It seems a rather trite thing to say that the world has changed. But, it is true. In 2021, seismic shifts are everywhere from crypto assets to payments, lending to capital markets and banking, and financial services professionals have had to sprint just to keep up, let alone forge ahead with their own innovations.
But, as we inch ever closer to breaking out of the pandemic-panic cycle that has defined our world over the past 18 months, a number of grand themes are starting to emerge in the way that fintech interacts with financial services.
Deloitte describes a ‘second wave’ of fintech activity as we move further into 2021. In its research report Fintech 2021, the authors write: “Despite the Covid-19 pandemic we appear to have entered a new phase in the evolution of the financial technology sector.”
Financial institutions are now keener to seek out and partner with emerging technology companies to gain access to new markets and products, they say. The clearest example of this is the way that seriously capital-rich institutions are engaging with crypto assets.
In an interview on 16 March 2021 for Fortune’s Leadership Next series, Visa CEO Al Kelly noted: “We’re trying to do two things. One is to enable the purchase of bitcoin on Visa credentials. And secondly, working with bitcoin wallets to allow the bitcoin to be translated into a fiat currency and therefore immediately be able to be used at any of the 70 million places around the world where Visa is accepted.”
The Stanley Effect
Morgan Stanley becomes just the latest international player to make a serious move into the space, with reports the investment bank is eyeing up a $441m play for a stake in South Korea’s largest digital asset exchange, Bithumb.
This should come as no surprise to keen digital asset watchers. The Korean crypto-asset exchange volume recently exceeded mainstream equity stock market volume, as reported by Hankyung.com, a division of South Korea’s largest business news conglomerate.
The country exists as a unique marketplace globally: the financial legislation restricts Korean traders to domestic exchanges only, making it far simpler to track country-level trading volume. And, the four largest Korean exchanges accounted for $14.75bn in volume on 15 March 2021, compared to $10bn of volume on the KOSDAQ.
Morgan Stanley’s move came only days after its analysts published a report: “The Case for Cryptocurrency as an Investable Asset Class in a Diversified Portfolio” arguing for a 2.5% allocation for sophisticated investors,
noting that the asset class “has crossed the critical thresholds of market liquidity, regulatory scrutiny and institutional acceptance,” at a point where achieving market-beating alpha has become ever more challenging.
The global crypto asset market cap, which includes Bitcoin (BTC), Ethereum (ETH) and 10 newer top players, like DeFi coin Uniswap (UNI) and price feed service Chainlink (LINK), is now over $1.75 trillion.
The appetite for institutional M&A shows no sign of slowing down. Paypal, rebuffed by custody giant, BitGo has now confirmed it is buying crypto-security firm, Curv.
As General Electric CEO, Jack Welch famously said in response to a question on how businesses can compete in tough times: “We have 11 companies in our private equity [portfolio]…go out and buy or bury your competition. Steal their salespeople. Steal their employees. Steal their R&D people. Bury them.“
We should expect to see far more M&A in the space as power consolidates upwards from crypto-asset startups to institutional giants.
NFT Is Everywhere…For Now
At a retail level the largest key move in 2021 has been the explosive growth of NFTs: ‘non fungible tokens’ (no wonder the acronym has become more popular with a mouthful like that) which are being used to represent ownership of common digital assets like gaming or sports collectables, artworks or unique video files. Transactions are carried out by Ethereum smart contracts and ownership recorded on the ETH blockchain, which means it cannot be forged or faked, a longstanding problem in the collectables and art worlds.
The buying frenzy includes digital artist Beeple selling his ‘Everyday – the first 5000 days for a stonking $69.3m at Christie’s, musician Grimes picking up $6m for her works on Gemini’s Nifty Gateway, while shares in the NASDAQ-listed Hall of Fame Resort & Entertainment jumped nearly 80% on 24 March when it announced a tie-up with Dolphin Entertainment to create a series of NFTs based around the NFL.
Such surging growth is reminiscent of the stunning rise of crypto market niches like ICO fundraising in 2017-2018, or the 40x growth of the decentralised finance (DeFi) market in 2020. Such incredible buying and interest in NFTs may not last forever. However, I do not see financial regulators like the SEC stepping in to put a dampener on the market, as they did with the frankly shady ICO boom where they have levied hundreds of millions of dollars in fines and cease-and-desist orders.
At a glance, there are risks here.
While the UK’s Law Commission, for example, set out a landmark ruling in November 2019 stating that smart contracts were legally enforceable, this has not been widely tested, and we should expect fireworks when the first tranche of NFT ownership disputes comes to court.
Cash Is Dead, China Wins, the US Loses
One of the other major themes to emerge in the wake of the worst public health crisis in 100 years is the rapid shift to cashless societies. What started out as an amorphous and generalised fear that the public could spread coronavirus by handling coins and notes has exacerbated long-standing trends towards contactless payments.
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In the UK, for example, businesses that had never had a need to engage with cashless payments have seen the government extend the limit for contactless card payments twice in the last year. The limit increased from £30 to £45 in March 2020 (a modest 50% hike) then by over 120% in March 2021 to £100.
And, research backs up these movements: consumers are moving away from cash at record speed, according to a major new report by FIS Worldpay. The annual 2021 Global Payment Survey found that e-commerce exploded in 2020, posting the highest growth rate in five years. This 19% hike to $4.6 trillion in transactions “accelerated the rate of e-commerce penetration by almost three years.” Declining by 42% from 2019, cash will be the least-used traditional payment method within four years, it says.
FIS research found that: “Digital wallets are now the payment method of choice among global e-commerce consumers, accounting for 44.5% of transaction volume in 2020, up 6.5% from 2019. Chinese consumers lead the way with digital wallets, accounting for 72.1% of e-commerce purchases.” The US lags global averages in digital/mobile wallet adoption, at 29.8% across 2020, but these numbers are still 23.7% higher than the year before.
And, by 2024, digital wallets, credit and debit cards will account for 84.5% of e-commerce spend, FIS says. That is an ever-decreasing window of opportunity for cash.
The true leader in cashless societies, of course, is China. As long ago as 2019, four out of every five payments in the country were made through digital wallets WeChat, owned by Tencent, and Alibaba’s Alipay. But, there is much more innovation here.
While according to the Bank for International Settlements, 80% of the world’s central banks are investigating CBDCs, and over half are now beyond the pilot stage, none have shot out of the gate quite like the PRC.
And, few outside Asia have yet realised the far-reaching effects of China’s CBDC, the DCEP, and its impact will send shockwaves through the world in 2021. It incorporates blockchain technology, as well as all the standard mobile wallet features like NFC (near-field communications) for contactless tapped payment but crucially, unlike Alibaba or Tencent, is entirely state-controlled.
PwC’s March 2021 report: “China and the Future of Money” attempt to rationalise this trend, noting that the DCEP is representative of a broader momentum behind virtual and digital currencies: “as the world becomes more digital and commercial transactions shift even more forcefully to digital platforms, the DCEP…could further lubricate domestic and global commerce for Chinese companies. It could also provide safeguards against fraudulent transactions. Broad uptake could raise the RMB’s profile in world money markets against the dollar and the euro.”
Some go much further than PwC, asserting that the DCEP will one day be the dominant global currency. Speaking to the BBC back in November 2020, cryptocurrency mining farm operator, Chandler Guo suggests that one day “everybody will use the DCEP”. Guo’s machines at one point were capable of mining 30% of all the Bitcoin on the planet, so he is perhaps uniquely placed to make this kind of suggestion.
And, this interaction between cash, central bank digital currencies and cryptocurrencies is set to define the 2020s.
Crypto vs Cash vs CBDC
China’s DCEP of course is centralised and state-controlled: anathema to the decentralised nature of cryptocurrency.
Citibank, whose $318,000 price forecast for Bitcoin by the end of 2021 set off mass institutional cryptocurrency buying, said in a March research note that Bitcoin is “at a tipping point” and could one day become the preferred currency for international trade.
But, to take this assertion at face value ignores everything we have learned about Bitcoin.
In reality, its deflationary architecture, costly transaction fees and usage over the past decade have morphed away from a payment-like medium of exchange into a gold-like store of value.
Showy reports that Tesla will accept Bitcoin for its cars, and confirmation on 24 March from Elon Musk that the BTC will be accepted natively and not converted to fiat currency, will do nothing to change this fact.
The other factor to consider is the US. And, the American central bank’s role in all of this. The US Federal Reserve’s attempts to push ahead with a Digital Dollar seem less like bold ambition and more like fear of a Chinese takeover. And, the Fed will meet stringent opposition from Wall Street, as Bloomberg Quint reported in mid-March.
The US, as we note above, lags behind the rest of the world in fintech adoption and innovation. It is this kind of indecisiveness and regulatory hand-wringing that will leave the once-great power mired in a swamp of its own making, and could well see the death of the dollar as the global reserve currency.
Whatever results in the near term, this powerbase tussle between cryptocurrency, cash and central banks will be the defining fintech battle of 2021 and beyond.
Maxim Bederov is an investor and entrepreneur