The Future of Money: The Developments You Need to Know this Week (Issue 11 - 12 September 2020)

Dear Friends,

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

Make sure to subscribe to receive your Future of Money newsletter in your inbox every Saturday! 

If you enjoy this content, you will also love what I post on Twitter (@HenriArslanian) and the library of videos on my YouTube channel.

1. Will DeFi Reshape Financial Services? 

Decentralised finance, or DeFi for short, has seen tremendous growth in recent weeks. 

DeFi is the ecosystem of financial applications built on top of decentralised ledger technology that enables the delivery of financial services without the traditional centralised intermediaries. 

The DeFi ecosystem is generally open-source, permissionless and transparent. Users maintain full control over their assets and interact with the ecosystem through decentralised applications, commonly referred to as dApps.

But whilst the financial services offerings on a DeFi ecosystem are similar to what exists in the traditional world, the way they function and operate couldn't be more different. 

Today, finance as we know it is centralised. There is a core set of institutions we all use, which all of your financial activities go through. 

When you send a payment to a friend, you need to go through a traditional bank or a payments platform. When you want to get a mortgage, you need to get one from a bank. When you want to invest in stocks, you need to work through a broker. 

DeFi allows us to use some of the inherent attributes of blockchain technology to completely reinvent finance, so we can conduct financial transactions without any centralised intermediaries. 

DeFi platforms operate using blockchain smart contracts, which are basically contracts that are written in code. If the conditions coded into the contract are met, then the payout or consequences are automatically executed -- basically, the contract is fulfilled without any human intervention.  

DeFi not only makes the process faster, cheaper and more transparent, but also allows such platforms to scale without the limitations of human bandwidth.

In addition, such DeF platforms are open to anyone. A traditional bank can pick and choose its clients. It can decide to work only with the ones that will be the most profitable, or exclude clients from certain countries. 

In contrast, DeFi platforms are open to anyone with a basic internet connection and access to cryptocurrencies.

This is seen by proponents of DeFi as another example of how blockchain can help in promoting financial inclusion and providing access to financial services to anyone, regardless of their wealth, status, or where they were born. 

But what is probably one of the most powerful features of DeFi is its interoperability, or what many call the permissionless composability. 

Composability is a design principle that allows various different components within a system to be combined together, thus allowing any new DeFi application to combine any existing DeFi products to form entirely new DeFi products.

This is why DeFi is often referred to as financial Lego, as it allows you to combine any number of Lego pieces together to build the creation of your choice. 

And DeFi has begun to grow very quickly.

The first use cases to gain popularity were stable coins like Dai or borrowing and lending platforms like Compound. 

But all eyes have been on decentralised exchanges in recent weeks, especially Uniswap, that allow parties to trade without the need of a central counterparty.

Source: Dune Analytics, The Block Research

Should you care?

The answer is yes.

Although the total activity in DeFi is still very small even in the crypto world (the total value locked in DeFi last month was only around US $8 billion), DeFi shows us that it’s possible to reimagine a new financial system based on blockchain first principles.

Expect lots of developments in this space in the coming months!

Money Quote of the Week:

“Don't tell me where your priorities are. Show me where you spend your money and I'll tell you what they are.”

James W. Frick

2. Why are Central Banks Issuing CBDCs?

According to the Bank for International Settlements, the “club” of central banks, around 80% of surveyed central banks are engaging in research, experimentation on, or development of CBDCs. 

And things are moving fast.

According to the BIS, the share of central banks (by number) that is likely to issue a retail CBDC over the medium term (in one to six years) doubled in 2019, to 20%.

But a good question to ask is why do they want to issue a CBDC?

Well the BIS analysed the question and the results may surprise a few.

There are, of course, the regular differences between advanced economies and emerging economies. 

Source: BIS

For example, financial inclusion is a big priority for emerging economies, whereas the robustness of the payment system is a bigger priority for advanced economies. 

But the BIS also wanted to analyse if there was any common denominator between countries experimenting with CBDCs. 

So they analysed a number of indicators including mobile phone and internet use, the country’s innovation score, government effectiveness, levels of financial inclusion and even the number of internet searches on the topic by residents of that country. 

The result?

The launch of CBDC initiatives is very strongly associated with at least two indicators: the greater use of mobile phones (mobile cellular subscriptions per 100 people) and the innovation capacity of the country (jurisdictions with a higher innovation score overall). 

Will be interesting to see if this turns out to be true in a couple of years!

Funny Image of the Week

If only there was a digital solution or a digital version of gold…..

3. One Unforeseen Challenge to the Future of Money: Rain

Did you ever think that Mother Nature could have an impact on the future of money? Well, it recently did.

China has recently been dealing with some of its worst floods in decades. 

These floods have affected over 50 million people, with 3.7 million displaced and more than 158 people dead or missing.  

China also happens to be the country where the majority of Bitcoin miners are located.

(If you want to know what Bitcoin mining is, along with the purpose of mining, you can watch my FinTech Capsule? Explainer video on this topic.) 

To what often comes as a surprise to many, roughly 65% of global mining today takes place in China. Sichuan province is the clear leader, producing around 54% of the global hashrate, with the remaining 11% split more or less evenly between Yunnan, Xinjiang and Inner Mongolia.

Source: Coinshares

Sichuan is a natural location for Bitcoin mining, with ample and cheap electricity from hydropower.

However, the floods have forced many Bitcoin miners to stop operations. Some were simply devastated by the floods, but others were hit indirectly when hydropower plants temporarily cut off electricity generation, as the increasing water reserve levels would have otherwise caused pressure on the dam. 

This caused a drop in the hashrate of Chinese Bitcoin mining pools of between 10-20 percent and caused the global Bitcoin hash rate to fall by up to 10 percent.

The Bitcoin hashrate (which, for those of you who watched my explainer video, is the act of throwing the dice) is very important, as the higher the hash rate, the more decentralised (and secure!) the Bitcoin network is. 

The recent events had no material or lasting impact on Bitcoin, with the minimal effects not even comparable to the human, physical and emotional damage that the floods have caused for millions of people in China. 

But it’s another reminder that Mother Nature has a big role to play, even when it comes to the future of money!

Launch of the Crypto Capsule? Commentary Series!

Say hello to the latest addition to the Capsules family: the Crypto Capsule? Commentary, where I answer every week some of the questions that you send me from all around the world. 

My Crypto Capsule Video This Week

Not even a 14 day mandatory quarantine in a hotel room in Hong Kong can stop our Crypto Capsules!

Want to See Me Live? Here are My Upcoming (Virtual!) Speaking Engagements

16 September - CAIA Webinar: Latest Global Crypto Trends

17 September - Futures & Options World

18 September - Chainalysis Links - Central Bank Digital Currencies and Their Impact on the Future of Money

24 September - UBS Live Global Family Office Tech Connect Series

25 September - Global Monetary War Game 2020

6 October - Futurism Forum

6 Oct  - FinTech South

Enjoyed this content? Make sure to subscribe or share it with a friend! A new Future of Money newsletter will be in your inbox each Saturday!

See you all next week!

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Global Crypto Leader, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

 With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media, including Bloomberg, CNBC, CNN, the Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world. 

Chambers Global also named Henri the “highest profile FinTech consultant in Hong Kong” and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book, The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services, published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]