Blockchain set to disrupt trillions of dollars, billions of users; A2A payments taking off but not in US as FedNow is caught in culture wars, Stablecoins over tokenized deposits,
IMF free book: “Fintech and the Future of Finance”
1. IMF free book: “Fintech and the Future of Finance”
2. Blockchain set to disrupt trillions of dollars with billions of users!
3. Account-to-Account payments taking off, but not in the US.
4. Tokenized deposits? I prefer stablecoins!
At the Moulin Rouge: The Dance, Henri de Toulouse-Lautrec1890
“Welcome to the Moulin Rouge! It's the late 1800s, the century is coming to an end, and there's luxury and debauchery all around. Henri de Toulouse-Lautrec's painting captures the swanky and the sordid in fin de siècle France.”
Just as Talouse-Lautrec painted the end of an era, I feel I am writing about the end of an era of “expensive” payments! Fees paid to cards and banks, a form of debauchery, is ending as deposit tokensization, CBDC and other new forms of money are set to take over.
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1. IMF free book “Fintech and the Future of Finance”
“The World Bank” delivers a great read on fintech and I recommend it without hesitation.
The book is intended as “a useful guide for policymakers around the world as they seek to manage the long-standing risks and maximize the economic and social benefits of financial innovation.”
Why the World Bank?
One question that needs to be answered is, why The World Bank? What’s their interest in fintech?
Their answer: “The World Bank has been supporting governments in adapting regulatory frameworks, modernizing systems and other financial infrastructure, and ensuring high standards of consumer protection. The International Finance Corporation has been investing in a diverse group of private sector fintech providers for over a decade, promoting the growth of responsible, inclusive finance providers that serve tens of millions of customers across global emerging markets.”
If that sounds sterile, it is. The World Bank is hardly the hotbed of fintech transformation, but they recognize that change is required. You have to give them some credit for that! They have also actively promoted financial inclusion as part of their primary mission long before crypto was born.
Controversial statement of the day….that is pro-crypto!
Now here is my bit of controversy for the day. Whether we love or hate crypto, we have to give crypto credit for forcing the hand of institutions like the World Bank to change.
Without crypto, I think we wouldn’t see publications from the World Bank supportive of changes in the financial system. So we all owe crypto a debt of gratitude!
Look at the genuine fear of crypto for its potential to end "primacy" just as we saw in ECB reports:
“Some types of crypto-assets, notably global stablecoins, have the potential to attract broad public use as a means of payments, including in the decentralized finance (DeFi) ecosystems. In this context, public authorities are actively exploring issuing CBDCs. Widespread adoption of crypto-assets could challenge the primacy of public money with implications for, among other things, monetary policy and financial stability.”
And the solution is CBDC not crypto:
“It is perceived that a CBDC, being a digital version of fiat currency, could imbue public money with the necessary digital features and enable it to provide society with a safer, more efficient alternative while also promoting competition and innovation.”
—Great read from the World Bank on fintech
—While the World Bank is likely to side with incumbents, I give them credit for recognizing that change is needed.
—We all owe crypto a debt of gratitude, whether we love it or hate it, as it is helping drive change
—Crypto strikes fear in the heart of the World Bank helping them support change!
2. Blockchain set to disrupt trillions of dollars with billions of users!
Blockchain’s next billion users and $9 trillion in disruption is coming sooner than you think!
Citi’s report on blockchain makes it clear that the technology is a “disruptive innovation” poised to transform our world in a big way.
Citi makes an excellent point: “Blockchain is a back-end infrastructure technology without a prominent consumer interface, making it harder to visibly see how it could be innovative.”
So unlike cars or the electric light, blockchain won’t be visible to users even though it will be behind the metaverse, tokenized assets, and many other products that will become the norm.
–Citi goes all in for blockchain:
“We believe we are approaching an inflection point, where the promised potential of blockchain will be realized and be measured in billions of users and trillions of dollars in value. Successful adoption will be when blockchain has a billion-plus users who do not even realize they are using the technology.”
–I wish that Citi understood that most CBDCs won’t use blockchain!
Citi does raise the point that CBDCs may not use blockchain but seems to ignore this in its figures. What’re a few billion users, more or less anyway? I do, however, agree with their use cases in payment, social media, and asset tokenization:
“This is likely to be driven by the adoption of central bank digital currencies (CBDCs) by large central banks as well as tokenized assets in gaming and blockchain-based payments on social media. By 2030, up to $5 trillion of CBDCs could be circulating in major economies in the world, half of which could be linked to distributed ledger technology.”
“Tokenization of financial and real-work assets could be the killer use case driving blockchain breakthrough with tokenization expected to grow by a factor of 80x in private markets and reach up to almost $4 trillion in value by 2030.”
–Tech enablers required
Citi sees tech enablers as required for blockchain technology to be adopted. I want to call your attention to the first, Digitial Identification!
The entire digital world is still avoiding the necessity of digital ID, and I don’t know how much longer we can as a society, delay its adoption.
"To be successfully adopted into the mainstream, blockchain needs the help of technology enablers, including:
Decentralized digital identities,
—Blockchain is going mainstream. It’s not if but when.
—Whether tokenized markets attain $4tn by 2030 is immaterial. What is important is the disruption it brings.
—Digital ID will be required to enable further use of blockchain-enhanced digital products.
—When will gov’t get serious about digital ID? Look to India’s Aadhaar!
3. Account-to Account payments taking off but not in the US.
Account-to Account payments taking off globally, while the US's FedNow is caught in the culture wars!
FIS’s Global Payments report is a great read that provides a graphics-driven overview of payments by region, showing how quickly the payment world is changing!
Let’s look at FIS’s top 3:
1️⃣ Account-to-account (A2A) payments are taking off, driven by real-time payment (RTP) rails.
RTP schemes increasingly enable A2A payments from persons to businesses (P2B). A2A is disrupting payment value chains with lower costs of payment acceptance versus cards. Global A2A transaction value surpassed $525 billion in 2022 and is projected to grow at 13% CAGR through 2026.
—This sounds great for everyone except the US, where the new FedNow A2A system is now equated with a CBDC and has become unwilling to participate in the “culture wars.” This shows that virtually any modernization of a payment system still heavily dependent on writing checks is considered a cultural issue and a death sentence for a US digital dollar.
2️⃣ Consumer use of credit cards remains strong, while sources of credit are diversifying.
Despite our forecast of modest share declines, global credit card transaction value continued to rise both in store and online. Credit card spend exceeded $13 trillion across all channels in 2022. Consumers are increasingly paying via credit card- funded digital wallets, BNPL and POS financing offered by banks, fintechs and merchants.
—This development begs the question of where future card revenue will come from? With interchange fees and credit revenue declining, card companies’ fattest days are likely behind them. The card duopoly isn’t going away; just becoming less profitable, something we should all celebrate.
3️⃣ Digital wallets extend their omnichannel dominance.
Wallets such as Alipay, PayPal and Apple Pay remain the leading payment method globally in e-com (49% share) and at POS (32% share), accounting for ~$18 trillion in consumer spending. Wallets remain among the fastest growing payment methods with 15% CAGR at POS and 12% annual growth in e-com forecast through 2026.
—What will be interesting to watch whether Western Apple Pay or Google Pay can migrate off credit card rails and onto A2A payment systems like FedNow to become true "card killers."
—A2A is the future…at least until CBDCs become the norm
—FedNow adoption will be hindered by culture wars which will kill the US’s retail CBDC
—Card companies' most profitable days are behind them.
—Can A2A replace card rails for Western digital wallets?
4. Tokenized deposits? I prefer stablecoins!
A BIS DOUBLE HEADER: Tokenized deposits vs. stablecoins and a primer on tokenization!..🔥SPOILER: I’ll take stablecoins! 🔥
Download two BIS papers: here
The BIS produced two great reads in what will be my first BIS Double Header! The first document compares stablecoins and tokenized deposits, and unsurprisingly the BIS prefers bank-tokenized deposits.
Given recent stablecoin de-pegging events, that shouldn’t come as a surprise! The second BIS paper is a self-described primer on tokenization.
The two documents fit perfectly; that was likely no accident on BIS’s part. The tokenization paper makes it clear that for all the gains tokenization brings; there are a host of economic, legal, and technical issues to be solved!
Tokenized deposits keep payments in the hands of banks
Tokenized deposits have become the sensation of 2023, with a shocking amount of papers and research dedicated to them.
I’ve explained in prior writings that while I like the concept, I view them as an inferior solution to CBDC as they leave payments solidly in banks' hands and do nothing for disintermediation.
When the BIS compares deposit tokens with stablecoins, I’m not surprised that from a stability point of view, the BIS is in favor of deposit tokens. The BIS’s natural tendency is to favor incumbents.
In a rare divergence in opinion with the BIS, I respectfully disagree. I prefer stablecoins!
Stablcoins over deposit tokens
Why? Very simple, I want greater freedom for my money. I don’t trust banks to deliver deposit tokens without a host of accompanying fees and limitations over which you cannot control.
I like that stablecoin is a bearer instrument, as this will spur more significant fintech innovation that banks would likely crush! It is wishful thinking to assume that banks would be as welcoming to new uses for deposit tokens as a stablecoin issuer would be!
I’d also say that with the potential regulation of stablecoins as narrow banks, there would be no practical difference between stablecoin and tokenized deposit risk profiles! In effect, the BIS is comparing future deposit tokens with the current stablecoin design, which will likely change for the better.
The second paper shows how tokenization can deliver real gains and takes the reader through the basic concepts. This is an essential follow-up to promoting tokenized deposits in the prior paper.
“Tokenisation could deliver gains in two ways:
First, through automation it could greatly speed up transactions and increase efficiency by ensuring all parts of a transaction occur simultaneously, in what is called atomic settlement.
Second, it opens up new ways to transfer assets that are currently not feasible, potentially expanding the universe of possible contracting outcomes via composability.”
—The BIS prefers deposit tokens to stablecoins.
—I disagree I’ll go with stablecoins as they disintermediate banks!
—I like the bearer nature of stablecoins and think they will spur payment innovation.
—Tokenization gains are real and underpin stablecoins and tokenized deposits.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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