The future of Crypto is in a regulated banking system | Techy Kings

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After reaching all-time highs in 2021, cryptocurrency prices have not found a definitive level. And the appeal of crypto’s promise to reinvent money has also reached its limits in a very specific audience. To attract a larger, more mainstream user base, proponents of the new technology will need to completely overhaul the way they promote it.

Imagine your cousin, your dentist or anyone else you know who hasn’t at least experimented with money or technology. I think about my mother. He would never use a Bitcoin wallet on Coinbase or open a savings account in USDC, a digital stablecoin pegged to the dollar. He will never want a token that cannot be used for a digital collection on the Tom Brady Autograph network. But he may be willing to verify his identity on his mortgage lender’s website if it allows him to speed up the process of buying a home. And if that digital identification process is powered by the blockchain technology that underlies crypto, he doesn’t need to know.

Most people are like him: They are not interested in any new technology unless it can help them do things faster, cheaper and safer. That’s why iTunes is a winner. That’s why Amazon.com is a monster. That’s why Netflix is ​​gaining so many followers. And that’s why payment apps like Zelle and Venmo have mass appeal.

The problem with crypto so far — in addition to its volatility, fraud and the failure of untested intermediaries — is that many of the problems it claims to solve have already been solved. We can already send digital payments or set up online savings accounts. And we can do it with the same currency we use to pay taxes and make cash transactions. So why do we really need cryptocurrencies?

Create trust

Let’s go back to where it all started: our need to believe in money. That’s why the financial industry is full of terms like trust, security, custodian, guarantee. However, there is often a catastrophic breach of trust where bankruptcies run rampant, investors are wiped out and millions lose their jobs and homes.

An example is the Great Depression, when people found that the banks they entrusted their money with were not as safe as they had hoped. Subsequently, government powers and a new regulatory structure were put behind the banks to help restore trust. In the US that means the creation of the Federal Deposit Insurance Corp., the Securities and Exchange Commission and a new housing authority to help support the increase in home loans.

Then the financial crisis of 2008 showed how inadequate those protections were. The big financial institutions and their regulators seem unprepared for the fall in house prices and the resulting impact on financial markets and the wider economy. Suddenly people don’t trust the banks or the government.

Enter crypto. Bitcoin was born in a white paper published on October 31, 2008, just weeks after Lehman Brothers went bankrupt and the government and the Federal Reserve began bailing out banks. The newspaper declared that digital commerce is too dependent on trust in financial institutions. The idea is to create an “electronic payment system based on cryptographic evidence rather than trust.” Effectively, no trust. Instead of relying on bankers repossessing your house while paying themselves massive bonuses, people can choose to use a secure decentralized network called blockchain. Crypto, enthusiasts say, will rival existing centralized financial systems in the future.

Almost 15 years later, this new money has lost much of its utopian appeal. It turns out that, for many people, this new financial system requires your trust in an institution — perhaps a wallet provider or token exchange or a decentralized finance (DeFi) lender. And too many of them have turned out to be scams or are vulnerable to hacking. Today, even some of crypto’s most ardent supporters say the market needs government regulation to regain trust and bring in established financial institutions that were once crypto’s enemies.

If crypto doesn’t provide a more reliable alternative to traditional finance, then what does it? So far, its main users seem to be people who fear using their own government’s currency because of political or economic risks or because they want to avoid law enforcement. Otherwise, its primary use is speculation — gambling on the value of the currency itself or digital assets, such as NFTs, purchased with the currency.

How to rebuild crypto

I have an idea, though. When we talk about financial transactions, we are really talking about two different things.

There is money, a medium of exchange that allows us to buy or sell goods and services more efficiently than barter. But to make such a medium reliable, it needs to be a reliable store of value over time. Otherwise, you risk exchanging your valuable goods or services for tokens that quickly sink in purchasing power. Indeed, it is the intertemporal nature of some transactions that requires the highest degree of trust.

So when we talk about money, the second thing we talk about is debt — that is, transactions that are inter-temporal from the start. At the end of the first quarter of 2022, total credit to the private non-financial sector was more than $37 trillion in the US.

And few types of debt are more mainstream than mortgages. In 1920s America, buying a home might have required paying half the value up front and borrowing the other half over five years. Before the US government stepped in, lenders didn’t trust buyers enough to take out 30-year loans with just 10% or 20% down, as is common today. There are now more than $10 trillion in residential mortgages in the US.

But real estate transactions and mortgage loans are notorious for the amount and complexity of paperwork required. Keeping track of the necessary information and processing it efficiently can be challenging. Facilitating those types of transactions — by putting important information about properties, owners and loans on an immutable digital ledger — could make crypto indispensable.

For loan originators, after the initial investment in technology, digital records can lead to significant savings in time and manpower. Part of the savings can be channeled to the borrower. For mortgage applicants, automatic verification of identity, income, bank account statements and the like will speed up the stressful but inevitable process.

If established and regulated financial services companies migrate their home loan documentation to such an ecosystem, they may eventually migrate various other services as well.

We have seen several well-known companies investing in blockchain technology. Hedera Hashgraph has bought in from some of the biggest names in technology and banking, including Boeing, Deutsche Telekom, Google, LG and Nomura. And while JPMorgan CEO Jamie Dimon has called cryptocurrencies a “decentralized Ponzi scheme,” he’s investing the bank’s money in a digital ledger called the Onyx coin system, which JPMorgan’s website describes as “helping address the complex challenges of cross-border payments, facilitating clients’ liquidity funding needs and offering next-generation corporate treasury services.” Could this herald a new future for crypto-based technology?A highly regulated system of established companies transacting through a more secure digital database?

Not only does this initiative lack the Wild West charm of crypto’s early years, but it also runs counter to the anonymous and decentralized network that crypto enthusiasts hope to create. Ethereum’s website describes DeFi as “an alternative to systems that are opaque, tightly controlled and held together by infrastructure and processes that are decades old.” But Ethereum’s example of DeFi’s current use case — helping people make loans without using any personal identification and allowing crypto-savvy Argentines to escape inflation — doesn’t seem likely to rise to the mainstream.

When I started thinking about crypto and trust, I was optimistic about the chance to reboot the crypto space. But when I think more about how existing crypto platforms are structured, it seems almost impossible to transform the DeFi and NFT culture into something that can truly replace existing banks and money. But the idea of ​​moving some of our financial systems to a distributed ledger might still work.

We could end up with a combination of three different trust systems: trust in established brands and institutions, trust in regulatory protections and trust created by immutable and unhackable digital ledgers. All this has been proven imperfect by the Great Recession, the great financial crisis of 2008 and the crypto crisis. Maybe the combination will be less than perfect. There is value. But it is not the future of money.

Edward Harrison writes about bonds and currencies for Bloomberg’s Markets Live blog.

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