The Global Financial System is a Myth

Every new economic age in modern history has been driven by an explosion of technological innovation that leads to increased efficiency, throughput, and coordination. The end result has been sharp and steady growth in global GDP and wellbeing.

The growth of our global GDP in the last half century has been exponential. In recent decades, this growth has stemmed from the emergence of new markets, and the bridging of global economies the Internet enabled. Not everyone has shared in this wealth creation, however. A closer look at the global distribution of wealth shows that while global GDP growth has been exponential, so has its concentration in the hands of the few.

The global economy today is worth more than $80 trillion: that is a lot of wealth. But that wealth is not being returned in ratio-balanced measure to the people who are doing much of the work. Companies are not properly incentivized to create strong and equitable wealth distributions among their workers and partners. The driving economic ethos of much of our world is a “scarcity mindset,” where to achieve wealth requires the economic suffering of another company, country, or individual. As a result, competitive economic incentives have concentrated the growing global wealth in the hands of a few monoliths who have tremendous access and control over the world’s most valuable asset: data.

A coherent global financial system doesn't actually exist. It is a network of walled gardens; brokerages that serve their jurisdictions, stock exchanges that serve their jurisdictions, central securities depositories for each nation, and banks that handle their business nationally and reach out using correspondent banking relationships when they need to cross into another walled garden to complete a transaction. This loosely knit network is often extremely inefficient when jurisdictions or currency boundaries need to be crossed, exposing participants to risk, delays, and high operational costs.

Post-crisis capital markets infrastructure in the wake of 2008 relies on layers upon layers of rules, duct tape, and nails. The industry names for such patches are controls, collateral management, default fund contribution, reserves, capital buffers, and so on. Financial institutions spend billions auditing the systems that these nails and duct tape are holding up.

Today’s financial markets are closed. Participation requires locking into the same interfaces everyone else is using, which are rigid, outdated, and disincentivized to innovate. Whatever we gain in terms of economies of scale, resilience, and managed operational risk, we more than lose by way of severe diseconomies from lack of innovation and transparency.

The trend of the past half-century suggests that global growth will continue—and likely accelerate—as the world grows more connected and better optimized. In particular, technologies like the Ethereum blockchain will allow for the realization of wealth through the access and promotion of previously-untapped wells of wealth, namely people and economies left behind by our society’s most recent exponential growth:

• According to the World Bank, there are currently 1.7 billion unbanked people. These people have personal, local, and community economics —but that wealth is not managed by or trusted to regional or national banks, meaning its opportunity for investment, growth, and empowerment is forgone. In Southeast Asia alone, 73% of citizens are unbanked —that’s 438 million people who are not currently participants in the financial industry.
• An estimated $5.8 trillion held by private equity funds is currently locked up in illiquidity. A more transparent, lower cost, digital-first infrastructure that does away with some of the value-consuming intermediaries —auditors, lawyers, paperwork —can make much of this value liquid. Unlocking that capital would undoubtedly speed up growth across the board.
• Residential real estate is valued at nearly $300 trillion globally. Real estate is a notoriously illiquid asset, and even for people who are fortunate enough to own land, it can account for up to the vast majority of their net worth —that’s, let’s say, 70% of individuals’ net worth not made available to them to invest.
• Finally, despite the growing ubiquity of the Internet, in 2016 the ITU reported that nearly 4 billion people globally did not have reliant or consistent Internet connection. This means well over half of all people on Earth cannot regularly or confidently use the Internet to interact with, participate in, and contribute to the global economy.

The realization of these opportunities has been hampered by the reality of the “walled gardens” of our financial industry. Barriers to entry are too high for many people to access financial services and engage in the global economy. Physical assets are stubbornly resistant to secure and traceable liquidity. On our current path of global development, worldwide economic opportunities become greater, but inversely more difficult to realize.

“Decentralized Finance” is a term that describes how financial services—both B2B and B2C—will be organized, facilitated, and executed when fully underwritten by blockchain technology. Ethereum is part of the Internet, meaning that companies using the technology don’t need mainframes or SWIFT messages to go about business. Decentralized means records can be accessed securely and transparently by individuals, issuers of securities and regulators, or other parties promoting industry standardization instead of requiring companies to build proprietary databases, interfaces, and messaging systems. Decentralized does not mean that companies or intermediaries sacrifice control, security, access, or transparency over their data or information.

So where does this leave those of us who have so much experience and allegiance to the traditional financial sector? There are a number of ways blockchain technology, Ethereum, and decentralized finance will impact the financial ecosystem and increase wealth and abundance across the world.

We are building bridges from legacy systems to decentralized finance at ConsenSys. To learn more about the opportunities we see ahead, read the full paper: “Advancing Capital Markets on Blockchain Technology.”