The financial markets are in transition. It is rather slow right now but things are going to accelerate. There will come a point where things move at light speed.
Blockchain will be at the center of the remaking of our global financial system. This is something that was long discussed by crypto advocates.
Ultimately, they will be correct although probably not in the way they envisioned.
The driver behind this will not be start ups or decentralization. Instead, it will be Wall Street. We will have the same animals operating like they always did. They will incorporate blockchain into their system, enhancing the services they provide.
In this article we will delve into how blockchain will be the basis of finance.
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Our global financial system is not global. Instead, like social media, it is siloed. We see markets that are isolated, permissioned, and incongruent with others. Settlement is slow, with more intermediaries adding friction to the system.
As long espoused, blockchain solves this.
The question is what do we mean by blockchain. To crypto uses, this is permissionless and, to some degree, decentralized. For Wall Street, this means something completely different.
JP Morgan entered the ring with their permissioned blockchain that was established a few years ago. This includes a number of banks who operate on the system. This is closed, facilitating settlement between the different entities. To make it easier, the bank came out with a stablecoin that is utilized.
While crypto advocates will scoff, we are going to see a lot of this. There is no dispute this is a centralized, owned blockchain that is controlled. It does, however, provide transparency to all who are involved in the transactions.
For much of the financial world, this is what is needed.
The tendency is to look at the system through our eyes. The means, for the most part, looking at the retail operations, i.e. how these entities interact with us. That is only a small piece of the total. When we look at the volume, the major action is between these institutions themselves. Unfortunately, they deal with the same thing as everyone else; a slow system (of settlement) mixed with a lack of transparency.
Blockchain solves this.
This is another concept we have seen the crypto community work on. The idea of trading across Ethereum, Solana, and Cardano is something many have mentioned. We see exchanges, protocols and other infrastructure being built.
Let us contrast that with the existing financial system. We have the CFTC, Nikkei, DJIA, and COMEX. These deal in stocks, commodities and metals. Then we have futures. We can add in repo.
The list just keeps growing.
Of course, each of these is separate and siloed from the rest. There is little direct interaction. Transferring assets is difficult (if not impossible). It requires going through other intermediaries.
Tokenization is the answer. Once there is a tokenized representation of an asset, it can be swapped across many different networks. As we saw with public networks, moving from a stablecoin on one network to the base coin on another is a simple process.
Here is where public blockchains like Ethereum could enter. These tokenized assets could float across that network, providing a transfer mechanism that beats the settlement times of what financial institutions are dealing with.
Essentially, we are looking at a system anyone can access that provides instantly settlement on a global scale.
No more silos or isolation.
Does this mean that public blockchains are slated to be nothing more than niche networks? Not at all. In fact, the future is massive.
One of the challenges traditional financial firms will face is Big Tech. Fintech has done damage over the last 20 years, gobbling up large market share in some sectors. This will continue.
The other facet to this equation is AI. We cannot ignore the fact that major entities are already implementing this. That said, as we move further along, the distribution of AI horizontally means services of all kinds. This is a threat to the major institutions.
At present, the numbers for crypto pale compared to traditional finance. The wealth difference is epic.
There is one major advantage to this. We are dealing with the development of networks. This means that value is driven by networks effects. Since public blockchains are tokenized, values grow as those effects take hold.
This sets things on an exponential curve. Where traditional finance will face issues is from the fact their network effects are purely financial. Future success requires more than that.
All of this will unfold over the next decade. We will be in a period where hybrid systems rule. This is true for others sectors along with finance.
