Banks: Past to Future (Part 2)
· A. Banking model Adjustments
∘ 1. Savings accounts for retail investors:
∘ 2. Credit Provider:
∘ 3. Data Analytics
∘ 4. Identity and Security
∘ B . TECHNOLOGY ADOPTION PATHWAYS:
∘ Scenario 1: Top to bottom
∘ Counter argument:
∘ Government CBDC introduction: India case study
· Scenario 2: Bottom to Top
∘ Technology adoption cycle:
∘ Small case Studies of Block chain adoption for Cardano
∘ Atala Prism: Identity on Chain
∘ Scantrust: QR codes for supply chain
∘ Community Banking: Stake Pool economics
∘ SUMMARY:
- Banks as they exists are on a point of no return with negative interest rates and entry of CBDC as a substitute for FIAT currency.
- Generation 3 blockchains like Cardano, Polkadot, Eth2, Tezos etc. are making inroads with large leaps in technology that will be required to generate returns using POS (Proof of stake) especially the ones relying on truly decentralized network, that can be trusted unlike the centralized ones controlled by the same set of institutions (classified as falling under banking cartel or modified large company cartel(where large government support and funding exists)).
- Modern community as a building block of international professional organization, has been enforced by technology networks. But reward structure for the value created which ideally should be cross border and non-hierarchy oriented, is currently missing. Taxation, governance rules etc. are governed by location of the workforce while this should be related to profession of people and not related to geographical location.
- Next generation banking based on communities that can easily transact values among themselves. No more centralized banking institutions are needed. Rather a set of dApps built on existing chains like Cardano / Polkadot / Algorand (and other chains with compatible features) can substitute them. People keep ownership of funds to themselves while generating returns using POS for example.
[Terminology: Centralization : Implies that it is not under one single power entity who controls the network instead it a set of distributed actors who are responsibile for running the miners which controls the network. This is to clarify the other way of interpreting this in sense of geographical distribution of servers which can be done by any centralized authority and call it a decentralized system , which is as vulnerable in terms of control by a governments acting against it.]
It is not yet clear from the earlier documentation how this transition might happen in the future. Will the banks instantly disappear or will it be a transformation of current banks to community driven institutions. As usual the way we probe our way forward is ask some questions and answer them. In the process we discover some insights into the situation.
A. How will banks adjust their business model in order to stay relevant in the age of crypto driven value chains ?
B. How will adoption happen of this technology happen: We explore two scenarios: Top to bottom and from the grassroot level.
In order to understand in layman terms how this is going to happen, we need to take a look into the revenue sources of the banks mostly.
A. Banking model Adjustments
Following are the customer segmentation of the current banking institutions:
- Consumer and Community banking : This is where most of the wage earners belong. We work in companies and get our wages paid out from corporate accounts to our consumer accounts held in the banks. And that becomes our source of bread/butter. Basically they charge their customers for maintaining accounts and being the middleman in paying people their wages. (with the rise of internet banking this certainly became better but still the Centralized systems revolving around customised banking software is still in place.).
Peer to peer banking via blockchain can easily address this system over time, especially when CBDC is introduced. In fact cross chain communication being already possible (very early stages. Look at NiPoPows for Cardano for example), we should be able to architect a system that allows new kind of corporate apps, that deals with payment of employees directly without need of a bank.So this is where the community banking concept will shine.
- Corporate and investment banking : Basically this is the segment addressing the protected account of the corporates which has a separate set of regulations as far as credit/lending/liquidation/forfeiture and other banking functions. It is obviously not accessible to wage earners unless they themselves own a corporate or be a part of equity holder. Their source of earning would be again acting as middleman for the transactions. This segment may be a direct replacement target for CBDC for example, where the consumer (corporate) has direct contact with the central Bank via the digital channels. Data analytics and apps replace the human factor in between.
This segment would be a direct source of connection for example to the central banks when liquidity is injected into the market and distributed via corporate financing to projects. The corporates suck up cheap credits and use it to inflate their balance sheet and provide some token jobs (to show to the government) and create inflation in order to price out the cheap credit repayments. It is a win-win for the corporates and loss for the consumers who never get access to the credit lines provided by the central banks, being only left with debt and higher inflation as consumers of products created by corporates.
- Asset and wealth management: Basically this part deals with the stored wealth of individuals or corporates and tries to recycle this to other segments in order to generate returns (both for themselves and their clients). Just meant to address the needs of HNW (high net worth) entities. For example they would be associated with funds, ETF, leveraged instruments in order to provide their rich clientele with exclusive services otherwise unavailable to normal investors. In this case they take a margin / maintenance fees for the money they manage and for large fund size this easily becomes a good way of earnings. This segment has one important human element necessary, the investment manager who cannot be replaced (for now …till AI also eats up this job), because trading is still a mind game.
So for the time being we can safely assume that other than crypto being a separate investment class and providing new ways of generating returns, the banks will still have some role to play, albeit for the rich people only (top 10 percent or so).
- Commercial banking: Commercial banks provides comprehensive financial products to the clients including small businesses, mid-sized and large corporations, and local government. So it basically tries to provide instruments and tools for the business segments to control their money flow. Their earnings can be via the data analytics of their customer base transaction history and tying in the customers via providing them tools that helps them in their personalized segments to enhance and maintain customer value, thus creating stickiness and indirect revenue source via transactions. Here Defi can play a very important role in ensuring peer-to-peer payment systems between business without the need for banks who basically adds no value at all. And to take care of the customised financial applications, there will be the so called dApps that can be used to deploy capital by individuals for getting returns or availing of other financial channels.
From the above segmentation we filter out the two relevant segments :
- Consumer and retail banking
- Commercial banking
where open blockchains can possibly act as disruptors in form of providing alternative value transaction channel for consumers and small/medium scale enterprises. In the above two segments the main value generation channels are:
1. Savings accounts for retail investors:
Since the blockchain staking mechanism provides an automated, safe and easy way to provide returns (equivalent to saving accounts in banks), it goes without saying that in this zero interest / negative interest environment, capital will flow towards this stream and hence banks will find it hard to survive based on this source of capital.
2. Credit Provider:
An obvious offshoot of the above savings account via staking, means that we will have facility of liquidity pools, where capitals are locked in for a longer period of time, and this capital will then seek to get returns via dApps built on top of the stake pools which will provide loans (against collaterals) to people. Later as this matures, we will have credit agencies that will provide identity based credit scores for individuals so that they can take these credits at interest rates determined by they personal scores.
3. Data Analytics
Since right now banks are able to keep retails customers this data analytics service generates revenue as the transaction goes via the banks. Gradually as people move over to staking based chains, these chains will have enough consumer behaviour data especially as cross chain interactions becomes the norm and since it is open data, these analytics platforms via dApps will be able to get these data, except they will need user permissions in most cases for personal data analytics and have to provide part of revenue to them. A win for the consumer who till now was basically losing out on this.
4. Identity and Security
B . TECHNOLOGY ADOPTION PATHWAYS:
From now on the scenario can evolve in two different ways. We will argue keeping the flow of value in focus. Where is value generated and how does the value flow ?
Scenario 1: Top to bottom
The above image shows the income disparity in the percentage of population in the world. The income gap between the high and low income group has expanded enormously. Because of this lot of money is stuck in the upper level of society. Hence these large amounts are with institutional investors and mainly guided by large funds / fund managers.
In order to attract these investments, equivalent instruments needs to be created in the crypto world, and offer equivalent level of services and legal frameworks so that the money can flow.
This is the so called Top to Bottom scenario. It means that the money has to flow from the topmost level (richest people, Hedge funds, Pension funds where Trillions are stored. Look figure below) to the people driven networks or so called decentralised networks.
The use of web3.0 spreads over time (7–10 years), the value based internet driven by corporates communicating with each other (right now private chains and later a collaboration of private with public chains like generation 3 chains or even better ones), will suck up some of the stored investments in funds. And this value unlocking that happens via the blockchain driven internet.
Counter argument:
A counter argument to the above simple scenario would be as follows. What happens when the corporates / Governments who are owning most of the money and power try to maintain their hegemony over majority of the middle/lower middle class population, by creating their own chain and not using the public ones like Cardano, ETH2, ALGO, Polkadot (to name a few) ?
Let us take the case study of India who is actually trying to do the same except without the people knowing or able to control it. They are probably not using a blockchain even (but the centralized system can be replaced by a centralized Chain as China CBDC has done already).
Government CBDC introduction: India case study
India has formed a government and large corporates partnership entity called NIPC. They have a nice branding (as mentioned in the earlier article, pouring poison with a sweet smile) so that people do not recognise what they are getting into. In this case they have created the most centralized monetary control system (let us call in CBDC Indian version) where they control every single transaction. In order to spread the system, government acts as the stick master, who passes laws in order to make institutions comply in using their payment gateway. And once the transformation is complete , the next generation of torture via law/financial control systems will be introduced. A match made in heaven between the filthy rich and the government. People being used as toys only.
Now this system can serve the purpose of rich for sure, but they will not be able to serve the people, as the foundation of debt driven economy and FIAT printing stays in place. This is at best what these institutions can do, and their the game stops thee. In fact each of these government will create these jails inside their country so that anyone who wants to do anything will have to use these centralized systems. China and India recognizes their demographic strength and will use that to drive up these control systems.
But outside their country this institution like NIPC will be irrelevant. And that is where the value of the open standards like Cardano, ETH2 will shine. They have the trust of the common people of the world and will be used across the globe. Since we are living in a new age of globalization, these chains will provide cross border value transactions. These chains represent trust of common people and where global citizens come together leading to maximum wealth generation except the wealth is spread more uniformly among people.
One can draw the parallel of the US stock exchange and the Chicago Mercantile Exchange for commodities trading (a bad parallel but we will see why it is relevant). In this case for the past 100 years due to dominance of the USD for global trade, the above institutions have been invested upon by all the countries and hence gained global acceptance and source of value transfer and investment by large corporates. They have been used for raising funding from global audience.
Similarly as these open blockchains (run by 1000s now and millions later) gain acceptance, businesses will use these as the default cross border value transaction medium. Eventually what will happen is the centralized unitary government driven systems such as NIPC (Indian CBDC) will interface with these open standards in order to gain greater acceptance in the global community.
Thus all the international cross border banking transactions, that now happen via the banks who have a monopolistic power to set prices, will gradually be replaced by peer-to-peer channels such as blockchains which are interacting with one another and provides Dapps for making these possible. Corporate dApps will serve purpose of corporate customers and retail dApps for normal consumers.
Thus the value shift that we envisaged will eventually happen and who will be running these chains. A lot of small groups of people all around the world. This revolution has started and the economic models built into it will make it scale 100–1000 times more than what centralized institutions can ever manage. Thus the dream of community banking will drive value from top to bottom.
Just for stats let us look at the compared market cap of the current top Blockchains and compare them to the largest banking institutions of the world:
Eventually when corporates see this value shift they will be investing in these smaller corporate entities (the algorithms that control these chains will ensure a more equitable distribution of value in terms of staking rewards) and try to take a share of the pie/value generated. For the first time (in last few centuries) we will be seeing people driven economic value transfers.
Scenario 2: Bottom to Top
In this scenario, what the current third generation chains are targeting, is weaker business segments and smaller economies in order to make their financial systems more robust, transparent via adoption of their chains. In the process they are increasing their network growth and robustness.
Technology adoption cycle:
In this segment we try to answer the question:
What will be the time horizon of these changes taking place ?
COVID-19 and unlimited QE all over the world (especially in the developed countries in EU and USA , is triggering the growth of crypto adoption (driven by Bitcoin ) and is going to help this value standard to cross the technology chasm. Once bitcoin helps spread the word about crypto among the masses, it will help the second and third generation crypto to cross this chasm as well as they actually remove much of the drawbacks of the bitcoin and gradually convince developers, institutions and retail investors (last phase) to begin using crypto in mainstream.
Small case Studies of Block chain adoption for Cardano
Atala Prism: Identity on Chain
For those who does not know about Digital onchain identity they can refer to my earlier article on the same. What Atala does is package the requirements of large organisations especially governments who have to issue identity for its citizens (largest scale of operations running into 100s of millions of people at the same time) and provide it as a service. It allows governments agencies like libraries, universities, job centers and host of other organisations to work with each under yet giving control of identity of the people, so that no misuse of personal data is possible. Also since the whole system is based upon open public blockchain the system is in to a large extent decentralized thus providing stability against attacks and corruption.
Scantrust: QR codes for supply chain
For example in the supply chain business, cutting across different segments it is now well established that blockchain provides very good traceability of goods from production to sales.
This small company based in Berlin is making headways in making special QR codes that helps to track goods end to end from source to consumption using blockchain.
These fundamental changes happening silently will help the adoption of the blockchain for many day to day stuff. Because the cost of not doing it will be very large as days go on.
Community Banking: Stake Pool economics
Most importantly if we focus on the business of staking as we are doing in CARDANO it is simply unimaginable that more that 1600 independent small operators are working together to host the MOST DECENTRALIZED CHAIN IN THE WORLD. It is an extremely scalable chain that is now going to spread all over the world into different segments. Few things the world community will be observing just like they observed Bitcoin from the beginning.
- Scalability and the robustness of chain against failures.
2. Transactions on chain and how adoption increases this value constantly.
3. Cross chain interaction with other relevant chains that already have widespread adoption such as ethereum. As the gas fees for ethereum is very high, and cardano has already built a bridge using KEVM, it will help to drive traffic from Ethereum to cardano network and finally adoption of Cardano as default chain of further development.
And as the dApps ecosystem starts to get developed on this, we can now use the capital in stake pools to utilize the capital to generate higher return for the stakeholders. Just a matter of time. And then the true community banking functionality will be triggered.
With that identity management as well may kick in, because banking being a regulated industry these pools will be handling financial transactions more and more over time, and hence will come under financial survelience.
SUMMARY:
- Corporate Banking may still have some lifeline in terms of time for crypto to catch up with them. But there is no reason community banking should survive any more because effectively small retail investors now have to pay the banks due to negative interest rate and no value added service.
- With recent bull run of the crypto starting in mid 2020, BTC is already become the largest in terms of market cap, crossing that of JP morgan. Good luck. What a seminal achivement of this token!
- COVId-19 has just allowed the crypto industry to leap frog into the future, with the infinite Quantitative easing introduced by the US and EU government, in order to support the lockdown scenario. Thus the ‘chasm of Uncertainity’ in the innovation curve has been crossed and we are looking into the face of strong crypto adoption both ‘top down’ and ‘bottom up’ scenario sketched earlier.
- We expect regulators now to warm up for slapping new regulations in terms of KYC for wallets etc so that the government can play a cat and mouse game for tax purposes.
- CBDC and crypto co-existence and co-working is going to be the future trend where they support and learn from each other to make the world more decentralized and hopefully better than the current unsustainable scenario we are in.
