Decentralisation: The “Stargate” between Pushing Paper Locally and Moving Data Globally

One of the foremost observers of the financial services industry, Chris Skinner, provocatively calls banks “local paper pushers”: he rightly contrasts banks, even international ones, who despite their presence in various jurisdictions have traditionally compartmentalised their services along national silos, with FinTech, whose startups move data globally.

In this analysis, banks’ much-trumpeted “global franchises” are nothing more than massive sunk costs to build a battery of jurisdictional outposts that cater to a largely local or at best regional client constituency.

Much of these sunk costs are required by local regulators, who impose jurisdiction-specific norms on the banks that operate within their territory, in return for granting them a banking license.

CHRONICLE OF A DEATH FORETOLD?

This regulatory “pay-to-play” is now under threat from FinTech, which – at close to zero marginal cost – moves data globally.

This has allowed FinTech startups to nibble away at a number of FinServ’s traditional business cases, such as cross-border payments.

However, traditional bastions of banks’ intermediary role, such as lending or funnelling capital to businesses, remain largely unassailable and unassaulted.

For instance, apart from the fact that much of today’s so-called crowd-sourced debt is intermediated by non-bank financial players such as hedge funds, the overall volume of peer-to-peer loans remains trivial against a typical commercial bank’s loan book.

In addition, crowd-lending has not made any inroads in the institutional-type debt syndication required for large infrastructure projects or mega mergers. In the same way, equity crowdfunding does not seem to pose an immediate threat to the banks’ role in IPOs.

Banks may have given up on international payments and more generally let FinTech do the innovation at the margin, but until there is technology that can replace the clogged pipes and ducts in the plumbing of today’s global financial infrastructure, reports of FinServ’s death are greatly exaggerated.

A TECHNOLOGICAL STARGATE

What is required is a Stargate-type “tele-transportation” technology that enables businesses to transcend jurisdictional confines and frictionlessly let dispersed participants from all over the globe contribute to projects and ventures, be it with capital or labour.

Blockchain announces itself as this technology. The fully decentralised ledger fundamentally removes the “agency problem” identified by economic literature, in which intermediaries benefit from asymmetrical information to extract excessive rents.

If blockhain can achieve this at lower cost per transaction, it truly holds the promise of turning a whole swathe of intermediated businesses on its head.

Domain names are a good example: It’s an irony that a high-tech digital product is transferred in such a low-tech, analogue way. Blockchain would remove the intermediary role of registrars by automatically transferring the domain name the moment payment is made, eliminating the need for an escrow.

TOWARDS A DECENTRALISED FINANCIAL INFRASTRUCTURE

Domain name transfer is just one blockchain use case in which disconnected parties could transact in an unintermediated way, without the need for personal trust or any other form of proximity between them.

Company shares are next. When passing through the decentralising Stargate, they transform from localised paper bundles to digital data packages that represesent a claim on the future profits of assets held in a legal container with legal personality and limited liability.

By virtue of having its shares live on blockchain, this “Version 2.0” of the private limited company can now source funding or remunerate collaborators frictionlessly across borders by transferring shares with the same ease as sending an email.

This is relevant to startups but arguably even more so for the big institutional sponsors of financing vehicles, who seek to corral a diaspora of investors globally, ranging from high-net worths and family offices to private equity funds, to pool their money towards the construction of capital-intense assets such as skyscrapers, airports, container ships, drilling platforms, etc.

The friction in setting up such pool is massive: only the legal documentation to secure shareholders’ legal claims on the fund’s assets and the drafting and distribution of the suite of subscription agreements easily add up to half a million dollars. This is before the ongoing governance and boardroom costs kick in.

All in all, the analogue setup of a fund will mortage its performance and will ultimately be paid for by its investors out of the management fee.

By contrast, our Stargate could entirely replicate a find structure without the legal sunk costs, and help automate the fund’s governance. By extension, it opens the way for an entirely disintermediated Mutual Fund or Exchange Trade Fund. Think Blockchain Blackrock!

THE TRUST MACHINE

More metaphysically, by virtue of the “trust machine” of blockchain, as The Economist so accurately labels the distributed ledger, for the first time any human endeavour in which capital and labour join forces can be made to replicate the legal wrapper of a traditional limited company, in which the upside is shared proportionally to one’s stake, and the downside is limited to the magnitude of one’s contribution.

As a bundle of private contracts, any new venture can function largely unshackled from a specific jurisdiction: registering a company now only serves to grant it its legal charter (until the day the Courts recognise “stateless” companies whose shares only exist on blockchain, and “BCC” or Blockchain Chartered Company becomes the default suffix rather than “Ltd”).

In addition, irrespective of their location, shareholders hold their respective shares in a digital wallet, managed by a cryptographic key pair. And with the shares themselves programmable like software, “liquid democracy” replaces the slow, analogue paper-based governance processes of yore.

LET’S INHABIT OTHER PLANETS

Only this type of widely decentralised trust machines can harness geographically dispersed talents and funds required to realise Elon Musk-size ambitions for humanity to start inhabiting other planets

More immediately, it will enable the type of pools of resources required to address some of the world’s most pressing challenges such as water provision, climate change abatement, fuel cell technology, nuclear fusion etc.

The good news is that this is happening as we speak, not by central design but by an increasing number of geographically distributed nodes. Together, they are weaving a decentralised global mesh that is set to replace the clogged arteries of today’s financial system.

Time to watch Stargate — the Movie again?

The author is Founder and CEO of Otonomos.