From the top of the world, it’s amazing what you can see. I recently had the opportunity to travel to the United Arab Emirates to speak in Dubai at the 7th Edition of the Alternative Investment Management Summit. While I was there, I took a few moments to ride to the top of the Burj Khalifa, currently the tallest building in the world, and the view was incredible. Other skyscrapers, once relatively tall in their own right, seemed like little matchboxes down below.
And it occurred to me at that moment that the awe-inspiring view from the top of the Burj Khalifa is the perfect metaphor for the incredible pace of technological change that we are witnessing in the financial industry. What is cutting edge one moment can be challenged in an instant by other players looking to go even further, taller, faster.
Nowhere was this rapid change more evident than at the AIM Summit, where I had the pleasure to speak on “The Emerging Crypto-Economy” and “AML and KYC on Blockchain.” In the U.S., we take for granted that our banks generally tend to be trusted institutions – you put money in, and you expect it will be there when you need to withdraw it. In other parts of the world, banks do not have the same level of trust. The distrust for traditional financial institutions, when combined with a millennial generation that came of age with technology, is causing a paradigm shift; and entirely new financial instruments (i.e. cryptoassets) and financial infrastructure (i.e. blockchain) are causing established industry participants to take notice. In fact, even the question of whether cryptocurrency should be deemed its own asset class is the subject of debate.
The emerging crypto-economy reminds me of the way in which Amazon changed retail. Online shopping changed our economy from one in which consumers felt the need to physically touch goods and products before buying them, to one in which consumers were comfortable purchasing online, sight unseen. Similarly, the new crypto-economy is one in which we can digitize almost anything. But just because we can, should we?
This new crypto-economy includes three components:
- Digitization of information
- The secure storage, transmission, and sharing of that information, and
- A value proposition, such as efficiency or cost. In other words, it has to make something better for it to be a worthwhile effort.
Unfortunately, with certain cryptocurrency exchanges reporting the theft of hot wallets, and one study reporting that hackers have caused $882 million in damages to cryptocurrency exchanges, it is clear that the public at large needs to get comfortable with the underlying technology and security before we see a large industry shift.
That shift is already under way though. With Fidelity and Northern Trust moving into the crypto space, institutional money is poised for deployment into what has traditionally been a playground for retail investors. The expansion towards institutional players may shift focus towards stronger anti-money laundering (AML) processes. Some cryptocurrency exchanges only require as little as a mobile phone number and an email address to start trading, while other exchanges require a government identification and additional verification steps.
The Wall Street Journal earlier this year estimated that $88.6 million was laundered on 45 cryptocurrency exchanges, and highlighted exchanges such as ShapeShift that provide users with the ability to convert Bitcoin to Monero, a currency that is relatively anonymous and untraceable.
Technologies such as blockchain appear ready to provide new solutions to address these emerging issues, and may be able to provide for more efficiency in the process. Think for a moment about the investor who must provide identification paperwork to numerous funds and investment advisers as part of the current AML process. If that information can be digitized once, placed on a blockchain, and securely shared with trusted third parties, the AML verification process can be made more efficient. Capital calls, settlement, and other processes appear to be ripe for blockchain applications as well.
Only time will tell what technological changes today will radically shape the financial industry. But from where I’m standing, the view looks great out there.