Harvard University

Someone recently asked me about the future of the financial sector, especially that of the banks. To be upfront about it, I don’t work in the finance sector but this is my take on it.

With the development of Web 3, blockchain and cryptocurrency, the concept of money is going to continue with its current trajectory of journeying towards digitization and decentralization. Money has already been existing in the digital format for quite some time and I believe that this transformation was actually integral to the early growth of the financial sector at the turn of the century. Along this journey, the digitization of money also helped to spark the proliferation of many creative pursuits, ones that help to reimagine currency and its storage.

First, we witnessed the emergence of DeFi, which is an emerging financial technology that is based on secure distributed ledgers. This technology removes the control that banks and institutions have on money, financial products, and financial services. This means that anyone can potentially just store their money in their digital wallets without ever going through any third-party organizations.

I think that this trend of viewing cryptocurrency as an legitimate medium of transactions, will become stronger when Gen As enter the workforce. Gen A is the generation after Gen Z. This generation is one that lives and breathes cryptocurrency.  Why? This generation is being brought up on a steady diet of games like Roblox and MineCraft.

In these types of gaming construct, aside from playing the games, players can also create games for others to play and they can monetize their gaming creations in various ways, such as charging entry fees, paying for superpowers, paying to skip difficult levels, etc.

Plus, they can also design digital assets like jewelries, clothing’s, accessories, etc and sell these for a tidy sum of money. Last I checked, one of the players sold a piece of game weapon for around USD$32 and he/she/they/zir sold it more than 1,000 times.  There are many of such cases. Instead of USD, players/ creators earn Robux, which is the digital currency used in the Roblox game and they can store it on Roblox’s server.

Through platforms like these, Gen As are exposed to and have become very familiar with earning/ using digital cash. Their first experiences with money never involved any banks, unlike the earlier generations. As such, it is natural for them to view/ use cryptocurrency as an legitimate medium of transactions when they step into the workforce. Salaries by then, could be deposit directly into their digital wallets. Many mom-and-pop stores now also accept cryptocurrency.  By then, they may not even need to step into a bank or use any banking apps for any financial transactions.

Second, hackers and scammers have been persistently exploiting banks’ cybersecurity weaknesses and have shaken substantially the consumers’ confidence in banks. During the peak of Covid-19, the Hong Kong Monetary Authority has been busy dealing with such hacking and scamming incidents in Hong Kong. Media platforms have also been reporting similar incidents in other parts of the world and this really added fuel to the fire.

At the other end of the spectrum, there were also reports of spectacular weaknesses within the cryptocurrency system. Proponents of cryptocurrency like to promote the view that the blockchain is unhackable but anyone who has done some research will know that this is not true. It just takes a lot longer to hack the system with current technology.

These blockchains and nodes, after installation, will always become legacy systems and lagging behind new technology. Even when upgrades have been applied to these legacy systems, the improvements provided by the enhancements are still limited by previous algorithms. New technology can be developed from scratch, and that in itself can be considered as an advantage because it is not encumbered by old build. When new technology develops and computer processing power increases, hackers in the future are going to test the new technology against these legacy systems. I believe that one day it might have sufficient computing power to hack and manipulate the systems.

Now, its like watching a tennis match with both sides taking hits, and the bystanders glued to see which side will buckle under first and then they will flock to the safer haven. So, on this second point, I think that the resiliency, stability and security of the system, are extremely important functions of a financial system, and it signals its ability to preserve the wealth of the user. Now, it seems like banks are doing a better job at this, but I noted that not everyone is drawn to this (which I will explain later).

Third, the value of services provided by banks are slowly being whisked off by innovations stemming from DeFi. For e.g. people currently buy houses with vanilla products like housing loans from banks. Now, people can potentially buy houses or take out loans by crowd funding from multiple people on the blockchain. Monthly repayments can be split through smart contracts apportioned to the multiple lenders.

Failing to repay loan? Well, smart contracts can be designed to pick up on that after certain number of buckets, reassigning titles and activating an automatic auction through a linked property website.  Anyway, smart contracts can potentially be programmed to give out tenders for repossessions on behalf of all lenders. All these actions can be performed without a bank, lawyer(s), and maybe even without a real estate broker.

Fourth, at the moment, growing body of organizations and consumers are increasingly concerned about ESG and sustainability issues and how business operations contribute to carbon emissions. Cryptocurrency and its exchanges were previously under a lot of attacks for how much their technology consumes electricity and accelerates climate change. All these time, I noted that coders and technologists have been working extremely hard to make their operations more green and as many already know, some of the exchanges and mining operations are shifting to harvesting renewable energy like hydropower and leveraging proof processes that use less energy. I must say that the people who are on the side of cryptocurrency are making significant headwinds by ensuring that their Scope 1, 2 and 3 emissions are fully minimized.

However, I can’t say the same for the banks. The finance sector is a well-aged industry therefore it is involved in different sectors, so even though they may score well in Scope 1 and 2 carbon emissions, I am not too sure about how they will fare in the Scope 3 category. I’ll be really concerned if banks’ Scope 1, 2 and 3 carbon emissions are more than the crypto exchanges and mining operations. I belong to the Millennial generation and I think that the Gen Zs and Gen As are even more concerned about ESG and sustainability issues and this is going to affect their future choices.

Fifth, if you notice, we have amazing real stories of how people betted on cryptocurrency and became overnight millionaires and billionaires. People are drawn to such stories because it gives them hope of a better future. As such, many are on the lookout for new Initial Coin Offerings, hoping for a repeat of the BitCoin story. These people are not on the lookout for stability. On the other hand, they are seeking a lot of fluctuations so that they can flip their digital assets at a higher price.

Apart from this, we have witnessed extraordinary news reports of Non-Fungible Tokens (NFTs) artists who sold their NFT artworks for millions of dollars and because of this, we have incredible number of people flocking to peddle their NFT artworks. I am actually not concerned about how NFTs could potentially be used as a vehicle for money laundering although it really is a concern. I am more amazed at the social effects created by the invention of NFTs, how NFTs can only be purchased by using cryptocurrencies, how it has activated an extremely large global group of artists and artist wannabes and finally, how all these combined to play a critical role in generating enormous amount of demand for cryptocurrencies.

So I currently have these five thoughts and to quickly summarize, it will be that the draw towards cryptocurrencies will become stronger because of firstly, NFTs and second, Gen As coming into the workforce. On the accounts of ESG and sustainability, we cannot be sure that Scope 1, 2 and 3 carbon emissions of banks are more than that of crypto exchanges and mining operations. If cryptocurrencies are indeed more environmental-friendly, it simply adds another point to attracting consumers. In additional to that, innovations stemming from DeFi are competing directly with the traditional financial products offered by banks. This makes both sides equal in some sense and since its equal, consumers would have less resistance in choosing alternatives to banks. Last but definitely not the least, the cybersecurity of the financial system. It influences the consumer’s (or at least just my) perception about the resiliency, stability and security of the financial system, and how these inter-play to preserve the consumer’s wealth.

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