This is a guest opinion post from Eric Saraniecki, Digital Asset’s Co-founder and Head of Strategic Initiatives.
2021 was a banner year for digital assets, blockchain, and distributed ledger technology (DLT). Market caps of cryptocurrencies eclipsed those of many Fortune 500 companies. Non-fungible tokens (NFT) dominated the collective consciousness. Nations banned crypto for the tenth year in a row. Markets reinvented shorting derivatives, and incumbents got kind of, sort of serious about participating.
The chasm between the challengers and the incumbents is widening, with the former sprinting toward occasionally overzealous innovation, and the latter often stuck in cycles of lift-and-shift with legacy technologies and methodologies. The innovators are winning because they are embracing the strategy of Open Business — a shift in mindset and architecture that enables a truly interconnected global economy.
Looking ahead to 2022, I see two main themes:
- People are rediscovering the joy of owning and directing their investments
- There is an enormous unrealized opportunity for TradFi to embrace the Open Business ethos.
The return of ownership mentality
The NFT boom may seem frivolous, but the euphoria around them is a serious, authentic expression of joy. People have rediscovered the pleasure of owning assets directly – not just holding the theoretical or contractual rights — and it’s not a fleeting trend.
Although NFTs don’t bestow actual ownership, they do grant holders the ability to direct assets as they see fit. People thrive on the autonomy that comes from engaging directly with the markets, creators, and issuers that catch their eye. Whether it’s an NFT or a more traditional asset class, the joy of ownership lies in the fact that it’s the individual’s risk tolerance — not that of their broker or a traditional intermediary — that determines the deployment of capital. This growing appetite for innovative ways to interact with markets is shifting the landscape in a profound way.
There is little doubt that open networks and the strategy of Open Business will continue to break into the broader capital markets. As this trend unfolds, I hope that large financial institutions, including central banks, will embrace the return to the ownership mindset. If they simply layer on blockchain and DLT technologies to their existing, deposits-based business models without adopting the ethos — as they may be tempted to do — they risk missing the transformative potential of the underlying technology.
We have already seen what happens when the major institutions lift-and-shift into transformational tech. For example, while online banking and mobile apps have enhanced convenience, they haven’t fundamentally changed the value proposition for customers. It wasn’t until the PayPals, Squares, Stripes, and Plaids of the world came along that we started to see what “online banking” could really mean. That connection between creators, issuers, investors, and end-users is one of the most powerful — and underestimated — attributes of open networks.
The opportunity for TradFi
Our capital markets infrastructure is built on the concept of cascading liabilities and consolidated, centralized ownership — all in the name of efficiency. That represents a tremendous risk to all investors, both big and small. It also means people don’t own anything directly. Not the stocks in their portfolio, the cash in their checking, or the Bitcoin in their Coinbase account. What people hold is a promise backed by the depository institution — the equivalent of a credit default swap without the yield.
My hope is that regulators will catalyze a wave of innovation by pushing for and supporting direct asset ownership. This would drive firms to offer a wider range of personalized services to anyone who can share, direct, and manage their own assets — crypto and otherwise — via DLT platforms or digital wallets. Firms would have to compete on services, experiences, and value-creation for customers, as they should.
Central banks have a once-in-a-generation opportunity to lead this revolution by expanding their ledgers and granting name-on-register access to all customers. Such a central bank digital currency (CBDC) system would propel us into a world where traditional institutions would no longer be depositories but true providers of financial services.
I have reason to be optimistic. The technology is ready for the Open Business revolution. We have many of the raw materials and ingredients we need for a smarter, safer, more client-centric financial system. New platforms, new business models, and new ways of thinking about the potential of those technologies are making this revolution tangible. My hope for 2022 is that we get closer to seeing it a reality.