The Next Upgrade, a Financial System Reset

Roads of Uncertainty and Disruption

The year 2020 signaled a major shift in our lives as well as the financial and economic system, with the pandemic causing global lockdowns, supply chain disruption, and global mobility transportation disruption. Many governments around the world were unprepared to handle the situation despite the fact that many of them had the capability to tack the pandemic head on. In reality, many of these governments failed due to poor resources and crisis management.

The pandemic has brought to light a number of issues that exist within the global economy, along with outdated systems and the need for process revisions. One of the fundamental pillars of the economy is the financial sector; the pandemic displayed a number of weaknesses within the financial system. So, what must we do to maintain and manage the current financial system and avoid an economic collapse that would send a ripple effect across the globe? We need institutional reforms to make the system more resilient and able to withstand a variety of future "shocks," as described by the Federal Reserve Board Governor Lael Brainard.

Outdated System

Some say this takes us back to Bretton-Woods’ system and its failure due to several reasons when fiscal and monetary discipline fails. This system only lasted from 1945 to 1973. The foundation of the system was based on the classic gold standard. It lasted until President Nixon announced the end of the gold standard due to global economic instability at that time. In 1973 the IMF declared the death of the Bretton woods system. Since then, the world economic system has continued to be driven by unpegged currencies.

So, why is our current financial system outdated? It goes back to how the system was designed in the first place. It was designed with a long and complicated bureaucracy that is driven by a lack of accountability and transparency with the absence of proper distribution of funds and wealth.

Banks continued to print money to cover financial issues and economic recovery. Is this enough, or is radical reform needed to stabilize the system in high volatile events such as situations like pandemics or conflicts? The financial system has been tested before; who could forget the 2008 crash. However, did banks learn any lessons from the situation? The answer is no because of their nature as a centralized authority regarding decisions and secrecy.

That’s why the system is outdated internally; however, what about external international cross-border payments? We are talking about the SWIFT system enabling interbank transfers across the world through its messaging system. The SWIFT system is under disruption as well as it cannot handle the emerging rival systems (like Ripple Lab). A post published by Credit Suisse describes the decline of SWIFT “It is old, inflexible, slow, and increasingly prone to cyberattacks at a time when banks are under tremendous pressure to cut costs and protect customer data from hackers".

The outdated system needs to be updated with new concepts and technological tools, shifting towards a digital transformation through the 4th industrial revolution with DLT and blockchain technology to manage payment and risk faster with the power of transparency.

"SWIFT is old, inflexible, slow, and increasingly prone to cyberattacks at a time when banks are under tremendous pressure to cut costs and protect customer data from hackers"

Newly Reformed System

Digitalization has created many opportunities but has also enabled the introduction of many unnecessary and complex systems. This is what the fourth industrial revolution is now doing; it will disrupt and redefine how we do things, starting with cash.

It’s important to establish a new major policy and legal changes in the ecosystem of the current global financial system assisting in the efficient transition to this new international monetary system.

We can see how cryptocurrencies/digital assets, as a new asset class with foundational technology DLT, have already begun encroaching on the banking sector’s landscape. Why? Because it can be stored, managed, and utilized without relying on an institution to assure the funds. A long waited executive order was signed last month by US president Joe Biden calling on federal agencies to take a unified approach to the regulation and oversight of digital assets. Other countries took similar approaches to present digital asset regulations.

"Fourth industrial revolution will disrupt and redefine how we do things, starting with cash"

The UAE introduced virtual assets laws for the first in the MENA region, taking concrete steps to establish a strong digital economy in the region. Before the conflict started in Ukraine, Russian Finance Minister Anton Siluanov, in an interview in February, said that he hoped the regulations would be passed into law by the end of the year. Not to forget, last year El Salvador became the first country in the world to make the cryptocurrency Bitcoin a legal tender; a historical moment and challenging step toward a decentralized financial system that has opened doors for other countries to question their fragile system and stand against the waves of the coming tsunami, The Great Reset.

From Centralization to Decentralization

The financial crisis of 2008 brought the collapse of Lehman’s brothers, sending shockwaves across the global financial markets and threatening the existence of traditional banks and central authorities. It made a case for the release of the Bitcoin whitepaper that included revolutionary ideas, peer-2-peer transactions, and interaction away from the centralized and corrupt structure.

The alternative to the traditional financial system is a new vision that accompanies DLT and has the potential to shift the structure of the whole financial system at a macroeconomic level. Decentralized finance (DeFi), based on DLT concepts, is an emerging industry with the ability to revolutionize the traditional financial system creating an alternative to central-governed institutions. DeFi leverages agile tools for an open, transparent, and secure digitalized financial ecosystem in the age of data.

We are gradually seeing the adaptation of digital assets and the widespread use of crypto exchanges (CEx & DEx). The NFT art and music along with Metaverse industry are preparing for the next evolution to web 3.0 an age driven by AI; this is when we witness the shift of authority this time in the hands of most vital commodity of our century, Data.??