Fragile Money Factories and Our Digital Decentralization Moment
Guest editorial by Jon Ungerland, CIO, DaLand CUSO
During the previous crypto crash (December 2018), when bitcoin price in USD dropped from $20,000 to $3,000 (and crypto/BTC was “dead!”), bankers and investors were relatively ignorant to and unconcerned with approximately $3.3 billion in capital that had migrated outside the global banking system into so-called stablecoins. At that point in time, the majority of the financial services industry was clueless when it came to bitcoin, most financial professionals knew nothing of the general category of cryptocurrency, and even fewer were familiar with the concept of a stable value coin (or stablecoin asset pegged to the USD). Today, during the present crypto and bitcoin “apocalypse,” the banking industry is now grappling with a staggering $150 billion in deposits living outside the banking system in the form of consumer and corporate stablecoin balances alone (with nearly $1 trillion dollars in global market cap across all cryptos having exited the global central banking scheme at the time of this writing).
Let that sink in for a minute. That’s 50 times the amount of deposit capital sitting on the sidelines in stablecoins within the crypto ecosystem in our present moment as compared to the last time crypto “died.” Far from a failed asset class, it seems crypto and digital assets may be lining up for an explosion into the mainstream with 50 times more powder in the rocket engine in comparison to the launch from $3 thousand to $60 thousand that started in 2020.
Perhaps that’s why stablecoins are the target of proposed (bipartisan) legislation and regulation currently being debated in the U.S. Congress. Stablecoin and crypto regulation is also on the agenda for the G20 summit this autumn. If these bureaucratic governance bodies charged with safeguarding the dollar’s reserve status are prioritizing bitcoin/stablecoin policy, then politely I’d suggest it’s past time crypto and digital assets become a similar priority focus for your financial institution. That is, if you’re interested in remaining in the wealth, money, and value manufacturing business for your community and consumer.
Let’s shift into a little thought experiment by analogy and see if we can gain some clearer perspective on the stakes for the banking industry. Imagine yourself as a mid-20th century manufacturing plant manager. Business has been booming for two decades. Cars, toys, appliances, housewares, they’ve all seen explosive growth due to the post-war shift to consumerism. However, there’s change in the air. A new substance, plastic, is 50x more available than it was in the 1930s. It’s also faster to produce, easier to use, and more cost effective for making anything from dishes and dolls to dash boards for the new family sedan. Knowing that, would you retool your plant for the plastic era, or would you double down on toys always being tin?
If the U.S. banking system is a factory, the electronic dollar (USD) is best understood as the network of machinery inside the factory. We’re not talking about cutting-edge machinery. What I have in mind is something more like a picture from the late 19th or early 20th century. You know the ones where workers are surrounded by a seemingly improvised series of belts, pulleys, and conveyors perpetually on the cusp of chaos and controlled productivity. It must have been simultaneously terrifying and amazing to see one of those factories in action, before precision engineering, robotics, computers, etc. The very fact product rolled out of the factories each day was surely a marvel as much as a miracle.
Such is the current situation with any modern person attempting to work and build wealth within the framework of the U.S. dollar. Our money, the global reserve currency, is now a complex and fragile network of archaic technologies built more than 50 years ago. Sure, the architects of the electronic dollar and the engineers in the factory of modern money mechanics have layered on new belts and pulleys along the way. Via an ever-expanding web of whirring wheels and whizzing belts, central bankers have bolted on checks, wire transfers, automated clearing houses, plastic cards, next-day settlements, account-to-account transfers, person-to-person payments, prepaid cards, etc.
If we’re honest about our operations and our strategies, despite our shiniest platform and best bolt-on innovation, most of our banking products and services are predicated on NACHA, SWIFT, and EFT technologies that are (on average) 20 years older than our Millennial or Gen Z customer/member targets.
For the last 20 years or so, the wizards of the world reserve currency (USD) have managed to conjure up illusions of their mid-20th century machinery working with the internet. Online banking, mobile banking, PayPal, Venmo, etc., are mere specters of money moving on the internet. In reality, electronic dollars don’t move on the internet. Just ask your IT admin; at best your credit/debit card processor, or your corporate settlements account allow electronic dollars to move under or behind the internet (maybe alongside if you’ve electronically optimized your entire operation to the core).
Our world is moving beyond the rusty industrialists and rotting infrastructure of the 20th century manufactured money mechanics, which powered the past era of financial services industrialization and productization. Money, like manufactured goods of the past, must become lighter, faster, more malleable, less costly to use, less prone to rot and decay, if it’s going to remain appealing to consumers and profitable for commercial entities. Just as consumers and corporations used the internet to overcome the inconveniences of centralized institutions controlling mail, music, magazines, newspapers, television, movies, travel, taxis, etc., centralized bankers are grappling with new moneys that live and flow on the internet (as opposed to simply being visible and accessible alongside it). Businesses and consumers are already deciding they don’t want to apply for a loan online and then have electronic dollars deposited into their bank account (or worse, a paper check handed or mailed to them). They want liquidity and capital streamed on demand (see “DeFi,” “Staking,” and “Liquidity on Demand.”).
Money will merge with the internet; commerce and economies will become truly digital (surpassing the current clunky, risky, expensive interfaces between electronic dollars and internet transactions). It’s time to modernize your plant operation in preparation for an era of streaming internet money. If you’re not sure how to do that, it starts with education, engineering plans, and new language of financial literacy. Let’s be less concerned with the price of bitcoin in dollars and more preoccupied with ensuring local, democratic, decentralized, financial flourishing can endure the probable demise of electronic dollar money mechanics.
At this moment, there’s $150 billion in money data in the form of stablecoins already merged with the internet – close to $1 trillion in capital across all cryptos. U.S. and global regulations are inbound, which will drive more adoption. Deposits and assets will move beyond electronic balances accessed with the internet. Retirements will need to be accessible in the world of the internet. Digital assets will need to be leveraged for property in the physical world. As the lines blur between past and future, it’s not too late to map a path to data-money being part of the core of your financial institution strategy.