I fear global banking regulators are about to make a decision that will inadvertently “obsolete” banks by banning an upcoming technology shift. This error would guarantee that the tech industry would continue to bypass the banks as internet-based payment technologies begin to scale.
The telecom industry offers a cautionary tale: when Voice Over Internet Protocol (VOIP) was invented in 1995, most people vilified it as a technology that didn’t scale and posed no threat to the telecom giants. Then, around 2003, the technology to scale VOIP came along—broadband—and in a flash, most of the telecom industry’s copper wire networks were obsolete. Useless relics.
Bitcoin is a “Money Over Internet Protocol”, as is Ethereum possibly. Just like VOIP transports voice data on the Internet nativeBitcoin and Ethereum move value data around the internet native. Most people denounce Bitcoin, Ethereum and Co. as protocols that are not scalable and cannot possibly threaten the established financial industry, just as they denigrated VOIP. But the scaling technology is here now — it’s called the Lightning Network, a Bitcoin Layer 2 protocol. Its throughput capacity is roughly the same as Visa, and payments via Lightning cost practically zero. There are other scaling technologies as well. If I am correct and scaling technologies for internet native money protocols have been introduced, many legacy systems operating in the financial system today will become obsolete within a few years.
As the CEO of a new generation of banks – a Dada bench (“dollar and digital asset bank”, defined as a custodian authorized to handle both and pronounced like “database”) – my company lives with the problems inherent in the outdated legacy systems of the banking industry on a daily basis. From a cultural point of view, banks have a long tradition of building complex “walled garden” IT systems. Fintechs have emerged in recent years to provide efficient frontends that act as “middleware” between antiquated backend systems and the user experience demanded by customers. Culturally, fintechs build the opposite of banks’ IT systems – fintechs tend to build their systems as open and “flat” as possible to create network effects. If banks had done this, fintechs would not have to exist! But until Money Over Internet Protocols came along, banks still played a role because fintechs still had to work with a legacy bank to process their customers’ US dollar payments.
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Large-scale “Money Over Internet Protocols” are a real threat to traditional banking, as they allow money to move outside of the traditional, antiquated payment lanes. To date, the US banking industry has lost around $600 billion, or 3% of its deposit base, to the crypto industry — and it has happened before that scales “Money Over Internet Protocols”! Despite all the legal, regulatory, accounting, and tax issues their products face, and all the rampant criminals and scammers (who ought to go to jail), the tech industry has proven its ability to bypass the banks.
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It will take Lightning a few years to build this proverbial broadband (scaling) infrastructure before the “money over internet protocols” reach their tipping point in scale. But make no mistake, it happens. The proverbial undersea cables that scaled VOIP are being laid before our eyes.
But the “Aha!” of these “money-over-the-internet protocols” is neither cost nor scope. There are two ahas that are far more important: integration speed/cost and developer communities.
- Integration Speed/Cost: Anyone in the world can become a member of these burgeoning payment networks in a matter of hours, with devices costing a few hundred dollars.