Part 1 Mapping the global Digital Economy and How this is affecting Governments and Financial institutions
This article reflects on the challenges and problems that are coming with emergent Financial and decentralised tech blockchain and AI driven. These new disruptive innovation models are sort of a Tsunami that will affect all the social, financial, regulatory and economic fabrics of civilisation.
The world economy and financial industry are only in their early days of digitalisation and already being profoundly disruptive. We are going through a wave of emergent disruptive fintech systems and blockchain and AI decentralised models. At the moment there is a process of digitalisation / Tokenisation / “Cryptolisation” of the economy/ financial industry. The question is how these new digital models of decentralised and distributed finance and economics, can impact the society both in a positive and negative ways and what risks they bring us.
We can call this new model Cryptoeconomics or Tokenomics. Cryptoeconomics comes from two words: Cryptography and Economics. Josh Stark defines cryptoeconomics in the following way:
“Cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks (…) it is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.” ( Stark, Josh, in Coindesk, 2017)
This new model of crypto economics is faster than anything seen and is driven by decentralised technologies and innovative (and more “democratic”) financial methods such as token systems, technological forks, ICOs, and a whole array of new elements such as smart contracts, tokens, digital paradigms of new identity, DLT, DAO systems and so forth. Cryptoeconomics is still in its inception thus, it has an exponential potential of growth, embedded in its DNA.
To measure the seriousness of this just listen to an interview with Bloomberg at The Year Ahead summit in New York, by Citigroup CEO Michael Corbat. This leading CEO of a global major financial organisation recently predicted that bitcoin’s threat to the financial system will lead to state-sponsored digital currencies, as governments will have no choice.
Part 2. The Next Tsunami of an Emerging Black Swan? Plus Exponential Growth!
The impact of this growth can be seen through the eyes of Nassim Taleb’s black swan metaphor, as no one saw cryptoeconomics coming our way, at such a fast pace. The black swan theory is a theory that describes how an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on an ancient saying which presumed black swans did not exist, but the saying was rewritten after black swans were discovered in the wild.
When Sakamoto wrote his white paper, not even a decade ago (on the aftermath of the 2007 Financial Crisis), no one was expecting that it would have such an impact on the world. The pace at which blockchain and Crypto-economics as a whole, are growing is so accelerated that is becoming disruptive, because it touches technology, financial models, society models and governmental models. It matches the disruptive pace of the technological innovation / acceleration we live in nowadays, but in many ways, it is overwhelming, and we are not prepared for it. And this disruption is and will have a major impact in the financial industry as a whole and the established traditional models such as central banks and so forth.
We are talking about an exponential growth that in a change per instant or unit of time — such as the value of a mathematical function is proportional to the function’s current value, resulting in its value at any time being an exponential function of time, i.e., a function in which the time value is the exponent.
“I think that we are about to see massive disruptions,” IMF Managing Director Christine Lagarde told CNBC about developments in financial technologies Lagarde didn’t rule out that the IMF could at some point develop its own cryptocurrency.
What we have nowadays is an exponential growth of new fintech and crypto economics models, special with the number of the crypto economics. To reflect on this we have to look at the numbers. The entire cryptocurrency market capitalization industry-wide as of 19th November 2017 comprehends around 1301 Cryptocurrencies, distributed through 6739 Markets reached over a Market Cap of: $236,675,140,539 with an average 24h Vol: $7,755,202,654. This has a crypto currency Dominance of BTC: 56.6%, according to coinmarketcap.
This is a huge increase when compared with the $40 billion market cap number at the beginning of 2017. In many cases if we look at this in pure financial history facts we are close to a financial bubble. But the challenge is that according to major experts including Goldman Sachs analysts these numbers are still in its infancy and will reach over 1 trillion USD in coming next 2 years.
But this is nothing. The total number of global cryptocurrency transactions is still growing and it might or will surpass the $1 trillion mark in 2017, according to a new study by Juniper Research. Bearing in mind that the world economy is around 80 trillion this is now not a detail of some cyber punk technology geeks. This needs to have a serious look and financial organisations and governments have to put the explosive growth in cryptocurrency in perspective, and look at the collateral things that come with this. $1 trillion of transactions is roughly 15 times the total number of transactions registered in 2016. But the growth is still in its early days as of September 2017 the official number of crypto wallets is only around 15 million. What happens if it reaches 100 million?
If we look at biological examples such as the explosive increase of bacteria that sours milk; the sustained exponential growth of cells in the body that creates cancer we will have trouble coming soon. History tells us this. The initial growth of unstressed populations, in general is a thesis well known; the accumulation of interest and high speculation on investments compounded continuously has created over and over economic crisis.
Part 3 How to cope in this new Tsunami of Blockchain, AI and IOT? Are Governments, Regulators, Businesses and Financial organisations prepared?
The challenge is that with disruptive technologies, special blockchain, AI and machine learning applied to financial and economic models we can (and somehow we started already) disrupting the entire global economy. The question is how are we doing this explosive growth in a sustainable way of in a exponential decay?
However, in no real-world scenario can exponential growth be sustained indefinitely, because growth implies increased consumption of resources, and resources are always limited. When we apply this to economics and finance we have to look at risk models and regulations.
To finish the words of Citigroup CEO Michael Corbat
“I don’t think governments are going to take lightly other people coming in and potentially disrupting their abilities around data, around tax collection, around money laundering, around know-your-customer.”
The exponential growth tends to create an exponential decay. For example when a biological population has to compete for scarce resources, its growth slows, stops, or reverses. Indeed, the sustained exponential growth of almost anything is dangerous and pathological. In finance we call it bubbles. The important concept is how to use a sustained growth model that in the case of a population, for example, is a population explosion, and sustained exponential growth of cells in the body that the example is cancer. And how to do this when we are digitalising our economy and finance using AI, decentralised technology that brings new distributed governance models and at the same time in a global different rhythm path.
The challenge for professionals, organisations and companies is how to cope with these models, since these are changing our financial legacy faster than anything we saw over the last centuries.
Trust is the DNA of the world and financial economy and all needs to be done to create trust but also mechanisms that can create sustainable solutions out of these tech and financial exponential growth systems.
How to adapt and evolve to something that is happening and changing at increased speed, as we speak? What will happen in next years to come?
This new economic model is already here and is impacting the real economy and the digital financial ecosystem. Bearing in mind that at the moment we live and have mostly centralised models, how will their decentralised ethos affect and change the present established, financial models?
Crypto-economics, special new fast growing cryptocurrencies, open before our eyes a new scenario of disruption, in some ways a pandora box. At the present moment there is a dysfunctional unbalance in the way this sector is evolving and its volatility will affect all present risk management models and creates regulatory challenges, frictions, geopolitical instability.
My feeling is that the relation between economics / commodities, financial model values, and all digital assets present in the financial ecosystem will be irreversibly change.
In one hand, crypto-economics presents itself as financial and technological Tsunami. An evidence of the tsunami is the way bitcoin and Ether are growing towards astronomical valuations. As mentioned before the numbers are real but governments, banks, financial organisations are still in denial.
The challenge is how to look at legacy systems, established good governance and look a sustainable models that have been there for thousand of years. How to look at old solid commodities value such as Gold, silver in one hand and bitcoin and digital currencies or tech platforms in the other hand.
- Are we preparing and educating ourselves for this?
- Are we preparing common citizens for this?
- Are we preparing central governments for this?
- Are we preparing financial organisations, and regulators for this?
- And how is crypto-economics impacting new emergent sectors, as the sharing economy and circular economy?
Some considerations to look as a conclusion:
- Governments, regulators and financial institutions need to consider decentralised models in order to enhance industry resilience, integrity and stability and work in governance structures while using data driven technology to leverage this.
- Crypto Economics models needs to be at the centre of any government, financial organisation or regulator and by chain effect any business.
- KYC (know your customer) and AML have to be digitalised and use blockchain smart contracts ASAP.
- Managing information security to safeguard against attacks for both customer and the bank has to be done through DLT and associated AI and encrypted solutions.
- Distributed ledgers and the adoption of blockchains has to become a default setting but not as a fashion but as a part of the DNA both technological and governance wise.
- Users and UI and UX frictionless banking needs to be at the heart of financial services industry and within the sustainable way how to remain competitive.
- Best counteractions taken by banks to face the decline of correspondent banking are facing change, being prepared and not runaway of worst deny the tsunami happening now, not in six months, 1, 2, 5 years from now.
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