An interesting op-ed by Leah Callon-Butler in CoinDesk this week got me to change my mind about something pretty fundamental.
She asked: “Is crypto fintech?”
My instinctive answer was “no!” For me, fintech is technology applied to finance, while cryptocurrency is a technology unto itself. That technology is giving rise to a new type of finance.
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But something about that rationale felt a bit glib, so I wrestled with it some more. And then some more. And after way too long staring at the screen and wrinkling my forehead, I may be taking tentative steps into the “yes” camp, but with some heavy caveats.
What is ‘fintech’?
To start, let’s look closer at what we mean by “fintech.”
The term is the portmanteau of “financial” and “technology,” and most definitions stress the latter’s influence on finance. “Finance” is usually defined as “the management of money.”
Does crypto help with the management of money? Although they may have money-like qualities, cryptocurrencies are not yet generally recognized as such* as they are not widely accepted as a medium of exchange. Yet, they can help move money around, allow it to express opinions in new forms and generate returns in creative ways.
Of all the definitions of fintech from official organizations that I’ve read, the Financial Stability Board’s choice of words is perhaps the most inclusive: “Technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services.”
New business models. Check. New applications and processes. Check. Associated material effect on financial markets and institutions. Double check.
The “technologically enabled financial innovation” part is perhaps problematic, as crypto is about so much more than “financial innovation,” but it’s not wrong.
What is ‘crypto’?
We should probably define “crypto” as well. The term originates with cryptography, which has to do with the security of information, and is widely used in its abbreviated form to refer to all things blockchain, including cryptocurrencies, tokens, smart contracts, etc.
This past week Standard Chartered, about as “traditional finance” as you can get (its origins go back to 1853), announced the pending launch of a crypto custody service. More details are emerging on the plans of PayPal, long a darling of the fintech sector, to offer crypto services. MUFG, Japan’s largest banking firm, is developing its own crypto token for use in a smartphone payment app. In his timely report for crypto API provider Zabo called “Fintech Adoption of Cryptocurrency,” Alex Treece highlights how the rolling out of crypto-asset services boosted valuations of fintech firms Robinhood, Revolut and Square. Visa issued a statement this week in which it bragged that it was “reshaping how money moves across the globe,” and in the very next sentence talked about the “exciting avenue” of digital currencies.
So, fintech seems to be increasingly embracing crypto. But is crypto fintech? It does seem to be becoming part of the fintech set. It is a technology impacting how finance is handled. So, in some ways it is – but it’s also more than that.
Time for a refresh?
We should note that the term “fintech” is trying to put an edgy spin on an age-old concept. Financial innovation is not new, as material changes to how money is managed were triggered by the telegraph, telephone, centralized ticker service, complex derivatives and more.
Even in its modern application, it is becoming outdated because there are few traditional finance firms that don’t already heavily rely on new technologies to reach and grow client bases.
Given the impact of crypto-based innovation on our understanding and application of financial concepts, surely we can come up with something better. Using a tired catch-all for something so significant is like trying to put a formidable force into a tidy bucket.
So far, the technologies making the biggest waves in fintech are the internet and AI – they are game changing, for sure, but their innovation stems from the creation and treatment of radically new types of data.
Crypto is also a data innovation, but it goes much further – it’s an innovation of authority. And since the power of finance stems from the authority conferred to it and by it, the potential impact of crypto goes beyond what previous technologies have managed to achieve.
The technologies we apply to finance matter, as technology shapes what we do and how we do it. The internet, for instance, changed how we carry out age-old activities such as writing letters or grocery shopping. It also gave rise to entirely new activities such as video conferencing and fighting zombies (at least I think that’s new).
Fintech has been a transformative force; changing financial habits and attracting new audiences is no small feat. Crypto should be thrilled that it is being thought of as a tool that could join mainstream financial innovation. Yet it is not going to settle for just that.
The impact of new technologies on how we handle money should not be underestimated. But no technology until now has attempted to change our understanding of money.
Anyone know what’s going on yet?
This week in markets had both good news and bad.
On the good news, they say times of crisis bring people closer together. The European rescue package was seen as a step toward greater fiscal unity, and has boosted investor sentiment in European markets and in the euro.
And, at time of writing, S&P 500 year-to-date returns are now in positive territory, which is astonishing. Easy money is obviously a more powerful market driver than high unemployment, geopolitical tensions and uncertain growth.
The dollar, on the other hand, is trending weaker against most major currencies, and looks headed toward its worst month since early 2018. The COVID-19 case tally continues to go from bad to worse, China-U.S. relations have hit a new low and the likelihood that the global economy might not bounce back after all seems to finally be sinking in.
Bitcoin seems to finally be moving out of its doldrums, rising over the weekend to reach a gain of almost 10% on the week. Could this be the reawakening of crypto animal spirits?