Written by David Solomon, Blueprints
Even before the 2008 financial crash, many people had begun to realise that the financial system was profiting only a small group, as private citizens were burdened with bailing out major global banks.
Deeply entrenched services, practices, and products at traditional financial firms weren’t evolving for their customers’ needs. They were also maintaining old banking practices. So new platforms popped up to offer brand new services such as TransferWise and Monzo. Just look at how Monzo’s managed to disrupt the banking sector, in the process becoming the fastest growing bank in history!
But success stories like Monzo aren’t based on one technology alone ‒ it’s the combination of technology layers that allow for disruptive new approaches to finance.
Let’s take a look at the innovations coming through and how they will combine to turn FinTech into a force for good.
Financial services make up a sizeable chunk of the economy in the Western World. In the UK, the financial sector contributes 6.5% of total GDP
The financial sector is so large because it has become involved in almost every aspect of finance, from personal loans to government debt, home insurance to credit default swaps (CDOs), and, importantly, business loans. What’s more, while usually only acting as an intermediary for these services, financial firms earn a commission on everything they touch.
Essentially, financial services firms are expensive middlemen who have worked their way into almost every aspect of society.
Decentralised exchanges don’t rely on middlemen. As the name suggests, the exchange itself is not centralised in any particular location or around any particular company. As such, they remove the power and profitability from a small group of financiers and put it into the hands of the customers.
In the future, decentralised exchanges will play an important role in the democratisation of money and finance. People will be able to choose where to put their money, towards what initiative or cause, and move their money around at will without the complex and expensive middlemen.
The most widely used and well-known distributed ledger is Blockchain. Essentially, Blockchain is a public ledger of transactions. When a transaction occurs, it’s added to the Blockchain. Other technologies can then reference the transaction, call up transaction history, and use the data in other novel ways.
The important thing to know about Blockchain is that it is public and cannot be edited, making it reliable and transparent. While the technology and purpose are sound, the scalability issue needs to be resolved.
Consider how the Blockchain could be used to ensure sustainable and ethical purchases. A resource, such as a tree or mineral, is added to a Blockchain including reference information about where it came from, who the supplier was, the original costs, etc. Whoever then buys the raw material can check its history to ensure it came from an ethical source and that the works received a fair income.
This process then continues throughout the supply chain to the consumer.
Most people want to buy ethical and sustainable products but, currently, it’s impossible to know the full supply-chain history. Distributed ledgers will be used to provide the complete history of a product, right back to the raw materials, embedding economic justice into every product. This will allow consumers to make informed purchasing decisions which will, in turn, drive improvements to the ethics and sustainability of supply chains.
Brands need to be on the right side of history.
Take our current forestry project in Costa Rica. We want to ensure the protection of the local environment and help develop the local economy. By feeding the development through a regulated financial exchange which improves on the scalability of the Blockchain’s technology, we can ensure that developers are fulfilling their promises to provide sustainable wood while reinvesting into the community. The same approach could be applied to almost any product.
Imagine being able to find out exactly where your coffee was grown, how the farmers were treated, whether they were paid a fair price, and how the coffee has been processed along the way, that would provide a sense of meaning and fulfilment as you drink your morning cuppa. You could ensure that every sip was ethical and cruelty-free. That’s exactly what a number of key technologies are already doing – and we want to scale this to many other products.
Smart contracts use the Blockchain and decentralised exchanges to enact specific terms automatically, using technology. A simple smart contract used for a token purchase, for example, could state that when the sale is closed that x-amount of tokens will be transferred to the purchaser in exchange for x-number of Ethereum. The investor essentially buys the contract which is then executed automatically when the sale is closed. While this is a fairly simple example, there are almost infinite ways smart contracts could be applied. The technology is also developing at a rapid pace, allowing smart contracts to be applied in more cases than ever.
Again, smart contracts will cut out the expensive middlemen, allowing for direct and secure agreements between two parties without the need for financial advisors and lawyers. This will make it cheaper and easier for businesses to create deals and provide an additional level of security.
Small businesses will be able to float stock options without the need for a centralised stock exchange, freelancers and sole traders can ensure they are paid on delivery of the work, and charities can automate large chunks of their financial admin… just for example.
Applied to things like economic development, smart contracts could be developed to help build investor trust around assets that are owned by the indigenous people of a developing region. A smart contract could, for example, ensure funds are automatically distributed from escrow simultaneously into stakeholders’ accounts when the product has made it through the supply chain and all ethical standards have been met, all without having to pay expensive lawyers and financial middlemen.
Smart contracts, if constructed in the right way, can provide this level of transparency, efficiency and trust in all transactions, levelling the playing field for countries that have been left behind by investors.
One of the main allures of crowdfunding is that entrepreneurs can connect with potential customers to raise finance without risking losing a controlling stake or having an angel investor meddling in their business idea. Additionally, individuals can easily and cheaply own stakes in a number of companies they want to support, without all the complexities and costs of the stock market.
Essentially, crowdfunding allows anyone to become an investor rather than reserving that right exclusively for a capitalist class. This puts even more power into the hands of customers to drive innovation ‒ instead of being led by market forces and submitting profit to already wealthy individuals, customers can use their money to direct the market by helping businesses get started while enjoying a share of the profit.
In the future, Blueprints will be launching a joint-venture for decentralised exchange that will integrate all these technologies. Enabling a crowdfunding platform for development projects with an equitable share to the locals. Allowing individuals to support development projects around the world, where people can participate with money, time, or resources to advance the project, tracking its progress as it develops. This will allow them to make scalable investment returns while generating a positive social impact which, due to changing consumer demands, will be absolutely correlated in the future. More and more, people are demanding that the products they consume are based on the values they want to live by.
As we can see, FinTech is redistributing financial power away from big, centralised businesses into the hands of individuals. Until we democratise finance we cannot claim to live in a true democracy.