Home Innovation The promise of digital finance may be closer than we imagined

The promise of digital finance may be closer than we imagined

Rahul Mudgal
Digital finance has received a fillip due to the pandemic, and fintechs, big tech and central banks are taking the lead
Global Marketing Director at DOCOMO Digital
A coin embossed with an ethereum logo is kept leaning on a purse containing a Visa card with US currency notes below it and a memory chip and Gigabyte graphic processor

The world recently woke up to the news of three new promising vaccines which could mark the beginning of the end of the pandemic. I find a strong sense of hope on two accounts. One, the obvious countermeasure to the novel coronavirus. Two, the promise of new transformative technologies coming to manifest themselves beyond the hype curves and hyperbole.

Stop and think for a moment!

When the polio vaccine IPV was first administered in 1954, it had been in development and trial for 20 years. The coronavirus vaccine, on the other hand, has gone from development to potential mass production within the same calendar year that the virus was discovered. 

In the first part of this reflection on digital finance, I had argued that this crisis may just be the trigger for fintech to manifest its true potential in driving financial inclusion at scale. We may well be on course if the current tide is any indication.

The importance of recent developments

Slated to be the biggest IPO in the history of capital markets, Ant Financial’s IPO was stopped in its tracks hours ahead of its listing by the Chinese authorities. Reports suggest this development may have eroded $140 billion of the $350 billion valuation of the Ant Group. More than 40% of Ant’s business is in lending. And the authorities would like for Ant to have capital adequacy ratio or liquidity on its books like that of traditional banks. This has huge implications for how governments and regulators around the world may choose to treat fintech companies in the lending, payments, and banking segments.

The signal that the potential of cryptocurrency or more broadly of the distributed ledger technology have now gone mainstream, is without a doubt. These technologies will disrupt traditional finance as we know it. It is not a question of if but when.

It also means that unlike Ant’s valuation which hitherto was similar to Visa or Mastercard at 20-times revenue, it is likely that fintech companies should trade like conventional banks at a P/E of four times revenue.

In particular, digital banks and lending apps will find themselves caught-up in this quagmire of shifting policy. Overall, though, I believe it will be a net positive for consumers and build consensus around development of new governance principles for the fintech ecosystem.

The other development is the record surge in Bitcoin’s value, now bordering at an all-time high of $20,000. The rally is fundamentally different this time though. Unlike in the past when the valuation was catalysed by certain retail investors looking to make a windfall, for the first time in the history of cryptocurrencies, we now have institutional investors treating Bitcoin as an asset class and a real store of value. The digital gold is finally here.

This is obviously helped by the fact that PayPal and Square have recently legitimised the trading of Bitcoin on their platforms and close to 70% of the recent trade is enabled by these mainstream platforms. It is also helped by the fact that the number of Bitcoins in circulation was cut in half in May of this year, making those holding their positions in this digital store of value even stronger. Naysayers continue to speak of volatility without the medium being safe in terms of a reserve, leading to higher volatility. Yet, despite all the steep ebbs and flows, Bitcoin has appreciated an average of 200% over the last decade of its 12-year existence. Optimists argue that with the first IPO from a crypto fintech – Coinbase launching early next year, Bitcoin’s legitimacy and resulting value will rise even more rapidly. Naysayers argue that it will always be a risky and volatile bet, for it is not a “fiat” in the conventional sense, backed by a real currency, with no visibility of the supply. One might even argue that this is not a net positive because mining or keeping Bitcoin ledger up and running consumes 1% of the world’s total output of electricity.

Cryptocurrency coins of different brands Bitcoin, Ethereum and Ripple are kept atop a 100 dollar US bill
Cryptocurrency is slowly but surely going mainstream. Photo by WorldSpectrum from Pixabay.

But let us focus on the signal for now. The signal that the potential of cryptocurrency or more broadly of the distributed ledger technology have now gone mainstream, is without a doubt. These technologies, and not necessarily Bitcoin, will disrupt traditional finance as we know it. It is not a question of if but when.

The allure of decentralised finance appeals not just to consumers. Some progressive governments have been quick to notice the potential of stable coins and digital currencies.

Facebook’s role as an accelerant warrants a mention too. While the Libra and now Novi project has had its fair share of challenges, it is only when Facebook announced the project that entailed putting a digital wallet and currency in the hands of three billion people—mostly underbanked and unbanked—did the institutions, regulators and governments take notice of the promise and pitfalls of a less regulated, ideally more governed, system of finance.

In particular, digital banks and lending apps will find themselves caught-up in this quagmire of shifting policy. Overall, though, it will be a net positive for consumers and build consensus around development of new governance principles for the fintech ecosystem.

Facebook finally might be on the brink of being able to monetise the largest unmonetised platform in the world – WhatsApp. The focus is on getting WhatsApp Pay approved in two of the most lucrative markets for digital finance – Brazil and India. WhatsApp Pay may serve as a precursor to Novi and could be vital in terms of learnings Facebook and the regulators will be able to draw from, enabling exchange of value as simple as exchange of information over an instant message.

Central bank digital currencies the next frontier

The natural next step in the evolution of money is the dawn of the age of the central bank digital currencies (CBDCs). In addition to the first one slated to be out of the door—the Digital Currency Electronic Payment or DCEP in China—there are many other regulators seriously working on making CBDCs a reality.

These include the Bank of Canada (CAD-coin under Project Jasper), the Monetary Authority of Singapore (Project Ubin), the European Central Bank and the Bank of Japan (Project Stella), the People’s Bank of China (DCEP), the South African Reserve Bank (Project Khokha), the Hong Kong Monetary Authority and the Bank of Thailand (Project Inthanon–LionRock) and the Bank of England (unnamed project), among others.

According to the Bank of International Settlement, some key motivations for launching CBDCs are payment safety, payment efficiency, financial stability, monetary policy implementation and financial inclusion (more so in emerging market economies). 

But it is still early days, and there are issues at hand that governments continue to grapple with. On their own, governments lack the distribution prowess of platforms such as Facebook, even though they may have more credibility.

An ideal state will be a hybrid born of a public private partnership. Such a structure could be used to improve payments and securities settlement efficiency, as well as to reduce counterparty credit and liquidity risks that may surface with purely private ventures.

And additionally, it is still difficult for governments to bring these initiatives within the purview of their conventional monetary policies. Some lessons in macroeconomics may have to be rewritten for CBDCs to firmly become part of the mainstream. But this will happen, and that for now is certain.

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Global Marketing Director at DOCOMO Digital

Rahul has over eighteen years of experience in B2B marketing, account management and consulting. He currently leads marketing at DOCOMO Digital, the international mobile commerce business of NTT DOCOMO. He is an avid observer of the impact of technology on human behaviour, especially in emerging markets. He serves as an advisory board member at the Asia-leg of the CMO Council.

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