A World Without Trust: The Future of Finance

Our world is built on trust – we trust brands, products, and institutions. Over the last decade, this trust has been eroded as consumers have access to more information in real time, on the internet. Nowhere has trust been more essential than in the financial system - where we rely on a complex web of intermediaries that abstract out layers of risk and hide it behind a pretty facade. Until bitcoin was introduced, consumers had never had a functional way to operate independently from this web of intermediaries. Today, bitcoin is more complex and more difficult to use than , but for the first time - users have a viable alternative. This is a potent and powerful realization, and a force that will change the nature of trust in our world. This talk was delivered at Slush 2019 in Helsinki. More at https://www.slush.org/cryptocurrencies-are-the-future-but-not-before-they-gain-trust/

Transcript

1. A World Without Trust The Future of Finance is Trustless November 2019 Meltem Demirors | CoinShares @Melt_Dem / @CoinSharesCo
2. - 2 - Trust in institutions has been steadily declining Source: Pew Research Center, Gallup THE CHURCH THE STATE THE MEDIA 0% 50% 100% 1960 1970 1980 1990 2000 2010 Percent of people who trust the US government 2009 2018 Number of American citizens (millions) 178 167 39 68 Christians Religiously Unaffiliated 0% 30% 60% 1997 2002 2007 2012 2017 Americans' Trust in Mass Media WHO DO WE TRUST?
3. - 3 - COMBINED MARKET CAP $2.3T COMBINED MARKET CAP $6.4T 2.8x The most powerful companies are intermediaries – they control our access to our digital lives and our financial lives Source: Fortune Global 500 (Q3 each year) POWER IN OUR WORLD IS CHANGING WORLD’S LARGEST COMPANIES IN 2019 WORLD’S LARGEST COMPANIES IN 2009
4. - 4 - OUR DIGITAL WORLD REQUIRES TRUST Trust in tech companies is being challenges – the trend towards “surveillance capitalism” has led to increased mistrust of tech platforms
5. - 5 - Source: Linus Torvalds Hello everybody out there using minix — I’m doing a (free) operating system (just a hobby, won’t be big and professional like gnu) for 386(486) AT clones. This has been brewing since April, and is starting to get ready. I’d like any feedback on things people like/dislike in minix, as my OS resembles it somewhat (same physical layout of the file-system (due to practical reasons) among other things). I’ve currently ported bash(1.08) and gcc(1.40), and things seem to work. This implies that I’ll get something practical within a few months, and I’d like to know what features most people would want. Any suggestions are welcome, but I won’t promise I’ll implement them :-) Linus (torv…@kruuna.Helsinki.fi) P.S. Yes — it’s free of any minix code, and it has a multi-threaded fs. It is NOT protable (uses 386 task switching etc), and it probably never will support anything other than AT-harddisks, as that’s all I have :-(. After all, Linux was started here in Finland! THE PROMISE OF OPEN SOURCE
6. - 6 - Source: Linus Torvalds Open source has fueled enterprise SaaS business models, but in the rush to monetize, OSS has become more centralized and captive to big tech BUT OPEN SOURCE IS NOW ABOUT PROFIT ERA MOVEMENT PHILOSOPHICAL ORIENTATION RELATIONSHIP TO PROPRIETARY SOFTWARE (PS) ECONOMIC IMPACT 1983-1998 Free Software (FS) Liberalism ”PS is evil” Billions 1998-2013 “Open Source” Software (OSS) Utilitarianism “PS is not necessarily evil” Hundreds of billions 2013-2028+ Commercial OSS (COSS) Commercialization ”PS is complementary” Trillions 2017 - ? Utility Tokens aka (TOSS) Crypto Chad-ism “YOLO!” Who knows?
7. - 7 - Source: CoinShares Research THE INTERNET Innovation in Information Transfer Network: ISPs, OS’s, Devices Platforms Application Universe: Streaming video and music, eCommerce, messaging, data sharing, cloud computing Protocols: TCP/IP, HTTP, DNS, FTP OPEN PROTOCOLS. CAPTIVE NETWORKS. • Massive proprietary developer platforms • iOS and Android charge 30% payment fees and exert heavy influence over app distribution • Platforms restrict access, limiting access of third- party developers • Companies prioritize proprietary applications • Startups competing from a disadvantaged position Networks are a powerful part of the internet’s promise. Today, most networks are owned and controlled by private companies.
8. - 8 - PERCENT OF S&P 500 BY MARKET CAP GROWTH OF THE U.S. DIGITAL ECONOMY 5.0% 6.5% 8.0% $0 $750 $1,500 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 % share of GDP USD value added (billions) Value Added Share of total GDP Source: National Bureau of Economic Analysis, Yahoo! Finance While the digital economy is growing… …its growth is disproportionally captured by a select few companies Rest of S&P 500 15% WELCOME TO YOUR DIGITAL OVERLORDS
9. - 9 - Source: Google Images INNOVATION CREATED NEW INTERMEDIARIES The costs of our addiction to our digital overlords is not only transaction fees, but hidden costs of privacy loss and censorship via de-platforming
10. - 10 - Source: CoinShares Research ALICE BOB BANK TRUST TRUST $10 $10 People + systems verify THE ROLE OF INTERMEDIARIES Intermediaries play an important role in economic growth by reducing transaction costs and risk
11. - 11 - OUR FINANCIAL INTERMEDIARIES DON’T INSPIRE TRUST
12. - 12 - Source: CoinShares Research ALICE BOB BLOCKCHAIN .002 BTC (~$16) VERIFIED ON LEDGER BUT WE CAN DISPLACE THEM Blockchain transactions enable peer to peer transactions –some people may choose to use intermediaries, but they are not needed
13. Give a man a gun, and he’ll rob a bank. Give a man a bank, and he’ll rob the world. - Mr. Robot
14. - 14 - In the last ten years, the global banking industry has cashed in over $8.5 trillion in after-tax profit $388 $530 $635 $703 $859 $963 $1,070 $1,065 $1,144 $1,356 $0 $1,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Profit after tax (USD, billions) Source: McKinsey IT’S NEVER BEEN MORE LUCRATIVE TO BE A BANK BANKS ARE MAKING MORE MONEY THAN EVER
15. - 15 - Over two decades, 37 banks consolidated into four. The “Big Four” banks in the US hold 45% of all customer bank deposits totaling $4.6 trillion Source: Visual Capitalist AND BANKS ARE BECOMING CONSOLIDATED TRAVELERS GROUP CITICORP EUROPEAN AMERICAN BANK BANAMEX WASHINGTON MUTUAL FIRST COMMERCE FIRST CHICAGO GREAT WESTERN FINANCIAL JP MORGAN BANC ONE H.F. AHMANSON CHASE MANHATTAN BEAR STERNS DIME BANCORP CHEMICAL BANKING US TRUST FLEET FINANCIAL GROUP SECURITY PACIFIC BANCORP MBNA BANCBOSTON HOLDINGS NATIONSBANK CONTINENTAL BANK SUMMIT BANCORP COUNTRYWIDE FINANCIAL BANKAMERICA UJB FINANCIAL MERRILL LYNCH WELLS FARGO CENTRAL FIDELITY NATIONAL THE MONEY STORE FIRST INTERSTATE BANCORP CORESTATES FINANCIAL SOUTHTRUST NORWEST HOLDING COMPANY FIRST UNION WACHOVIA 1995 2009
16. - 16 - PLASTIC WILL BE REPLACED BY SILICON Banks don’t have the global reach or infrastructure to lead the payments charge – hardware manufacturers are the biggest distribution channel via native install $1,592 $2,211 $3,104 $4,297 $6,110 $8,961 $11,142 $13,980 2015 2016 2017 2018 2019 2020 2021 2022 Transaction value of next-gen1 payment tech (USD, billions) Digital Payments will be Delivered via Device Source: Statista Note1: Next-gen payment tech includes EMV chip, QR code, and NFC/contactless payment systems. Data after 2018 are projections. THE NEXT WAVE OF BANKING WON’T BE LED BY BANKS
17. - 17 - INTERNET USERS THAT PREFER MOBILE PAYMENTS (2017) WORLD’S LARGEST MOBILE PAYMENT PLATFORMS The importance and profitability of payments is becoming apparent to tech companies. By 2023, digital payments will total $3.5 trillion and occur largely outside developed markets 64% 63% 46% 46% 44% 41% 41% 39% 39% 38% 36% 36% 35% 33% 33% 33% China Mongolia Brazil Kenya Chile Colombia Russia Ukraine Worldwide Cambodia Myanmar Saudi Arabia Sweden Mexico Israel India COMPANY ACTIVE USERS Facebook / Libra* 2.7 billion+ WeChat 1 billion+ Alipay 1 billion+ Samsung Pay 1 billion+ Apple Pay 383 million PayPal 250 million Amazon Pay 50 million Google Pay 24 million Note: *This assumes Facebook launches Libra across all platforms. Source: Allied Market Research, WorldPay Global Payments Report, 2018 SOCIAL NETWORKS ARE THE NEW PAYMENT NETWORKS
18. - 18 - The money in banking in the future will be in data Source: Google Images, Allen Farrington (@allenf32) DIGITAL TRANSFORMATION ENABLES NEW OPPORTUNITIES TECH WILL EAT BANKING
19. - 19 - The next phase of fintech will be in open finance, which builds off public blockchains, but fits within the existing regulatory landscape FINTECH TECHFIN OPEN BANKING PERMISSIONED BLOCKCHAINS OPEN FINANCE 2009 - 2011 - 2016 - 2017 - 2018 - • New products and platforms • Targeting small slice of the value chain • Distributing products and services via app • Leveraging consumer data in new ways • Enabling 3rd party access via API • Create new offerings or improve UI/UX • Consortia-led efforts • Rebuild existing FS “plumbing” with “DLT” • Open source money on public networks • Censorship resistant financial services Source: Andrew Wong, Macro Narratives in Blockchain, published Feb 2019 MOVING TO OPEN FINANCE
20. - 20 - Source: CoinShares Research BITCOIN Innovation in Value Transfer Network: Miners and Full Nodes Application Universe: Censorship resistance, time-stamped data, disintermediated payments, distributed compute, data storage, and more Protocol Bitcoin OPEN PROTOCOLS. OPEN NETWORKS. With bitcoin, companies can deliver financial services at a fraction of the cost. Bitcoin will do for financial services what the internet did for software development • Bitcoin is an open, permissionless financial network • Blockchain is a global settlement system for all transactions • Not stuck within one platform or application – bitcoin can move freely on the network • Users can interact with the network directly or use a trusted intermediary to minimize risk - it’s a choice! Platforms
21. - 21 - The internet did not kill companies. It enabled new types of companies to grow and made existing ones more agile and efficient. Bitcoin and open financial systems will not kill financial institutions. It will enable new types of companies to grow and make existing ones more resilient. OPEN PROTOCOLS. OPEN NETWORKS.
22. - 22 - PERCENT TRUST IN EACH SUBSECTOR (2017 TO 2019) Source: 2019 Edelman Trust Barometer Financial Services Report 57% 36% 44% 46% 52% 54% 58% 62% 62% 0% 35% 70% Financial services Cryptocurrency Robo-advisory Peer-to-peer transactions Mobile wallet Financial asset management Insurance Credit cards Banks Financial services innovations designed to broaden access are not yet trusted Trust Neutral Distrust +2 N/A N/A N/A -7 +3 +5 +1 +2 IT TAKES TIME TO BUILD TRUST + / - % change 2017 to 2019