Blockchain Revolution

PART II
TRANSFORMATIONS

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T
CHAPTER 3
REINVENTING FINANCIAL SERVICES
he global financial system moves trillions of dollars daily, serves billions of
people, and supports a global economy worth more than $100 trillion.
1
It’s the
world’s most powerful industry, the foundation of global capitalism, and its leaders
are known as the Masters of the Universe. Closer up, it’s a Rube Goldberg contraption
of uneven developments and bizarre contradictions. First, the machine hasn’t had an
upgrade in a while. New technology has been welded onto aging infrastructure helter-
skelter. Consider the bank offering Internet banking but still issuing paper checks and
running mainframe computers from the 1970s. When one of its customers taps her
credit card on a state-of-the-art card reader to buy a Starbucks grande latte, her money
passes through no fewer than five different intermediaries before reaching Starbucks’s
bank account. The transaction takes seconds to clear but days to settle.
Then there are the large multinationals like Apple or GE that have to maintain
hundreds of bank accounts in local currencies around the world just to facilitate their
operations.
2
When such a corporation needs to move money between two subsidiaries
in two different countries, the manager of one subsidiary sends a bank wire from his
operation’s bank account to the other subsidiary’s bank account. These transfers are
needlessly complicated and take days, sometimes weeks to settle. During that time,
neither subsidiary can use the money to fund operations or investment, but the
intermediaries can earn interest on the float. “The advent of technology essentially
took paper-based processes and turned them into semiautomated, semielectronic
processes but the logic was still paper based,” said Vikram Pandit, former CEO of
Citigroup.
3
Around every corner, another bizarre paradox: Traders buy and sell securities on
the world’s stock exchanges in nanoseconds; their trades clear instantly but take three
full days to settle. Local governments use no fewer than ten different agents—
advisers, lawyers, insurers, bankers, and more—to facilitate the issuance of a
municipal bond.
4
A day laborer in Los Angeles cashes his paycheck at a money mart
for a 4 percent fee, and then walks his fistful of dollars over to a convenience store to

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wire it home to his family in Guatemala, where he gets dinged again on flat fees,
exchange rates, and other hidden costs. Once his family has divvied up the sum
among its many members, nobody has enough to open a bank account or get credit.
They are among the 2.2 billion people who live on less than two dollars a day.
5
The
payments they need to make are tiny, too small for conventional payment networks
such as debit and credit cards, where minimum fees make so-called micropayments
impossible. Banks simply don’t view serving these people as a “profitable
proposition,” according to a recent Harvard Business School study.
6
And so the
money machine isn’t truly global in scale and scope.
Monetary policy makers and financial regulators often find themselves lacking all
the facts, thanks to the planned opacity of many large financial operations and the
compartmentalization of oversight. The global financial crisis of 2008 was a case in
point. Excess leverage, a lack of transparency, and a sense of complacency driven by
skewed incentives prevented anyone from identifying the problem until it was nearly
too late. “How can you have anything work, from the police force to a monetary
system, if you don’t have numbers and locations?” pondered Hernando de Soto.
7
Regulators are still trying to manage this machine with rules devised for the industrial
age. In New York State, money transmission laws date back to the Civil War when the
primary means of moving money around was horse and buggy.
It’s Franken-finance, full of absurd contradictions, incongruities, hot pipes, and
pressure pots. Why, for example, does Western Union need 500,000 points of sale
around the world, when more than half the world’s population has a smart phone?
8
Erik Voorhees, an early bitcoin pioneer and outspoken critic of the banking system,
told us, “It is faster to mail an anvil to China than it is to send money through the
banking system to China. That’s crazy! Money is already digital, it’s not like they’re
shipping pallets of cash when you do a wire!”
9
Why is it so inefficient? According to Paul David, the economist who coined the
term productivity paradox, laying new technologies over existing infrastructure is
“not unusual during historical transitions from one technological paradigm to the
next.”
10
For example, manufacturers needed forty years to embrace commercial
electrification over steam power, and often the two worked side by side before
manufacturers finally switched over for good. During that period of retrofitting,
productivity actually decreased. In the financial system, however, the problem is
compounded because there has been no clean transition from one technology to the
next; there are multiple legacy technologies, some hundreds of years old, never quite
living up to their full potential.
Why? In part, because finance is a monopoly business. In his assessment of the
financial crisis, Nobel laureate Joseph Stiglitz wrote that banks “were doing

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everything they could to increase transaction costs in every way possible.” He argued
that, even at the retail level, payments for basic goods and services “should cost a
fraction of a penny.” “Yet how much do they charge?” he wondered. “One, two, or
three percent of the value of what is sold or more. Capital and sheer scale, combined
with a regulatory and social license to operate allows banks to extract as much as they
can, in country after country, especially in the United States, making billions of
dollars of profits.”
11
Historically, the opportunity for large centralized intermediaries
has been enormous. Not only traditional banks (e.g., Bank of America), but also
charge card companies (Visa), investment banks (Goldman Sachs), stock exchanges
(NYSE), clearinghouses (CME), wire/remittance services (Western Union), insurers
(Lloyd’s), securities law firms (Skadden, Arps), central banks (Federal Reserve), asset
managers (BlackRock), accountancies (Deloitte), consultancies (Accenture), and
commodities traders (Vitol Group) make up this expansive leviathan. The gears of the
financial system—powerful intermediaries that consolidate capital and influence and
often impose monopoly economics—make the system work, but also slow it down,
add cost, and generate outsized benefits for themselves. Because of their monopoly
position, many incumbents have no incentive to improve products, increase efficiency,
improve the consumer experience, or appeal to the next generation.