersecurity firm. This is because centralizing data increases the risk of a breach.
Aside from fraud and data breaches, the centralized payment systems of the past have simply not kept up with the need of a global population connecting digitally in ever more complex and constant ways. Before we can get to a world where the Circular Economy and Internet of Things are improving sustainability and driving down the costs of production, we have to have a payments network that can facilitate purely digital transactions. This has very exciting implications for helping reduce corruption and reducing human driven impacts on the climate.
This world won’t come to fruition without a way for people to transact with each other affordably, quickly, and easily. The bitcoin blockchain makes this feasible. For the first time an open, accessible, and fair financial future is possible. The good news is that this technological backbone is being used and adapted allowing millions to connect and transact in ways never thought possible. Much work remains to be done to scale such a network to reach the lives of the billions still outside the financial sector. While businesses, citizens, and new technology companies are experimenting with this technology and making it more usable and accessible, policy makers have a role to play as well. The first step is engaging with this new and powerful system. Inviting current participants, entrepreneurs, and software developers to policy meetings to stay abreast of developments and learn how and when to play a supportive role.
Ministers, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity.
Freedom of choice, bitcoins and legal tender Adrian Blundell-Wignall on OECD Insights