Today Andressen Horowitz announced its third Crypto Fund with a massive $2.2 billion war chest to invest in the sector, following a $515 million second fund launched last March. The venture funds have backed some of the biggest names in the sector. These include Coinbase, custody bank Anchorage, NBA Top Shot creator Dapper Labs, and Circle, which administers the $25 billion USDC stablecoin.
As vast swathes of the business landscape get rewritten with blockchain, such deep pockets targeted at the sector represent a challenge for enterprises and banks in particular.
Historically incumbents have been poor at innovation, focused on preserving their core profit centers. But it’s been 24 years since Clayton Christensen published The Innovator’s Dilemma warning of the dangers of ceding unprofitable new niches to startups because those niches can grow into the core market.
While evidence of that dilemma is still plain to see, today many corporates have innovation centers, venture funds and participate in incubators. Even a giant bank like JP Morgan had the guts to set up the Onyx division focused on blockchain technologies.
The irony is that one of the enterprise’s biggest strengths – access to capital – could become a weakness. Incumbent’s biggest disadvantages when it comes to innovation are lack of speed, risk aversion, short-term outlook, and changing personnel, such as the recent rejig in ING’s innovation areas after a change in CEO. Now incumbents can also get outgunned financially.
When Christensen first wrote his book, the venture funding available to U.S. startups was $14 billion. Last year it was ten times that. Now a significant proportion of both venture capital money and the investment cash of the younger generation is targeted at blockchain and cryptocurrencies.
Enterprises are already viewed as unsexy in the blockchain world. But even well-funded crypto startups find it hard to recruit experienced blockchain talent. That means corporates have to pay high salaries to retain staff, putting further pressure on investment returns, particularly for enterprise blockchain projects which are notoriously slow to gain traction.
The fight is on
The choice is to give in and stand in front of the train coming down the track. Or to fight. And numerous banks and financial players are already taking massive action. These include JP Morgan, ING, Standard Chartered, DBS Bank, SBI and others.
For those not fighting, the question is whether the C-suite fully appreciates that the train’s coming.
Trade finance may be a sector that’s attracted a lot of attention for blockchain with Contour, komgo, Marco Polo and we.trade. But it, too, needs to move faster. The controversial Triterras is using blockchain combined with alternative lenders and claims to be far bigger. And it’s a matter of time before more innovative startups like Centrifuge’s Tinlake successfully ‘DeFi’ trade finance.
In payments, digital currency progress is being made by Fnality and Partior on the wholesale front and Baton Systems in wholesale digital payments. But what about retail? Paypal will happily pocket digital currency merchant fees without needing to pay Visa and Mastercard. While DeFi undoubtedly drove the recent success of Circle’s USDC stablecoin (market cap grew from $1 bn to $25 bn in a year), that’s a classic Innovator Dilemma scenario. Arguably it surfed the DeFi wave, but it has far bigger ambitions.
When it comes to capital markets, incumbents should make an impression because it’s all about compliance. Perhaps in the next 12 months, security tokens might be that breakthrough. The ‘might’ is because we’ve seen the same high hopes in trade finance and insurance and it’s been slow.
While current iterations of DeFi automated market makers may have flaws, the threat of disintermediation cannot be written off. All that money focused on innovation buys the time of many bright people to focus on the topic.
On other fronts, things are more positive. Broadridge’s $30 billion a day blockchain repo transactions within a week of launch is a good sign. And HQLAᵡ continues to make progress with digitizing collateral.
Somehow there’s a need to move faster and find even greater urgency to get a quicker payback. Sometimes that might be going after quick wins. Even more collaboration is required. At a technical level, interoperability is essential to reap the full benefits of blockchain network effects rather than creating bigger silos.
Despite the challenges, banks and enterprises have plenty of talented visionaries capable of reconstructing their businesses for an unpredictable future. Listen to them.
After all, the biggest change needed is a mental one. As Einstein put it, “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.”