I fear global bank regulators are on the verge of a decision that will inadvertently “neutralize” banks, by banning the upcoming technology hub. Making this mistake would ensure that the tech industry continues to rally around the banks, just as local online payment technologies have begun to expand.
The telecommunications industry presents a cautionary tale: When Voice over Internet Protocol (VOIP) was invented in 1995, it was underestimated by most people as a technology that could not be scaled up and was not a threat to telecom giants. Then, around 2003, VOIP – broadband – came out and within a flash, most of the telecom industry’s copper wire networks became obsolete. Relics are useless.
Bitcoin is a “VoIP money transfer”, as is probably the case with Ethereum. Just as VOIP transmits voice data around the Internet originallyBitcoin and Ethereum are moving value data around the internet originally. Most people underestimate Bitcoin, Ethereum, and others. As protocols that cannot be scalable and cannot threaten the current financial industry, just as they denigrate VoIP. But scaling technology exists now – it’s called the Lightning Network, and it’s a layer 2 protocol for Bitcoin. Its throughput is almost equal to that of Visa, and payments beyond Lightning’s cost are almost zero. There are other measurement techniques as well. If I’m right and the scaling techniques of the original online money protocols have arrived, many of the legacy systems that run in the financial system today will become obsolete within a few years.
As CEO of a new dynasty of banks – A dada bank (“Digital Asset and Dollar Bank,” defined as a depository institution authorized to handle both and pronounced like “data bank”) — my company faces the problems inherent in the legacy systems of the banking industry every day. Culturally, banks have a history of building complex IT systems “walled gardens”. Fintechs have arisen in recent years to provide efficient frontends that act as a “middleman” between legacy back-end systems and the user experience that customers demand. Culturally, fintech companies build the opposite of banks’ IT systems – fintech companies generally build their systems to be as open and “low-walled” as possible to create network effects. If banks did this, fintech companies would not need to exist! But until the advent of Money VoIP, banks had a role because the fintech still needed to partner with an old bank to settle their customers’ payments in US dollars.
Online money protocols on a large scale pose a real threat to traditional banking because they allow funds to move outside of the old traditional payment range. So far, the US banking industry has lost nearly $600 billion, or 3% of its deposit base, to the cryptocurrency industry — and here’s what happened Before Scaled Money VoIP! Despite all the legal, regulatory, accounting and tax problems their products face, and all the criminals and fraudsters that run rampant (who should be in jail), the tech industry has proven its ability to get around the banks.
It will take Lightning a few years to put in place that exemplary broadband infrastructure (scaling) before “money over IP” reaches its tipping point at scale. But make no mistake, it happens. The proverbial undersea cables that scale VOIP are laid before our eyes.
But “Aha!” Of this “money voip” is not cost or volume. There are two “ahas” that matter most: integration speed/cost and developer communities.
- Integration Speed/Cost: Anyone in the world can become a member of these emerging payment networks within a few hours, using equipment that costs a few hundred dollars.
The IT systems of banks will not be able to compete with that.
It’s not even about whether legacy tech architectures can compete with these emerging protocols, for the simple reason that they are fast, cheap, and easy to join these networks. I remember a recent conversation I had with a B2B payments company, whose CEO was so proud that his team cut the time needed for their commercial clients to just 3 months to integrate with their system. In the world of legacy, 3 months is impressive. But the paradigm has changed: Payment system integration time is now measured in hours, not months or years — and a few hundred dollars, not a few million dollars. It is clear which approach will win.
- Developer communities: Unlicensed open protocols have huge developer communities, compounding the speed of development of the ecosystem and network effects. Network Effects is all about complexity. The code libraries and developer tools available for Bitcoin and Ethereum are an important infrastructure that bank-owned systems cannot replicate. Moreover, these developer communities create interoperability organically. Banks' "walled gardens" systems with closed groups of developers will not be able to keep up with the pace of innovation.
So, what is the role of banks in the world I describe? Answer: Banks become software application providers, providing access-controlled applications that run over unauthorized open protocols and to make them accessible to inexperienced users, just as carriers do with VOIP. I bet very few of us use the command line interface to make a phone call - although we can use it if we want to, most of us pay to use communication providers instead because they make the user interface so easy.
This is what banks will do, too: provide access-controlled applications to facilitate the use of "money over IP". Huge and successful businesses are built exactly this way - like access-controlled applications that run over unauthorized open Internet protocols. Car companies are just one of many examples - they are software companies now, albeit offering software that runs on a different type of hardware.
What about central banks? What would their role be in the world I describe? No difference. They will become providers of a fiat currency issuance software application that operates over unauthorized open protocols as well.
This brings me back to my fear that global regulators of banks (specifically, the Bank for International Settlements) are on the verge of making a decision to "wipe out" the banks. why? Because the BIS is proposing a bank capital transaction that would effectively prevent banks from interacting with unauthorized open protocols. If they do, they are ensuring that the tech industry will continue to rally around the banking sector.
The biggest concern for global bank regulators from banks that use open and unauthorized protocols, I think, is compliance. But banks do not need to comply to be included in the base layer of their IT systems. Compatibility can be included in applications that run above the base layer and that control access. In fact, this is what banks are already doing today with TCP / IP. Every bank uses TCP/IP, yet strictly controls access to their online banking platforms. Criminals and sanctioned countries use TCP/IP today as well, but banks have the tools to stop them from using banking apps. Same with Bitcoin and Ethereum - banks have the tools to prevent illicit finance from using their apps. It is easier to monitor illicit activity on open blockchain systems than on legacy systems.
At its pivotal juncture, telecommunications was a heavily regulated industry, just as it is today at a pivotal juncture. How, then, did telecom companies turn out to be software companies and avoid obsolescence? Answer: The organizers have enabled them to make this hub.
This is what banks will become, too - software companies - but only if Banking regulators allow banks to do the same hub. If they don't, it will be clear, looking back 10 years from now, why the tech industry has triumphed.