Marbles in a Sink

There’s an exercise I like to use when looking for ideas that will end up governing the course of history, especially when it comes to technology. Let’s imagine a sink, and you throw a handful of small marbles into it. At first, there’s absolute chaos as the balls collide with each other and roll all around the sink. But every now and then, one ball goes down the drain, and then another, and eventually, the marbles settle down and start streaming down the drain in an unstoppable force. This metaphor has been a great framework for me to examine all kinds of sectors and ideas and plan out where I place my bets on ultra long-term horizons. I take a step back and try to see where all the marbles are going. Where’s the drain?

In the world of personal finances, the drain is digital. We’ve all seen the writing on the wall that everyone will eventually be using online banking and digital payments because they’re fast, easy to use, and highly customizable so that every user has the best possible experience when managing his finances. It’s inevitable.

This trend started in 1872, with the first wire transfers being made on Western Union’s telegraph network. Then came credit cards, digital money transfers, online banking and lending. The nail in physical money’s coffin? COVID.

Back in March 2020, the American public lost the will and permission to perform activities in person in many cases. That shift impacted everything from entertainment to agriculture, and banks were not spared. A recent study by EY found that 57% of respondents limited or stopped using cash, and there was a 34% increase in people preferring contactless payments over all other forms. On top of that, 43% said they changed how they banked because of COVID. I had difficulty finding the specific research paper, so I don’t know the parameters under which the study was performed, so I don’t know the error bounds on those metrics. Nevertheless, this appears to validate the obvious conclusion that COVID has been a massive disruption to the status quo and indicates that the disruption catalyzed a push to a digital financial world.

These sudden changes are putting a lot of stress on traditional institutions with legacy infrastructure that is too outdated to meet the demand of universal digital adoption. The technology powering most traditional banks is exactly that: traditional. Right now, many of them (read: not even all of them) are trying to uproot their entire data infrastructure, which is going to take a lot of time and mammoth amounts of money with plenty of bumps in the road. The consumer is ready for the plunge, but the institutions are far from it.

The Next Step

But there’s more than just the move to a digital plane. There’s another step down the drain, and that’s crypto. The future of traditional financial institutions is on shaky grounds as the emergence of decentralized blockchain technology has created a means to close the gap between what consumers want and what the financial industry is willing to provide. In a wide-angle lens, there’s a mismatch between what consumers prioritize and what banks and payment services provide. This is one of the underlying stressors that are likely to continue the push to decentralization.

Some of the biggest priorities for customers when choosing whom to bank with don’t even show up on the radar for most banks’ prioritization strategies. On the matter of retail banking, customers use it as a safe store for their cash. Banks then lend out money at a higher interest rate than they pay on their customers’ deposits to earn profit…but only if people are willing to take out loans. At the start of the pandemic, people were depositing more and more cash to save their stimulus and higher unemployment benefits.

However, the uncertainty of near- and long-term consumer spending slashed demand to take on risk and borrow money, which ended up costing the banks dearly for holding static cash. So, they started to put in efforts to work against their customers and incentivize them to pull out their nonoperational deposits through means such as reverse tiering, where clients are given lower interest rates if they put in additional deposits above certain thresholds. And with strategies such as that being industry standard, customers have very limited means for protecting themselves when traditional banks start feeling the pressure.

The long-term solution to competing interests between consumer and bank, from my view, appears to be digital assets. Taking a look back at those customer priorities for retail banking and payments services, it seems like blockchain technology has the ability to satiate those demands better than any bank:

And the people realize this. The Motley Fool recently reported that over 50 million Americans, making up 20% of the adult population without crypto holdings already, are willing and likely to join the crypto movement next year. Many of them probably buy-in because they see the incredible bull runs that crypto tokens make. Still, many are also thinking of joining because they see an opportunity to escape the problems that are driving anger and distrust in the current financial system.

One common criticism of cryptocurrencies is that the anonymity behind public keys opens the door for money laundering by criminal syndicates. That was always an odd criticism that I never bought into. The whole purpose of a blockchain is to be an open, visible ledger that holds every single transaction that has ever taken place on it. So if an investigator were looking for someone trying to hide their money on the chain, he could find exactly how much money was moved, where it went, and where it came from. For example, in July of this year, the British police confiscated $250M in an international money laundering scheme after finding another $160M scheme three weeks prior. And money laundering is as bad as it ever was in today’s financial system. Just look at Wachovia, through which the Mexican Cartel had moved $300B, with a huge capital B. I like the transparent, distributed ledger blockchains.

I want to close this out with one of the most eye-popping numbers I’ve found while researching this topic. In that same EY survey referenced earlier in this piece, 17% of respondents trust the activities of financial institutions in a crisis. Let me repeat that: seventeen…percent. I don’t see how a system can operate in the future when one in six consumers trust that system. I’m looking at the marbles, and it looks to me like they are all rolling towards decentralized trustless finance and decentralized trustless cryptocurrencies. COVID shocked the system, rapidly upping the pace on this long walk to a world run through crypto, and the end state is now a lot closer than it used to be.