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
   

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   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?
   

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   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
   

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   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
   

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   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
   

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   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?
   

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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.
   

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   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
   

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   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
   

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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
    

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    OUR FINANCIAL INTERMEDIARIES DON’T INSPIRE TRUST
    

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    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
    

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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
    

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    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
    

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    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
    

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    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
    

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    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
    

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    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
    

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    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
    

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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
    

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    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.
    

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    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
    

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