#BeyondFintech: Trailblazer session with Lex Sokolin
In the latest trailblazer session for the Fintech & Payments Club, it was an honour to host one of the few people who is perfectly placed to explain the crypto economy and the role it will play in the future of finance.
Lex Sokolin is Global Fintech Co-Head & Head Economist at ConsenSys. By background he is a fintech entrepreneur with senior operating and board level experience in blockchain, digital investing and wealth management. I was joined in this discussion by my co-host Monica Jasuja, Head of Product Management for Mobile Financial Solutions at Comviva.
If you weren’t able to join the conversation, here are the main topics we covered and the key learnings I took from it.
The outlines of finance in the future are emerging
It’s impossible to be specific about exactly what will occur in five or ten years time but the outlines are emerging. A simple way of understanding what these changes will look like is to compare finance to many other industries in terms of manufacturing and distribution.
Over the last 20 years, distribution of financial products has essentially been reduced down into a phone. You used to go to a bank or broker for a mortgage or loan but now you access these servicesgo through your phone. The fintechs that have established themselves have done so by winning this distribution battle.
However, things are still very archaic on the manufacturing side of finance. It’s like we are dealing with the Spotify of CD-ROMs or the Google of books. Manufacturing has not been digitised in the way distribution has. This is the new frontier of digitally-native finance, with blockchain used to build everything from scratch.
These new financial products will sync with the digitised distribution we have and fintechs that are well funded and of meaningful size will benefit. Incumbents, who have been focused on digital transformation, will find it very difficult to adapt because building from scratch will basically mean killing off their existing businesses.
As a result, many in the mid mid-market will die. Some big players will be able to cross the chasm and survive, as Goldman Sachs is starting to show with its transaction banking initiative. Large tech companies will also prosper in different territories because they already dominate distribution. Therefore fintechs, tech giants and some incumbents will be the three main players.
Legacy banking may never integrate crypto
While everything is uncertain, it’s possible that legacy banking never integrates crypto and that crypto rails only power the crypto economy. It’s also possible that the crypto economy is ten times bigger than real world GDP because it aligns with the computational networks that the expanding metaverse will run on.
In this way, digital money might only be used in the digital world. We have seen some examples where bitcoin has been used to pay for a house or a Tesla but we do not use Apple stock to pay for sandwiches and there’s no guarantee that crypto assets become part of the real economy’s payment rails either.
The trends that might make this convergencemerger more possible are Central Bank Digital Currencies (CBDC) and stablecoins. Companies like PayPal and Facebook (through Diem) clearly see value in a crypto asset that functions as a cash equivalent but there’s still a lot of uncertainty. For legacy banks that don’t already have crypto as a core competence, their ways of working may never provide a clear signal that crypto is needed.
Embedded finance enables horizontal monopolies
Embedded finance is a really interesting middle step between legacy banking and a crypto economic future because blockchain finance might still be ten years away. It has emerged because banks couldn’t catch up quickly enough with the innovation that tech companies brought about. Therefore connectors were needed to plug into particular institutions or key infrastructure, such as the payments or card issuing networks.
As a result, a layer of horizontal APIs have been created that transform legacy functionality into something modern tech companies can use. This enables companies like Shopify to partner up with Stripe and offer cash accounts or card payments to their ecommerce customers. Tech firms can now add financial products to almost any service and do so contextually within the user experience.
The new paradigm this establishes involves wiring right down to the legacy ‘manufacturing layer’ at the bottom, which may make the banks less valuable over the long term. The intermediate layer is where the value increases because the more data that goes through them, the cleverer they become. This is how horizontal monopolies develop.
NFTs signify status in crypto communities
There are many factors driving the growth of NFTs, including media industry involvement, big tech’s interest in the metaverse and the changing way that rich individuals in developed economies spend their money.
To understand the significance of NFTs, you must buy into the idea of digital value. One of the fundamental innovations that blockchain brought about was the idea of digital scarcity. This used to be hard, because anything digital could just be copied. As a result, the payment system that developed around digital assets of any kind was all about attention.
What digital scarcity does is establish a platform for property rights online. Whereas in the physical world we rely on a country’s legal system and law enforcement to enforce property rights, this was far harder in the online world before blockchain. If you then consider that there is no real difference between a jpeg and a financial instrument in software terms, you start to see how this sort of innovation provides a crucial lego piece for building a crypto economy.
This is why NFTs have started to play such an important role within crypto native communities. They allow people to signify their status in a form that others in the community recognise. While they have been around for some time, they have really taken off as the early crypto adopters have made money that they now want to spend.
Combine this with the fact that artists, musicians and sports teams (who are influential outside crypto) are also getting involved and you start to see why NFTs are really popular. How this develops is unclear but it seems likely that NFTs will play a permanent role in demonstrating status within the metaverse at least.
Think long term to take advantage of NFTs
While NFTs are here to stay, it’s very difficult to give specific advice on how artists can take advantage because crypto markets and adoption rates are hard to predict.
For digital artists, NFTs have now developed to the point where you can produce pieces of art and have people pay for them in a way that provides revenue beyond just renting out your skills. Just as a traditional artist can paint a picture and have it displayed in a gallery for buyers to view, virtual galleries for NFTs are making that possible for digital artists too.
Essentially, NFTs are a new tool that all artists should try to understand. Some people will make lots of money from them in the next six months but a better way to approach them is to realise that every gallery will have an NFT rail and all artists will have an NFT plan in ten years’ time.
Therefore you should play the long game. Try to understand the early crypto investors who want to signal to others that they can afford these luxuries. Find out what aesthetic they appreciate, the platforms they use and why something like a CryptoPunk with an early genesis date carries more weight than another NFT.
On Ethereum, you can look up Foundation, Rarible and OpenSea or see how Palm from ConsenSsys is being used by media enterprises and established brands. Elsewhere, you can look up how NBA Top Shot has been built on the Flow blockchain or what is going on with hic et nunc (‘Here and Now’) on Tezos.
Curiosity will help a new economy to emerge
One of the hardest questions for the builders of the future of finance is how to help turn an idea into a fully fledged economic system. This kind of big question can’t be tackled with linear models involving excel spreadsheets with cash flow analysis or revenue projections. It requires leaders who have an interest in novelty and who value curiosity.
Radical innovation is enabled when people are able to embrace curiosity and search for novelty, finding new areas for opportunity and hopping between them. It requires an open canvas that isn’t restricted by regulation. At the same time though, open possibilities need to be combined with systems thinking if any foundational blocks are to be built. Curiosity can make you drift, so it’s important to tackle things sequentially.
For individuals who want to be part of this new economy, getting good at one thing at a time is a useful approach. Once you have done this a few times, you’ll have some useful lego pieces that you can fit together into new forms of innovation.
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