Our weekly take on fintech in the headlines. This week: mass adoption of crypto; will the trade war hurt fintech companies?
The future of crypto is fiat
Bitcoin’s white paper, released in 2008, was a call for disrupting fiat currencies such as the U.S. dollar.
Anything backed by a government was viewed as subject to manipulation by central banks, or by Wall Street, or by the Gnomes of Zurich. This was “soft” money, inflationary, used recklessly.
Bitcoin, Litecoin and other cryptos were “hard”. Bitcoin’s software would allow only 21 million tokens to be mined. Crypto enthusiasts believed such digital assets would supplant fiat currencies, particularly as governments continued to print money with abandon.
But it’s increasingly difficult to imagine crypto supplanting fiat money. Bitcoin may serve as “digital gold” but it would, at best, be like one of those small-country currencies, like the Swiss franc, that appreciated during the 2008 financial crisis. The Swiss franc never became a true safe haven, let alone a viable alternative to the dollar.
One way that fiat rules in the digital world is that central banks decide to issue digital versions of their currencies. IMF director Christine Lagarde is among those who expect this to happen sooner rather than later.
But most governments prefer to play things safe. It’s the projects from social-media companies such as Facebook (FT) and Line that are closest to realization. Their tokens, when they launch (CoinDesk), would be tied to the dollar, the yen or another underlying fiat currency. If your goal is mass adoption, then surely leveraging the existing mass-adopted currency makes sense.
The question then becomes which financial institutions are ready to process Facebook’s “global coin” or the like. Ignoring Bitcoin was a safe bet for banks. This isn’t. CB Insights lays out some of the ways Facebook can use blockchain – not to disrupt fiat, but to disrupt banking.
Fintech: casualty of war?
The trade war between the U.S. and China is heating up. America has key Chinese technology companies such as Huawei and Hikvision in its sights. China may block exports of rare-earth materials. Supply chains across consumer electronics are being torn apart. Tariffs could derail the global economy.
Fintech is not in anybody’s crosshairs, although the underlying technologies, such as artificial intelligence for facial recognition, certainly are.
The rivalry between Chinese and Silicon Valley/Western companies in third markets, such as in Southeast Asia, is nothing new. The trade war makes these decisions feel more like a zero-sum outcome, but the dynamic exists already.
For some fintechs, the trade war comes with a silver lining: an end to complacency (SCMP) among financial institutions over digitalization. As global economic conditions falter, banks and asset managers will turn more to technology to maintain a competitive edge.
The trade war could also spur China's fintech sector (China-US Focus website). First, Chinese and Asian consumers may decide to shun American service providers, in tech and in finance, if they have a credible alternative. Second, as tariffs bite, it will be consumers and small businesses that suffer the most. They will need ever more affordable financial services, which can only be delivered efficiently when it scales through technology.
Governments that have been the most active in building smart-city infrastructure and supporting fintech will be able to shield their industries from the worst (TechWireAsia). Singapore, Hong Kong and Australia have all promoted some combination of faster payments, open banking, digital signatures, and mobile banking.
If the aim of the trade war is to inflict pain, it will succeed, and fintech won't escape. Right now the tariffs and the bans are aimed at hardware companies, not services, but when your customers are suffering, you will suffer too.
If, however, the aim of the trade war is to curtail our open, free-trade economy, retrench supply chains and support domestic technology, then there really is no trade war when it comes to fintech. China won that battle some years ago (Brett King).