Three predictions for the year ahead in digital finance
Richard Gendal Brown, CTO of R3, shares his predictions for the future of digital finance, as published in Forbes magazine.
Trust takes centre-stage, DeFi meets CeFi, and CBDC proponents put up or shut up.
It’s fair to say the permissionless crypto world seemed to do all the running in the blockchain space in 2021. But that doesn’t mean those of us working to bring advanced cryptographic techniques to the world of business were resting. Indeed, and despite the ongoing challenges of the pandemic, 2021 was a year of significant progress for the digitisation of capital markets. 2022 will be another unprecedented year in financial technology – and the following three trends look set to continue reshaping the landscape for market participants, governments, regulators, and infrastructure providers over the next 12 months.
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The quest for trust will dominate the digital realm
We never think about it in our day to day lives but the ability to develop trust in each other in the real world is what has, uniquely, unleashed humanity’s potential. Trust is the cornerstone of human civilisation.
And as more of our personal and professional lives move into the digital realm, the sheer lack of trust in the digital realm is a trillion-dollar problem the industry must tackle in 2022.
Trust allows us to do things that would be almost impossible if we had to verify everything for ourselves. Can you imagine, for example, aviation if you couldn’t trust the airline’s safety engineers? And how often have you relied on a trusted brand when searching for a meal in an unfamiliar location? Imagine if you had to check the ingredients yourself before tucking in! Put simply: if we can trust, we don’t have to verify.
How would commercial enterprises ever have extended beyond immediate family if we had no mechanisms to develop trust in strangers? Ultimately, trust is the fundamental enabler of trade. And trade is what creates wealth. This is why I say trust is the basis of civilisation. In short, the fact humans can develop trust in each other explains the dazzling opportunities, wealth and living standards so many of us can enjoy. But consider how little trust exists in the digital realm.
In the early days of the web, you had no way of knowing if your browser really was talking to the company you thought it was. So, eCommerce and online banking struggled to take off. But the advent of the browser padlock – literally creating trust that you are connected to who you think you are – unleashed trillions of dollars of opportunity. Until recently, firms doing business with each other had no way of knowing if they had the same records. And so they wasted staggering amounts of money reconciling with each other. Blockchains are solving this problem by literally creating trust that “I know what I see is what you see.”
But there is so much further to go – and this is where the tech industry must focus its attention in 2022 and beyond. For example, when you send information to a third party, you have no technological way to know what they will do with your information. So you have to spend a fortune on ‘data scrubbing’ or audits… or, more likely, you don’t share sensitive data at all. It’s mind-blowing to imagine how many opportunities to create new value or serve customers better are squandered because we can’t trust how our information will be processed when it’s in somebody else’s hands.
One day we will look back in awe at how much we managed to achieve in the digital realm when the levels of digital trust were so low. But things are changing: trust technology is now here. The convergence of blockchains, confidential computing, and applied cryptography is happening, and firms are applying this to massively increase the levels of trust that exist within and between firms of all sizes operating in the digital realm.
The delivery of trust to all realms of our digital lives will drive the next wave of human advancement – and it begins today.
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The lines between DeFi and CeFi will continue to blur
Interest in decentralised finance, or ‘DeFi’, is booming in the technology world, and last year that interest peaked. The term has invited enthusiasm, skepticism and curiosity, in equal measure. But I have little doubt that the technology could be host to a number of exciting applications (assuming the grown-ups in that space can out-run the grifters). At its core, DeFi rests upon the central principle of disintermediation, and this could have many benefits – namely, democratisation of finance.
But let’s not get ahead of ourselves. The idea that DeFi is ready to replace the existing, centralised or traditional financial system, or ‘CeFi’, is wildly overstated, especially at a time when governments are increasingly favourable to regulated financial markets and institutions.
However, and at the same time, we’re already seeing incumbent financial firms and market infrastructures adopting some of the insights and breakthroughs from the decentralised world – for example DTCC’s Ion work and the Swiss Digital Exchange, SDX – so we can imagine these two trends coming together and reinforcing each other in 2022: DeFi will mature and co-exist with the financial services ecosystem we have come to know and trust as it, in turn, evolves.
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CBDCs will move even closer to real-world deployment
2022 will be the year that CBDCs gain clear, policy-led direction and guidance. We’ll find out if any central bank is bold enough to launch a true digital equivalent to cash. CBDCs at both the wholesale and retail level are now being explored by countries all over the world, to different extents. Riksbank has been working on its ‘e-krona’ in Sweden for some time now, for example.
One of CBDCs’ usages that have received less attention until very recently is their use in cross-border settlements. In December, Project Jura successfully settled a “real-life” transfer of securities and cash between France and Switzerland with a wholesale CBDC.
2022 will be a year of real maturation for CBDCs. They are now understood by jurisdictions and this year, policymakers will get off the fence and tell us: will we as citizens be allowed to make digital payments with the same freedom we can make them in the real world? Yes or no? We’ll get an answer in 2022 and that will unlock everything – as we will then know what we need to go and build.
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