Banks are about to face the same tsunami that hit telecommunications twenty years ago



I fear that global banking regulators are about to make a move that unwittingly “obsoletes” banks, by banning an upcoming technology pivot. Making this mistake would ensure that the tech industry continues to bypass banks, even as internet-native payment technologies begin to evolve.

The telecommunications industry offers a cautionary tale: when Voice over Internet Protocol (VOIP) was invented in 1995, most people decried it as a technology that could not scale and posed no threat to the giants of telecommunications. Then, around 2003, the technology to expand VOIP arrived – broadband – and in a flash, most of the telecom industry’s copper wire networks became obsolete. Useless relics.

Bitcoin is a “Money Over Internet Protocol”, just like Ethereum, potentially. Just as VOIP moves voice data over the internet nativelyBitcoin and Ethereum move valuable data across the internet natively. Most people disparage Bitcoin, Ethereum, et al. as protocols that can’t scale and can’t threaten the incumbent financial industry, just as they denigrated VOIP. But the scaling technology is now here – it’s called Lightning Network, which is a bitcoin layer 2 protocol. Its throughput capacity is about equal to that of Visa, and payments made through Lightning cost almost zero. There are also other scaling technologies. If I’m right and scaling technologies for native internet money protocols have arrived, then many legacy systems running in the financial system today will be obsolete within a few years.

As CEO of a new kind of bank – a dada-bank (“bank of dollars and digital assets”, defined as a depository institution authorized to manage both and pronounced as “data bank”) – my company lives every day with the problems inherent in the banking sector’s obsolete legacy systems. Culturally, banks are used to building complex and “closed” IT systems. Fintechs have emerged in recent years to provide efficient front ends that act as “middleware” between outdated back-end systems and the user experience demanded by customers. Culturally, fintechs build the opposite of banking IT systems – fintechs typically build their systems to be as open and “unobtrusive” as possible to create network effects. If banks had done this, fintechs would not need to exist! But, until the arrival of “Money Over Internet Protocols”, banks still had a role to play, as fintechs still had to partner with a traditional bank to settle US dollar payments for their customers.

Large-scale “money over Internet Protocols” are truly a threat to traditional banking, as they allow money to flow out of traditional, antiquated payment rails. To date, the US banking sector has lost around $600 billion, or 3% of its deposit base, to the crypto industry – and it happened before the “Money Over Internet Protocols” scaled! Despite all the legal, regulatory, accounting, and tax issues facing their products, and all the criminals and fraudsters out there (who should be in jail), the tech industry has proven its ability to bypass the banks.

It will take Lightning a few years to get this proverbial broadband infrastructure in place (scaling up) before “internet protocol money” reaches its full-scale tipping point. But make no mistake, it happens. The proverbial undersea cables that scaled VOIP are laid before our eyes.

But the “ah!” of these “Money Over Internet Protocols” is not cost or scale. There are two ahas that matter much more: integration speed/cost and developer communities.

  • Integration speed/cost: Anyone in the world can become a member of these emerging payment networks in a matter of hours, using equipment that costs a few hundred dollars.

Banks’ computer systems will never be able to compete with this.

It’s not even a question of whether legacy technology architectures can compete with these emerging protocols, for the simple reason that it’s fast, cheap, and easy to join these networks. I remember a recent conversation with a B2B payment company, whose leader was very proud that his team had reduced the time it took for his business customers to onboard his system to just 3 months. In the legacy world, 3 months is impressive. But the paradigm has changed: payment system integration time is now measured in hours, not months or years – and in hundreds of dollars, not millions of dollars. It is obvious which approach will win.

  • Developer Communities: Open and permissionless protocols have huge communities of developers, which accelerates the development of their ecosystem and their effects on the network. Network effects are all about composition. The code libraries and developer tools available for Bitcoin and Ethereum are critical infrastructure that banks’ proprietary systems cannot replicate. Moreover, these developer communities organically create interoperability. Banking “walled garden” systems with closed groups of developers will never be able to keep up with their pace of innovation.

So what could be the role of banks in the world I am describing? Answer: Banks are becoming software application providers, providing access-controlled applications that run on top of open, permissionless protocols and make them accessible even to unsuspecting users, much like telecommunications companies do with VOIP. I bet very few of us use the CLI to make a phone call – although we could use it if we wanted to, most of us pay to use telecom providers at the place because they make the user interface so simple.

This is what banks will also do: provide access-controlled applications to facilitate the use of “internet money protocols”. Huge, successful companies were built exactly this way – as controlled-access applications running over open, permissionless internet protocols. Car manufacturers are just one example among many. They are now software companies, even if they offer software that runs on a different type of hardware.

And the central banks? What would be their role in the world I am describing? No different. They will become providers of a software application for issuing fiat currency that also runs on open and permissionless protocols.

This brings me back to my fear that global banking regulators (specifically, the BIS) are about to make a decision that “obsoletes” banks. Why? Because the BRI proposes a treatment of bank capital that would effectively prevent banks from interacting with open protocols and without permission. If they do, they guarantee that the tech industry will continue to bypass the banking sector.

I guess the biggest concern global banking regulators have with banks using open, permissionless protocols is compliance. But banks don’t need compliance built into the base layer of their IT systems. Compliance can be built into applications that run above the base layer and control access. This is what banks are already doing today with TCP/IP. Each bank uses TCP/IP, yet strictly controls access to its online banking platforms. Criminals and sanctioned countries also use TCP/IP today, but banks have the tools to stop them from using bank applications. Same with Bitcoin and Ethereum – banks have the tools to prevent illicit finance from using their apps. It is easier to control illicit activities on open blockchain systems than on legacy systems.

At its turn, telecommunications was a heavily regulated industry, much like banking is today at its turn. How, then, did telecom companies pivot to become software vendors and avoid obsolescence? Answer: Regulators allowed them to make this pivot.

That’s what banks will become too – software publishers – but only if banking regulators allow banks to make the same pivot. If they don’t, then it will be obvious, looking back 10 years from now, why the tech industry won.

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