Fintech: Past, present, and sci-fi future

Jame DiBiasio, financial journalist and author of Cowries to Crypto: The History of Money, Currency, and Wealth, describes the long history of money, what the shift from Internet 1.0 to 2.0 means for trading large illiquid assets, and considerations for companies when dealing with bitcoin. He looks to a fintech future of wearable and implanted technology.

DiBiasio is also the author of an FM quiz on the history of fintech.

What you’ll learn from this episode:

• The definition of money.
• What “tokenisation” means and how it could make illiquid asset trading easier.
• Bitcoin’s limitations and its opportunities for companies.
• How digital money can be programmed.
• The importance of fintech compliance and regulation.

Play the episode below or read the edited transcript:

To comment on this podcast episode or to suggest an idea for another episode, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.

Transcript:

Oliver Rowe: Welcome, Jame.

Jame DiBiasio: Thanks, Oliver. Good to be here.

Rowe: Over the past 5,000 years, how have the forms of money evolved?

DiBiasio: Well, in some ways we’re dealing with the similar issues that people were dealing with back then. The Sumerians wrote contracts relating to debt. Seventeenth-century Japan invented the futures exchange, but what’s different is that money has become more abstract. It went from being a consumable commodity, such as a head of cattle or a piece of cloth to a metal coin, to a piece of paper, to a plastic card, and now to algorithms and cryptographic hashes. So, this abstraction has allowed money to become more pervasive. That means we can apply its uses to a lot more goods, a lot more services, a lot more ideas. So, the uses haven’t changed for money, though. I mean what we, what we still need for, we still rely on money to serve as a unit of account, as a means of payment, and a store of value. Those were the classic definitions of money.

Rowe: What does tokenisation — ie, the transfer of real-world assets to blockchain — what does that mean for today’s financial markets?

DiBiasio: I think it means a lot. We’re talking about the shift from Internet 1.0, which was the internet of information, to Internet 2.0, which is the internet of value. And why that’s important is it will make things or processes that have historically been difficult to value and exchange into things that are a lot easier to value and exchange. So, for example, illiquid assets, private equity perhaps, or real estate will become more liquid, easier to trade. Large assets such as, say, a block of Apple stock will be easily broken down into smaller units. What this means that more and more people, whether they’re institutions or individuals, can get a piece of them and trade them.

Rowe: What about bitcoin? What is the future for bitcoin, and what effects will that have on business in general and the finance function, finance teams in particular?

DiBiasio: So, bitcoin in treasury operations, it’s getting a lot of noise. Bitcoin is the original use case in crypto. It is the protocol that solved the problem of double spending. If I send you an image on WhatsApp, we both now have that photo of the cat or whatever. You can’t do that with money, and bitcoin solved that problem, and it’s really still the only cryptocurrency that really proves that it does work. But there are problems with bitcoin. In my opinion, it fails some of the tests of money. It’s got an environmental problem — all the electricity that goes into managing the protocol. I do believe it will survive.

It will probably survive as a store of value, but it is inherently volatile. Volatility is basically baked into the way it’s designed. So I think that the real action and what should interest treasurers and others will be what evolves beyond bitcoin, where crypto goes into things like stablecoins, possibly into central bank–backed currencies and other things.

Rowe: And if you are a company trying to decide whether to accept digital currency as payment for goods or services, what things do you need to consider?

DiBiasio: Number one is compliance and regulation. That’s always number one. And of course, those things depend on where you operate, and it also depends on the nationality of your customer. So, obviously, if you’re doing business with someone like me who is an American citizen, that might be more paperwork. Governments are very concerned about crypto evading rules around money laundering, terrorist financing.

Beyond that, I’d say just very generally, it’s still quite early. I mean, we’ve seen headlines about companies like PayPal being able to help people transact in cryptocurrency, but they’re not sort of accepting it as an on-ramp or an off-ramp. You have to be already involved in the currency to do that. Big tech companies like Facebook and possibly Amazon are going to issue their own crypto coins. Facebook is a big backer of a project called Diem — it used to be called Libra. These may initially be internal to their own e-commerce platforms or their social networks as a means for spending just within their ecosystem.

But I think, given the size of some of these companies that we’re talking about, the use cases will become more widespread. And I think some of these coins will be more accepted as a means of payment. There’s also examples of this in the financial world and the inter banking market: JP Morgan, for example, has its own coin, which is experimenting using that to facilitate payments among its cross-border clients and counterparties. And what’s really interesting is some of these corporate coins, the ones that have a consumer-facing side to them, could even become really true currencies in the full meaning of the word and vehicles for investment. The history I’m thinking of here is bankers in Renaissance Italy. When they began using double-entry book accounting so they could make loans to one another among the people whom they already knew and trusted, this led to basically these IOUs became tradable amongst themselves. In other words, they invented a bond market. And I can see something happening along similar lines with some of these stablecoins or other forms of crypto where it could sort of leap the fences and become something more alive, in a similar way.

Rowe: Thank you. And some companies, for example Tesla, have chosen to invest in bitcoin. What should companies and boards consider when investing and making decisions relating to digital currencies?

DiBiasio: So, Elon Musk is a remarkable person, but I don't think he’s a useful role model for corporate treasurers. There is a self-promotion in what he does and which he can get away with because he’s Elon Musk. But if you’re a treasurer for any kind of company, you’ve got to first preserve and safeguard the company’s financial assets. Bitcoin is really not suitable for this.

I do think that there will be opportunities in other dimensions of the crypto world, though, that will become apparent with time. And I do think that it will be, for some companies, a competitive advantage to be able to transact with their customers in some form of crypto. And if that does take off, then for treasurers it could become a very small part of a balance sheet. But I think for the most part, I think we’re still a ways away.

Rowe: And central banks have a role in regulating digital currencies. You've touched on regulation. How are they doing that at the moment?

DiBiasio: The most interesting response is to develop digital expressions of their fiat currencies. China is taking the lead in this, but Sweden and Britain and many others are also looking at this and testing the ideas of a central bank digital currency — the EU as well. For one thing with COVID, we’ve seen there's a big need. What’s a use case? Why have this? With [the] COVID-19 pandemic we've seen it was a big need to distribute government funds much more quickly and efficiently to individuals or small businesses. A digital version of currency would bypass the creaky infrastructure of commercial banks and physically writing and mailing checks.

What’s even more compelling is that digital money can be programmed. So let’s just stick with this COVID example. Governments could program relief money to only be used for certain purposes, such as paying rent or buying food, or they could simply ban it from being used to say speculate on meme stocks. I think we see a lot of relief checks in America going straight into GameStop and other speculative things, which is maybe not really what we intended to do. So there is really interesting ways you can design a digital fiat currency to be useful. But at the same time, authorities do not want to undermine commercial banks, which of course have been the intermediaries of this sort of thing and play a huge role in the economy and in monetary policy.

The other way that central banks are reacting, and I think politicians in general, this is true, not just central banks, are reacting to the rise of digital currencies and crypto is to apply traditional banking regulations. These efforts are well intentioned because they have a duty to protect consumers and prevent financial crime.

But crypto does need to be regulated on its own terms. We’re talking about a network rather than a security or a particular company.

In the US, regulation is based on laws that were written in the 1930s, so applying that kind of regulation wholesale to crypto is more likely to cripple innovation and drive business elsewhere.

Rowe: Looking ahead to the future, what do you consider the next big fintech development?

DiBiasio: Fintech is leaping ahead on many fronts. Artificial intelligence is another big one, but also the infrastructure of cloud, biometrics for identity validation, and the mind-boggling expansion of data are all critical enablers. And then just around the corner we’re going to have 5G networks, the internet of things. Then the next corner quantum computing. So, let me give you first, I've got a prosaic answer to this question about the next development, and I’ve got a sci-fi answer.

So, the prosaic one is really that fintech’s biggest social benefit continues to be helping make finance far more accessible to more people. That’s both at the retail level in terms of giving people who lack a bank account but own a mobile phone, the ability to obtain credit or some insurance, and the same for small businesses or companies that are in supply chains or involved in trade. Ultimately, this creates new platforms for large multinationals to leverage their credit rating and their networks to create a lot more of financing opportunities in partnership with banks. In addition to other things that AI is doing to help companies manage and even predict cash flows, I think the predictive side is still more on the drawing board, but I think people are working on those sorts of solutions to give treasurers and others more and more visibility.

My science fiction prediction goes back to the original question about money, Oliver. And I think what we could be moving toward is a stage where our wealth, our credit, and our ability to transact will become embedded in our biology, whether that’s through wearables or through some sort of plastic card or metal card that we still carry with us. Or it could just be a photograph, a visual, selfie, and a retina scan, palm scans. All of these things will allow me to basically be a walking portfolio. So, I think this is very exciting, but it clearly will demand a progressive and clear regulatory response.

Rowe: Thank you, Jame. And finally, we have an FM quiz on how money has changed over the centuries. It’s based on Jame’s book, your book, Cowries to Crypto: The History of Money, Currency, and Wealth. For the questions and answers, go to fm-magazine.com/quiz.

Thank you, Jame, again.

DiBiasio: Thanks for having me. Appreciate it.