FROM WIRED | OCTOBER 21, 2017
THE FINANCIAL INDUSTRY today looks stable and boring, with a few megabanks ever-more entrenched and markets that may not offer the same risks and rewards as before the 2008-2009 financial crisis but which remain highly profitable for incumbents. That stasis, however, masks looming challenges to the sclerotic incumbents. Two such challenges were much in evidence this past week: Bitcoin and China. The gaining momentum of digital currencies and the Chinese reinvention of a financial system led not by traditional banks but by technology companies are potent signs that Western financial architecture of the 20th century may not long survive the 21st.
The price of Bitcoin has been on tear for months, and the pace of gains has accelerated in the past weeks, reaching $6,000 on Friday. That’s sparked a new round of criticism from financial luminaries. Jamie Dimon, CEO of JP Morgan Chase, called Bitcoin a “fraud” and said that he would fire anyone who traded it for being “stupid.” After some pointed out that Chase is actively pursuing blockchain solutions and digital payments akin to Bitcoin, Dimon said he was done talking about it, only to repeat his critique a few days later. Larry Fink, CEO of Blackrock, called Bitcoin “an index of money laundering.” Global investment bank UBS just issued a lengthy report on the digital currency “bubble,” warning that Bitcoin is unlikely to become a bona-fide currency: “A constant theme of bubbles is the ability of speculators to shout that dreaded cry ‘this time it's different.’…Logical arguments against the bubble can then be disregarded as speculators declare that the doubters simply do not understand that the world has changed. The problem with this theory is that the world never changes that much.”
Excuse me? The world changes all the time, dramatically. Ten years ago, smartphones barely existed, and they now dominate our lives in ways that we still don’t understand. How about the revolutions of 1989 and the collapse of the Soviet Union? The emergence of jet engines and global travel in the 1960s? Widespread vaccinations? How about Uber? Business models enabled by the internet that were inconceivable and unsustainable before?
Bitcoin itself may, of course, be a speculative bubble; its price is up more than 750% in the past year, and such moves should give anyone pause. That is not the same as it being a “fraud.” In fact, the way that the guardians of the financial world are dismissing these phenomena says more about them than it does about Bitcoin, and what it says isn’t pretty. Rather than grappling with the ways in which the software and information-technology revolutions have yet to deeply disrupt finance, the defenders of the status quo are seizing upon the price action of Bitcoin as proof that it is all a fever and a mirage.
Even if Bitcoin is in a price bubble, that doesn’t make it a tulip. The same is true for other new and untested digital currencies. What makes Bitcoin so appealing is the potential that it will augment and replace traditional currencies. Through its underlying blockchain technology, Bitcoin has the potential to facilitate secure, authenticated transactions between a buyer and seller, without the mediation of a bank or a government. That it has yet to do so does not prove that it cannot or will not do so. Skeptics should welcome the debate.
In truth, the financial industry has been among the least nimble in adopting to the promise and peril of information technologies. If you want to see what might be coming, look at China, which lacks a strong and deep banking system. China is in the news this week for the 19th Party Congress that will see Xi Jinping solidify his leadership. Just as important is how China’s technology companies are creating a sui generis financial system. Alibaba, for instance, dominates the mobile- and electronic-payment infrastructure though its Ant Financial subsidiary. The range of service offered by Ant (formerly Alipay) dwarfs the capabilities of Paypal, and Paypal is among the most innovative and creative US financial companies. Ant facilitates mobile and nearly instant payments, wire transfers, loans, credit checks, peer-to-peer payments, and purchases. And it hardly stands alone; its services are offered by dozens of other established players, along with fledging entrants. WeChat, for instance, which began as a messaging app, now facilitates peer-to-peer lending and money transfers without users interacting with a traditional bank. Imagine WhatsApp or Facebook acting as your primary banking and payments portal and you get the idea.
Yes, our world is not China’s world; the United States has regulatory hurdles and a deep established financial infrastructure, as does the European Union. But those hurdles and that infrastructure are a product of the latter part of the 20th century. They are hardly eternal verities. That makes the belief that nothing changes quickly even more myopic and perplexing.
You would think that the leaders of the financial industry would be attuned to the potential for dramatic shifts. Some are. Last month, IMF Managing Director Christine Lagarde outlined just how much digital currencies, mobile solutions, artificial intelligence, and other technologies will likely upend traditional finance, making bank branches obsolete, money-center banks unnecessary, and much of the surrounding regulatory structure irrelevant. The financial industry in largely unprepared for that.
Lagarde, at least, implicitly realizes that it’s a mistake to summarily dismiss those who say “this time it’s different.” Yes, it is frequently the case that claims of “this time it’s different” are wrong, often spectacularly so. That said, it would be wiser for established financial institutions to look at what happened in the retail industry, what happened to media, to transportation, to communications, to what is happening in healthcare, and recognize that things not only change, but that when they do, incumbents are often crippled or destroyed. JP Morgan's acquisition this week of fintech start-up WePay could be a sign that incumbents are starting to recognize just how the world is changing. But it is very little and very late.
Dismissing digital currencies because of how they’ve traded in the past months is an easy way to avoid grappling with how technology might soon undermine traditional modes of finance. Change always comes, sometimes slowly, but often unexpectedly, dramatically, sweeping away what seemed to stable and certain with breathtaking speed. That doesn’t mean you should invest in Bitcoin today. But it does make it stupid to ignore what is very likely around the corner.