#226—The future of banks and identity
Also, how credit unions are deploying self-sovereign identity
Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.
This week:
An existential crisis for banks
Credit unions and digital identity
Ecosystem updates
Stuff happens
1. An existential crisis for banks
Digitization and the interconnectivity of the internet has disrupted just about every industry—from commerce to content to calling a taxi. That’s not news to anyone.
Every industry, that is, besides banking, where analog, legacy systems means that money and payments are still slow, expensive, and closed on the weekend. Sure, we’ve had a revolution in fintech, but ultimately, these startups still need a bank to partner with, which was already hard to come by but may be harder yet, going forward.
Banking, after all, is the most regulated industry in the world, shielding it from fast-paced disruption.
Crypto has changed that equation. Consider stablecoins. From a consumer perspective, it’s a product that’s vastly superior in every way. It’s accessible, always on, fast, cheap, and yours to own through self custody. For a generation of iPhone users, it meets contemporary expectations. Meanwhile, the Fed doesn’t plan to release their real-time payments solution until next year.
But for Custodia Bank CEO Caitlin Long, the regulations that protect banks from competition and disruption now pose an existential threat.
Her central thesis here is straightforward:
The telecom sector offers a cautionary tale: When Voice-Over-Internet-Protocol (VOIP) was invented in 1995, most people disparaged it as a technology that couldn’t scale and wasn’t a threat to the telecom giants. Then, circa 2003, the technology to scale VOIP arrived – broadband – and within a flash, most of the telecom industry’s copper-wire networks became obsolete. Useless relics.
Bitcoin is a “Money Over Internet Protocol,” as is Ethereum, potentially. Just as VOIP moves voice data around the internet natively, Bitcoin and Ethereum move value data around the internet natively. Most people disparage Bitcoin, Ethereum, et al. as protocols that can’t scale and can’t possibly threaten the incumbent financial industry, just as they denigrated VOIP. But the scaling technology is now here – it’s called the Lightning Network, which is a Bitcoin layer 2 protocol. Its throughput capacity roughly equals that of Visa, and payments made over Lightning cost virtually zero. There are other scaling technologies, too. If I’m right and scaling technologies for internet-native money protocols have arrived, then many legacy systems operating in the financial system today will be obsolete within a handful of years.
Long fears that regulators will prevent banks from interfacing with open, permissionless blockchains, potentially rendering them obsolete as money simply flows around them rather than through them:
That brings me back to my fear that global bank regulators (specifically, the BIS) are about to make a decision that “obsoletes” the banks. Why? Because the BIS is proposing bank capital treatment that would effectively block banks from interacting with open, permissionless protocols. If they do that, they are guaranteeing that the tech industry will just keep going around the banking sector.
Check out this crazy stat:
To date, the US banking industry has lost roughly $600 billion, or 3% of its deposit base, to the crypto industry – and that happened before the “Money Over Internet Protocols” scaled!
I’ve worked at a bank and I’ve also worked at a startup that partnered with banks. Nimble organizations, these are not. Integrations cost millions of dollars and take months or years.
Fintech, crypto, and startup identity integrations might take only a day and some hundreds of dollars (or less!). They’re also backed up by vibrant developer communities.
It’s here that Long finds a happy medium for the future of banks. Spoiler alert: the telecom companies didn’t become obsolete. Sure, they don’t make as much from international calls, but they’re still specialists in building out and maintaining network infrastructure. They’ve also got the business expertise to develop the requisite software and support systems to provide affordable, reliable, and user-friendly communications services to pretty much everyone—from fiber internet to 5G connectivity.
Banks, similarly, are experts in payments and compliance, risk management and lending. Why not allow them to employ that expertise toward this new era of money?
Here’s Long, again:
The biggest concern of global bank regulators with banks using open, permissionless protocols, I suspect, is compliance. But banks don’t need compliance to be built into the base layer of their IT systems. Compliance can be built into applications that run above the base layer, and which control access. In fact, that’s what banks are already doing today with TCP/IP. Every bank uses TCP/IP, and yet strictly controls access to their online banking platforms. Criminals and sanctioned countries use TCP/IP today too, but banks have the tools to block them from using banks’ applications. Same thing with Bitcoin and Ethereum – banks have the tools to block illicit finance from using their applications. It’s easier to police illicit activity on open blockchain systems than it is in legacy systems.
In a sense, banks are best positioned to develop a permissioned layer on these burgeoning open and permissionless networks.
What’s another way of saying “permissioned”?
Identity.
Relevant:
Via Chris Lewis—Banks Are About To Face The Same Tsunami That Hit Telecom Twenty Years Ago
How Cryptocurrency Meets Residents’ Economic Needs in Sub-Saharan Africa - Chainalysis
ECB Exploring Distributed Ledger Technology for Interbank Settlements: Panetta
2. Credit unions and digital identity
Last week, Bonifii CEO John Ainsworth and Lone Star Credit Union CEO Becky Reed shared a working demo of how credit unions could integrate GlobaliD’s reusable identity solutions to enhance the user experience and accessibility of credit union services.
Here’s John:
Enjoyed being on stage with rock star Becky Reed demonstrating how “bring your own identity” can revolutionize new member on-boarding in partnership with Bonifii and GlobaliD.
CUNA Councils Tech, Ops and Member Experience Conference
Here’s Becky:
Self Sovereign Digital ID is the future of personal identity protection! Thank you, John, for helping keep consumers safe.
Relevant:
Via Nikhil Khare—How to Build a Trust and Safety Team In a Year | Journal of Online Trust and Safety
Are decentralized digital identities the future or just a niche use case?
3. Ecosystem updates
Hard Yaka participated in this round:
Messari, a leading provider of crypto market intelligence products, announced today at its Mainnet 2022 summit that it closed $35 million in its Series B funding led by Brevan Howard Digital. The funds will be used to expand Messari's growing team and continue to develop Messari's offerings, including its newly-launched products, Protocol Metrics and Data Apps.
The Series B round includes support from new investors including Brevan Howard Digital, Morgan Creek Digital, Samsung Next, FTX Ventures, as well as existing investors Point72 Ventures, Kraken Ventures, Uncork Capital, Underscore VC, Galaxy, and Coinbase Ventures.
"We're excited to welcome a remarkable group of investors as partners in our next phase of growth," said Ryan Selkis, Messari's Co-founder & CEO. "We are committed to providing investors, crypto enterprises, and token communities with the tools they need to participate in the crypto economy. This new funding will help us grow our team, expand internationally, and invest in new data offerings and tools that complete our market-leading product suite."