- The electronic changes that are coming to the financial system are taking place all over the world, making the transition global rather than just national.
- The transition into the future is more than just crypto, as decentralized finance, with a more digital base, is going to be where the foundation of the future lies.
- The United States is just really getting started on this path but will dominate the systems and the structure of what evolves.
Niall Ferguson has it right!
First, everything going on in the world of finance is global.
Second, "In the great scheme of the global economy, digital payments are a bigger deal than crypto."
Third, "If decentralized finance becomes as big an American success story as e-commerce has been, then it will provide yet another reason for foreigners to invest in America--and therefore to own and transact in dear old dollars."
That is, the system we are evolving into is electronic
Remember, money is just information. When push comes to shove, money is nothing more than zeros and ones.
So, in the first place, the evolution of money and the money system is taking place throughout the world.
Ferguson's article, linked above, contains the names of at least 20 countries that are working in some way to create a digital future.
Ferguson writes about institutions that are providing "bridges" between central banks for payments and other transactions.
One institution he refers to has more than 1,200 member institutions and spreads across 100 countries.
The U.S dollar still dominates these payment institutions, so there is no immediate fear of the dollar being replaced.
For example, central bank reserves across the world are 59 percent U.S. dollar.
In terms of international payments in 2021, the U.S. dollar accounts for 40.5 percent of all activity.
The U.S. dollar, the Euro, and the Pound Sterling account for 83.0 percent of the world's activity.
Where is China?
Well, China comes in fourth with 2.7 percent of the activity.
Digital Payments Are Leading The Way
In terms of the foundation of the fintech business, however, digital is the crucial thing. And, this tells us a lot about what is dominating the scene.
Ferguson presents the numbers: there are now between 10,000 and 20,000 different cryptocurrencies in existence.
The technology of Blockchain represents a major advancement for the future.
But, something else seems to be winning the day in terms of business and in terms of what can be delivered.
Angus Loten writes in The Wall Street Journal about what is happening in the area of FinTech companies.
FinTech is building massive database platforms that are powered by artificial intelligence.
Not only is this allowing for many more applicants for loans to be serviced, but it is also speeding up the time it takes for the completion of a transaction.
Mr. Loten writes about OppFi Inc. It is a 10-year-old FinTech platform based in Chicago. Last summer, OppFi made its public-market debut. Its selling point is that it uses an artificial intelligence ("AI") model, real-time data analytics, and a proprietary scoring algorithm to automate the underwriting process.
"The company recently reported a record $187 million in loan originations of the last three months of 2021, up 25 percent from the same period a year earlier."
And, the momentum has carried on into 2022.
One company Mr. Loten cites has set a goal to close home loans within 15 days. The industry average is 40 days.
The bottom line: banks are slow; these companies are fast!
So, more data and artificial intelligence. Sounds good!
Whoa, seems like I wrote about something like this just a short time ago.
Oh, yes. This is what the Chinese are trying to do to dominate the future of innovation and finance.
The Chinese government has set out a major effort to build databases, not just for surveillance, but to help to make decisions faster. Also, to provide individuals and companies with the information they need to build new platforms and networks and generate economies of scale as they expand their reach into new products and services and into new geographic regions and customers.
And, China is also supporting the building of systems of artificial intelligence to better use all the additional data they are generating.
This is the future and it is not all crypto, but it is digital.
The Role Of The United States
The United States still is the "reserve currency of the world," but it is now being faced with many challenges to its "system."
The "crypto craze" has done one very important thing for U.S. policymakers.
it now realizes that it must move faster to keep its place in the world.
Mr. Ferguson puts out the figures: 20 percent of American adults and 36 percent of millennials "own cryptocurrency."
"Crypto is suddenly ubiquitous."
On March 9, the White House issued an executive order on the "Responsible Development of Digital Assets."
The Executive Order states:
"The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate."
The word is out.
The United States must deliver.
And, it must deliver on regulating the new, transformed system.
In 2021, DeFi projects lost around $10 billion to various hacks and scams.
And, yes, the numbers are going up.
Regulation is a must. The Libertarian idea is nice, but the reality of the system is that protections need to be added. And, the regulatory bodies have to be involved.
Mr. Ferguson is right:
"U.S. dollar dominance and flourishing crypto are not alternatives to one another, but complementary."
"Just as Bitcoin was never meant to be--and never will be--a substituted for the dollar, so DeFi is additional to rather than a substitute for the existing financial system.
But, this is not all going to happen overnight.
The global financial system is evolving, and it's going to take quite some time for it to find its new structure. The trip is going to be interesting and exhilarating. Lots of money is going to be made in the transition and lots of money will be lost.
Decentralized finance will dominate the U.S. economy and will contribute to the dominance that the U.S. will maintain in the world in terms of the dollar.
This is the reality of the age.
This article was written by
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