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Posted by AGORACOM-JC at 5:18 PM on Wednesday, August 28th, 2019

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Why Some Executives See Crypto As A New Business Tool

  • Executives are leveraging blockchain-driven currency to axe business process friction or fuel innovative products and services.
  • Signals are building that more organizations recognize its alluring features as fuel for innovative products and services, or useful for axing friction in the business process behind a transaction.

By: Jason Abdilla, Unsplash

Many executives see blockchain-driven digital currency as a terribly clunky payment vehicle or speculative investment. But signals are building that more organizations recognize its alluring features as fuel for innovative products and services, or useful for axing friction in the business process behind a transaction.

Unlikely Bedfellows Align Around Feature-Rich Token Projects

For example, a group of 14 financial firms led by UBS Group AG and including Barclays PLC, Nasdaq Inc., Credit Suisse Group AG , Bank of New York Mellon Corp., and State Street Bank & Trust Co have created a new company, Fnality International, to control development of a bitcoin-like token that the firms plan to use to settle cross-border trades. The token, called utility settlement coin (USC), is designed so banks can settle transactions directly with each other without having to involve a third-party intermediary, removing layers of costs and inefficiency. JPMorgan Chase & Co. is taking a similar approach, creating a network of more than 250 members that is working on a token called JPM Coin. Twenty eight brands, led by Facebook and including Mastercard, Visa, Uber, Spotify, PayPal, and eBay have created the Libra Association to develop a token, which is named Libra. In so doing, unlikely bedfellows are coming together to take on the extremely difficult work of forging a new financial infrastructure, pioneering challenging territory in joint governance, and navigating regulatory uncertainty.

What Is So Compelling?

Blockchain-driven digital tokens have very attractive attributes that make it possible to do something totally new: merge business and operational activity with the movement of money. All of a sudden, money can be programmable—terms and conditions could be directly embedded into how money moves from one party to another. While this is certainly possible in today’s financial world, the potential to reduce the cost of doing so to writing a few lines of code is tantalizing.

For example, the USC token serves as a messenger that includes the data needed to complete a trade along with payment, which could cut transaction cost and time. A key feature of Facebook’s Libra is a programming language called Move that can be used to customize transaction logic and create “smart contracts” that dictate the conditions under which value is moved—an element which could fuel a range of financial innovations. Imagine a world in which a few lines of code ensure a transaction doesn’t take place until certain other conditions are met—an asset couldn’t be spent until a certain time in the future, or until a certain number of parties have registered their approval. While moving this logic to code comes with a new set of challenges (including the possibility of bugs and the open question of legal enforceability), pioneers imagine digital tokens flexibly embedded into existing products, used to create innovative bundling, or develop completely new financial products.

Digital tokens carry other attractive attributes as well. They are designed to be interoperable (they are more useful the more widely accepted they are, and so token development is a race to get the flywheel turning on network effects). They are typically traceable, so they provide clear auditability, and hold the potential to settle on a near-immediate basis.

By cutting out intermediaries, they also offer the prospect of a low-transaction cost global currency. According to Bloomberg, retailers are paying $90 billion in swipe fees on credit and debit cards every year. On August 14, supermarket giant Kroger stopped accepting Visa at 21 supermarkets and five gas stations because of what the company called “excessive fees”.

Digital tokens could eventually also serve as an efficient way to shape and align consumer or partner behavior, functioning as a high value rewards system, like a supercharged loyalty point. This has the potential to exert influence across a wide range of organizations and business objectives.

Regulators Are Taking These Signals Seriously

UNITED STATES – JULY 16: David Marcus, head of Facebook’s Calibra digital wallet service, prepares to testify during the Senate Banking, Housing and Urban Affairs Committee hearing on “Examining Facebook’s Proposed Digital Currency and Data Privacy CQ-Roll Call,Inc.

Momentum has been met with a heightened response from regulators and lawmakers. Facebook’s announcement of Libra led to heated U.S. Senate Banking Committee and the House Financial Services Committee held hearings. At the hearings, Senate Banking Chairman Mike Crapo of Idaho painted the complexity ahead, “Libra is based on a relatively new and continually evolving technology in which it is not entirely clear how existing laws and regulations apply.” The Financial Stability Oversight Council, an umbrella group of regulators that includes the Fed, has formed a working group to discuss oversight of digital assets. The Group of Seven (G7) industrialized nations have elevated cryptocurrencies to a priority issue, with finance ministers debating how global cryptocurrency could impact financial markets. Bank of England Governor Mark Carney even suggested central banks should consider joining forces to create a virtual currency (based on a network of digital central-bank currencies) that could ease the global economy’s reliance on the dollar and be used to facilitate cross-border trade and international payments.

Suddenly, the prospect of whether this new form of money could undermine the role of central banks or become a viable alternate to national currencies had become serious debate. This acknowledges the power and influence of the players exploring these new currencies as well as the complexity of projecting how they would operate in the wild.   

Canary In The Coal Mine?

Will these initial projects succeed or fail? It is too early to project the outcome of such early work in the space, much less how it could evolve as momentum builds. However, we are seeing clear signals that there is hunger for the features and functionality blockchain-driven digital tokens and currency make possible. And many in the space are taking the position that it’s inevitable that something like these early projects will ultimately come to market, even if the initial attempts fail to make it through the regulatory gauntlet. It is likely we will see a race for innovation in this space, one that could blur the lines between the financial services industry and other sectors, and even the role of nation-states versus corporations.


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