Erin: As important and convenient as our financial systems are they, unfortunately, don't always work in our favour.

Patrick: Over the last 30, 40 years, um, we've seen the challenges to these centralized networks that us, as users on it, have no power over it anymore and it's only weakening what we know of as money.

Erin: But over the last two decades, a new model has been steadily evolving and gaining popularity. And it might just hold the key to upgrading everything from our financial system to our very concept of money.

Richard: When you go to a decentralized model where you remove any single authority, you have a level of assurance that simply doesn't exist in the current fiat, which is central bank issued money system.

John: Financial inclusion matters and just in the US alone the estimate is about 14 million adults are unbanked. Um and a similar number are underbanked. It's really important to not lose sight of this potential transformation to make the financial systems of the world more inclusive.

Erin: This is Financial Futures, the podcast that charts, the frontiers of FinTech innovation. In this series, we're exploring some of the biggest advances in banking platform ecosystems to guide you through the developments that are changing the way consumers and businesses alike think about their finances. I'm your host, Erin Dangler. And in our season seven finale, we're exploring this century's greatest financial disruptors - cryptocurrency and blockchain. I'll be joined by John Avery, senior strategy director at FIS; Patrick Sells, CIO at NYDIG; and Richard Walker, principal at Deloitte. We'll be discussing how these once fringe technologies are becoming more widely adopted and integrated into our financial ecosystem. Now embraced by everyone from consumer-level savers to high-net-worth investors, we ask how crypto will reshape everything from the way we think about saving to the way our financial institutions operate. By now, we've all heard of a range of cryptocurrencies, but awareness of this new financial technology has come seemingly from nowhere. So, what has caused this massive surge in popularity?

Richard: It's pretty fascinating, the level of uptake and interest that wall street banks, investment management firms have in the cryptocurrency space. And the reasons for it are, myriad. One is the level of investment can't be ignored. The investment is really being driven by the belief that it is a trusted store of value, that it's an antifragile global network, that it's an uncorrelated asset class that can be used to balance a portfolio. That the structure of a cryptocurrency, really, can be replicated and manifest all financial instruments that are known to the world, and provide an architecture to bring new financial liquidity into the banking system. Now that's a lot, but where we find ourselves, Erin, is that the financial market infrastructure, it's really very, um, fragile. Where the blockchain architecture is anti-fragile. We've got a a distributed network of nodes that could survive a nuclear war. And I believe that there's a recognition by large financial institutions that the industry needs to re-platform onto a blockchain architecture and cryptocurrency makes it possible, uh, because with the monetization of the crypto market, you can find a way to financially justify re-platforming onto this new financial infrastructure. And with that, begin to onboard new financial instruments beyond cryptocurrency. So, what we're seeing is a recognition of the future of financial services. John or Patrick, would you add anything to that?

Patrick: I think one of the things that we hear from a lot of the regulated FIs that we speak to, or even pension funds and insurance companies is that as the regulatory apparatus has continued to be built out and matured, that's given a lot of comfort to many, to be able to get into the asset class. So, kind of back to your original question as to what's going on with the popularity right now - I think as more and more clarity exists it allows more and more institutions to know that they can enter the asset class in a safe way, so I actually think that one of the tailwinds actually kind of helping the crypto ecosystem is the regulatory maturity.

Erin: John, do you have anything to add?

John: I think that the way that we look into this as crypto is really the internet of money and financial services, right? So, this surge we're seeing is real. And we're really at just at the beginning of the journey. Institutional investors will continue to move in, they're going to move in for the volatility and the returns, but also to ensure that they stay involved in the flow of funds and in future transactions. And I think we definitely need to look at the underlying fundamentals and all of the hype surrounding crypto and decentralized finance are these blockchain based economic systems that are being developed. So digital assets are really an innovation of both finances, but also technology. And that's what makes this so fundamentally disruptive. At the time of recording here, you know, December 2021, you know, I think in the past 30 days, more than $3 billion in venture capital has been committed to the crypto ecosystem. So, clearly, VC feels the same way. And I think, you know, Richard also noted, and very importantly, you know, this is, really, crypto is a gateway to the eventual tokenization of traditional assets on the underlying blockchain based tech stack. And I think that's a, that's a really important, note for our listeners out there where we really have just started the journey, and the underlying technology transformation here is very, very important and it's important that we all are, you know, are involved and we all have a role to play in this transformation of the industry.

Erin: John, I want to add, or I want to speak to something that you mentioned - you talked about the, the volatility. And I think that that has been what's scared so many people away from it, but really it's the long-term potential is enormous. Is that correct?

John: That's correct. I mean, the risk in that volatility creates the returns. And as an alternative to other asset classes, that volatility is also an important attractant to investors, to folks that are investing in the infrastructure. Um, and therefore, we actually think some of that volatility is good, although it can be a little bit, uh, scary at times And it attracts participants in the market. And as those participants get comfortable with, you know, how the plumbing works, in this whole new economic system, I think we're going to see traditional assets sort of become part of the infrastructure. As Richard noted very importantly, moving traditional assets onto this future infrastructure will actually create more liquidity and actually take some of the risks out of the existing traditional asset world that we see today.

Erin: And you also mentioned something as well that I think may be one of the reasons for the popularity is the decentralization. That cryptocurrency operates independently of any central financial authority. So Patrick, can you tell us a little bit about what having a decentralized form of currency means for those participating?

Patrick: To see that I think it's helpful to kind of step out and relook at a foundational definition of what is money. The reality is, is anything can be money. But then what we have to do is kind of score that money and there's really three fundamental characteristics that we have to look at it through. The first is how does it perform as a store of value? What's the supply side look like and how easy or not is that adjusted? The second is how does it perform as a mode of accounting? And the third is how does it perform as a means of exchange? Now let's think about gold. And so when we look at it through those same three lenses, what we see first is as a store of value, it scores very well. The amount of gold increases annually by only about 2%. And from what we can tell, the world kind of has an enough for that to always be true. And as a mode of accounting, it only scores okay. There's only a couple of different increments that we can use there's pounds and coins and bars. When we look at it as a means of exchange, it scores pretty poorly, especially in a global world. Just think about how expensive or painful it would be for me to send a bunch of gold coins over to John Avery. And if we take now Bitcoin, for example, and to see how it scores as a form of money. Well, there's a finite amount - there can only ever be 21 million. Now as a mode of accounting, Bitcoin would score better than anything we looked at so far because every Bitcoin is divisible into a million increments. And then if you think about it as a means of exchange, it scores very, very well. You know, two people can have flip phones on the other side of the world and they can send a dollar to each other or a billion dollars very easily. And so Bitcoin, as a form of money is actually the most attractive form of money that I think the world has ever seen. You know, over the last 30, 40 years, um, we've seen the challenges to these centralized networks that us as users on it have no power over it anymore. And it's only weakening what we know of as money. And so, when you think about Bitcoin, you have now this consensus driven protocol, and that's not controlled by a select group of people who are making decisions, but in fact, programmatic rules that can't be changed.

Erin:Fascinating. Richard or John, do you want to weigh in on the de-centralization aspect or anything else that we've spoken to?

Richard: I'd love to Erin. The decentralized aspect of it, I'd like to highlight on a little bit more because without math-driven governance model like that which is provided by Bitcoin and other decentralized currencies, you rely on a central authority to make decisions about the currency that you use in that sovereign nation. And those decisions don't always work in the best interest of the citizenry. Issuing more dollars has a deflationary effect today. And so when you go to a decentralized model where you remove any single authority you have a level of assurance that simply doesn't exist in the current fiat, which is central bank issued money system. So what we're seeing around the decentralized form of currency and the decentralized model - it's a superior model to that which the world has known heretofore of centralized banks. Uh, and the history of failed currencies, failed fiat currencies, is pretty well articulated over time. And I think that we have the good benefit of, um, having a decentralized currency that can backstop the inevitable failure of any number of fiat currencies that exist in the world today. And there's a period where we can move from the money that we know to the money that we can actually hold as a bare asset and that nobody can take from us, and it gives us a level of freedom that we've never known before. So it's a, it's a pretty exciting time but it's going to be uh, a relatively tumultuous transition as we move from centralized money to decentralized currency.

John:The way that we think about this is, you know, clearly decentralization with appropriate permissionless controls, they democratize access they reduce friction they lower costs and this is particularly good for the consumer particularly the consumers who have not been able to participate in traditional centralized finance, right. You know, financial inclusion matters and just in the US alone, the estimate is about 14 million adults are unbanked. Um, and a similar number are underbanked. Virtually no country has a hundred percent financial inclusion. And I think it's really important to note, you know, for all of us involved in the transformation of, you know, the world economies through digital assets and through the world of crypto, um, and and de-fi, I think it's really important to not lose sight of this potential transformation to make the financial systems of the world more inclusive.

Patrick:And just to piggyback on that a little bit. I think the reality that we have to deal with today is that any type of financial inclusion strategy that starts or stops with fiat isn't going to work. It has to start with Bitcoin. And this kinda goes back to some of the conversations we were having earlier, when we're talking about the US dollar, or any dollar, as a form of money. If you take a country like America - those that are low income or left out of the system, the problem is that they don't have that many dollars to begin with. And so when the government decides to just print more and more dollars and devalues what our dollar is worth, it, impacts the lower income far more so than those that have, uh, assets or more money. You know, if the dollar gets diluted down by 50%, but someone has a billion dollars, they're probably going to be just fine. The person though, that has $400 getting diluted down to $200 means they can't pay their bills fundamentally or for food. Um, and so that's where Bitcoin is such a powerful force, because bitcoin is an asset, but it's really much more than that. It's the democratization of asset ownership.

Erin: With benefits like reduced friction, increased financial inclusion and the removal of central authorities to determine value, it's no surprise that many are viewing crypto as a safe alternative currency. And this awakening isn't going unnoticed by the incumbent financial institutions. Some are even starting to take action because they believe that if they are to continue to serve the needs of the crypto customer, they too need to offer services that support this new technology.

John: We spend a lot of time focusing on this particularly on our institutional buy-side and sell-side clients in capital markets. We're expecting most of our institutional clients to allocate somewhere between 5 to 10% of their portfolios to the digital asset ecosystem over the next 18 to 24 months. In fact, we recently hosted a webinar for these clients and the feedback was pretty clear. H1, 2022, will be a watershed, sort of uh, half of the year with an influx of demand for investing in the spot markets uh for crypto as well as other products that are offered uh you know even today to get crypto exposure. And then eventually that will expand into decentralized finance and other forms of exposure to the market. I think we're at the early stages of institutional support for crypto assets and that's one of the reasons why we're so focused on this right now. Um, many of our clients are building teams, we're continuing to build our team, and all of these teams are really focused on three things: that the regulatory framework, what are the jurisdictions? What are the compliance requirements? Do we do this in-house, or do we outsource to a qualified service provider? Um the operating model, how does my operation, how does my team, need to change to support the processing of digital assets? And then the technology, how do we connect to the markets? How do we connect to the custodians that we'd like to use or the custody offerings like digital wallets? How do I transact? How do I integrate all of this data into my existing technology stack that's run my business for years? Those are all really critical questions. Um, some of our clients are also approaching this world not just from a vantage point of investing in crypto, um, or lending on crypto, but they're going straight to blockchain based transformation of existing traditional assets and processes. You know, there's more than a hundred trillion dollars in assets under management globally that are managed professionally around the world. You know, as traditional assets do get moved onto the blockchain, that's very much a significant ecosystem that will be transformed and hopefully will take advantage of reduced friction and reduced costs in these new economic systems and tech that are really being driven by the blockchain based technology out there

Richard: You know, John, one of the biggest challenges we see, and I work with banks, large and small, is the connectivity of a blockchain platform architecture to the legacy batch process rails. The way the banking system has been constituted is it's a batch process architecture. There's a handoff - one step to the next step to the next step. Sometimes over hours or days until things are settled. Funny that one of the biggest challenges is trying to reconcile the various temporal models that exist against different products and different service models and financial services to a model, which is largely real-time, whether it is moving from a fiat currency to a cryptocurrency, to move to a de-fi market, or moving from a fiat currency to a cryptocurrency to initiate a cross border payment and then to go back to that local fiat currency - those rails, the crypto fiat bridge and the processing cycles, they become most evident when you want to move money from your national bank account, into your crypto exchange to go and purchase an asset. The cycle times let's say you wire money, that whole model, is challenging for banks because they've built up a batch process architecture and to flip to something that is real time is not easy.

Erin: And what you're speaking to too is that flexibility, that's one of the real benefits of crypto is that 24/7, 365 access which could be a huge benefit to financial institutions that are used to working on a traditional schedule. Patrick, do you want to add anything?

Patrick:Banks and credit unions play a very valuable role in being an intermediary to the monetary system that exists today. Um, and they do a lot there from extending credit to process and payment and market formation. And with crypto, what you see happening is that consumers and businesses are looking for their financial institution to continue to play that same role of intermediary, except this time, instead of to the closed monetary network of the U S dollar, it's an open-source monetary network. We see that the majority of those who own Bitcoin in America would actually rather be able to do that through their bank - 80%, in fact, uh, is what our research shows. And I think the thing for banks is to recognize that, hey, there's kind of an analogue here in that I can play this role of intermediary to this other network, just like I do to the current network, and they can help facilitate those kinds of movement of those asset classes, just the way they do today with fiat.

Erin: So would you say that having, you know, uh, a traditional model banking system that's embracing cryptocurrency - do you think it provides an added layer of security or is it just familiarity to customers?

Patrick: I think that what we have here is a financial ecosystem that could be better and there's a recognition of that. And at the same time, in this country, there's a lot of trust in the banking system. And when you have this new thing emerging as a financial asset, Bitcoin, there's something about being able to take advantage of the trust that you already have with your bank to provide you access and safe keeping. And when they do, there's just an inherent trust that it's going to be done in the right way that doesn't, uh, put me into unneeded risk. And so when we look again back at those Americans who own Bitcoin and they want access from their bank, 71% of them would switch banks for, uh, one that it provided access. And when you look at those who don't own Bitcoin, the reason why most of them don't own Bitcoin is not because they don't want to it's because they're not comfortable with access or how they can access Bitcoin. And what we see is over half of those who don't own Bitcoin would, if they could, through their bank. And so despite, you know, kind of how popular Bitcoin already is, I believe in the coming years, as banks make access more, more easy, we'll actually see two to three times the growth of those who own Bitcoin in America, because the fundamental issue of access and trust can be solved.

Erin: Well, and that's really interesting about financial inclusion and what I hear you saying with access, and it makes me think of generational differences, like how are the different responding and embracing or being resistant to cryptocurrency? Um, we know, Gen Z is really bullish on crypto. They think you know, 50% of them believe it'll make them millionaires. And like, I know, you know, my father who is a baby boomer, wants absolutely nothing to do with it. So, Richard, can you speak to that a little bit?

Richard: Gen Z as digital natives just to have higher expectations for the use of money, the speed of money, that transparency of money, and they're finding all their expectations met through cryptocurrency. Particularly as you look at what is being brought forward as real time rails with fiat currency and compare that to the functional richness of use of crypto, you know, Gen Zs just see that it's better money. Money needs an upgrade and crypto is that upgrade. Also, they see an upside with regard to the future value of that money versus holding a dollar. A dollar in 10 years is definitely going to be worth less than a dollar is today. And so the upside there is, undeniable. I was at my mom's house outside of Pittsburgh at thanksgiving. Uh, she had gone to the community college and taken a class on bitcoin. She's like, yeah, I think it's, it's the future. And she was lamenting just the persistent low interest rates that she's earning on money sitting in a savings account. And so she's buying Bitcoin, she's also going to, um, buy stable coin and get a high rate of return on a par value asset that you just can't get with a dollar. So at 82 she's in. I don't know anybody who, believes that they're getting a good return on dollars they hold. And so they've come to a tipping point where they're looking for a better model, for money, a better way to hold money without losing that money.

Erin: That's great. I am so going to bring that up and see If I can get my 75-year-old boomer father to get on board. Does anyone else have anything to weigh in on that? I find the generational difference and approach to money in general Just really fascinating.
I definitely have, uh, you know, some insights to share there as well. You mentioned over 50% believe crypto will make them millionaires, I daresay, based on what I hear, probably a good 50% are already crypto millionaires and what's interesting is that all of those crypto millionaires will need access to financial services like wealth management and other services that one would expect if you're sitting on any type of asset, whether traditional or digital. Um, I think NFTs, the metaverse, play to earn gaming, web three, all of these topics that are very native to the Gen Zs that are really helping to create these systems, um, have definitely helped them here as well. And I think one statistic I like to look at here is by age group I think uh 40% or more of cryptocurrency adoption is actually by folks under the age of 35, which is pretty telling, right? But I think it also highlights, you know, Richard's example is very real and I think that's what honestly excites me most is the folks above the age of 35 that are really going to start to, you know, ensure that they have some exposure to these new assets as well as maybe this new form and store of value that, uh, Patrick noted. And I think that's what's really important here - it's the shift of some percentage of assets around the world into the digital world, And we're talking about you know a significant amount of traditional money that will be flowing into digital assets. And I think that's what really excites me most.
Yeah. I would echo what John and Richard shared. I think though, the other demographic where there's in some ways, even more demand is in the ultra-high net worth and the high net worth. They have the ability and access to get education and experts around them to help them think about their money and diversification and what's happening at a kind of macroeconomics level. And so I think, you know, when you have something as popular as Bitcoin, it really spans any demographic and all demographics. But I do think the two areas with the most heightened interest are the younger generation Gen Z, Millennials, and as well as the ultra-high net worth and institutions. And in many ways, this goes back to the point I made previously about a financial inclusion, and why it's so important for traditional financial institutions to make access possible - it's because if you're not digitally native, that has all the access to technology, you're going to be left out. And so it's really important that every financial institution has an initiative or an effort to make Bitcoin accessible, so that truly we can lift up everyone.

Erin:Cryptocurrency's appeal is cross-generational. For Gen Z-ers, it's a frictionless user-friendly currency that fits into their digital lifestyle. And even though the uptake is slower among the older generations, Gen X-ers, boomers and beyond are taking note, thanks to crypto's value holding capabilities. With this in mind, and given that institutions are increasing efforts to accommodate crypto and blockchain, it brings up a question that we asked way back in the first episode of season one - could we be witnessing the death of cash?

Patrick: If we looked back over the last 12 months, the reality of 99% of the money that we either made or spent was actually nothing more than pixels on a screen. And so I think for all of us, what we actually experienced is this concept of a digital dollar. But when you go underneath that or you kind of peel it back, what you see is a very antiquated, and expensive system. You know, there's trucks and vaults, and we have to move all this money and these printing machines that support this notion of a digital dollar. And so I think if we find ourselves in a spot where we can look around and say, hey, I can, uh, I've already adjusted to this experience and now we can deliver that experience as a financial system, but in a far more efficient way using technology, that makes a ton of sense. And so, you know, what does that mean for cash? I think, well, the paper thing of that will go away because that can be replaced with technology, but you know, we'll always have a role of cash in our life as long as there's a central bank, um, I think we'll just see over time it becomes more and more digital, uh, especially even over the coming next year or two

John: You know, if you think about the world that we live in, we're using digital payments as a means to pay for goods and services. So is it a really huge leap to peg these payments to, you know, sort of, crypto so that's that's what I think about the elimination of cash for I guess the types of transactions that we undertake every day. But I do think there is serious work going on um for bigger ticket transactions, right. And they're really looking at how to shift away from cash for those big-ticket transactions, particularly the transactions that we know and love in the institutional world, right. Stable coins are a really good first step here on the path to central bank digital currencies. The high yields and the role that Stable coins play in the de-fi system; they're helping to create what I think is necessary visibility for both the market but also for the regulators. CBDCs are also going to be what I think is really the first huge milestone for digital fiat. These really create an opportunity to reduce friction again, uh, for transactions across borders. It's very very compelling using these digital forms and digital representations to reduce the friction, uh, for these transactions. The incentives, the fee structures that's going to shift very quickly. I think we're already seeing hints of this with all of the FX traders FX vocabulary that has permeated the institutional world today in crypto, I think there's definitely a recognition that the transformation of how transactions are conducted, you know, with some type of digital form of value is very telling. But I also think there's an opportunity to rethink the role that fiat currencies play today. We're already seeing hints of Bitcoin becoming a benchmark in its own right and I do think we're on a very high-speed evolutionary train here that's going to unfold rapidly over the next three to five years.

Erin:Well, and John already gave his prediction, Patrick, Richard, where do you see the crypto revolution heading?

Richard:There was a recent report done by a large investment bank that cited they expect in 10 years that only 10% of the financial markets’ infrastructure will be on a blockchain architecture. Now, 10%, still hundreds of trillions of dollars flowing on a blockchain network, but the long tail of this money we know to the ramp up of, an upgraded money is going to take a few years, unfortunately, because change is hard.

Patrick: If I take that question in maybe the broadest sense, what I would comment on is the regulatory environment. And I think that's been a theme throughout this conversation. Um, because when it comes to money or at least money in this country, everything is regulated and fits into a well-existing well-defined regulatory apparatus. But with cryptocurrency, what happened is you brought this technology to money, and it happened so fast that as it came to be, some fundamental attributes were rearranged in a way that made it not readily apparent as to what it was. And it wasn't until it got large enough that, you know, the regulators really began to focus on it and all of a sudden, you can begin to realize what this cryptocurrency is. And so, I think what we'll see is that many things that exist today in the crypto ecosystem will go away. They'll be shut down, but the technology and the breakthrough and the innovation will come back in just a way that's, uh, you know, legal. And so, there's going to be some chop in the water, and I think that will affect everything, but ultimately cryptocurrencies like Bitcoin and others are here to stay and will only grow more popular over time.

Erin: I mean this could be a year-long podcast ongoing in and of itself just talking about the ins and outs of crypto. There's so much to discuss outside of the technology - we could talk about sustainability and environment and global impacts, but just as we wrap up today, let's go to what's great about it? What's beautiful about it? As you each wrap up your thoughts on it, tell in a perfect world how is cryptocurrency going to make the world a better place?

Richard: I'd love to offer a few thoughts on that. One, it has accelerated innovation around compute platforms. It has accelerated innovation around converting energy to wealth. It is catalysing the growth of renewable energy sources. Arguably it will provide the, uh, financial incentive to solve for cold fusion. And it has proven that the power of decentralization and democratization of money for the benefit of the world's population and introduced a opportunity for financial freedom. The notion of it being an ESG problem or recklessly consuming - I like to cite the fact that it, the bitcoin network uses about the equivalent of Iceland for energy consumption, but that the GDP of Iceland is 22 billion. And the market value of a bitcoin is around 2 trillion. So, I'd say you get a much better return on the energy used for Bitcoin than you do for other, more traditional, uh energy consuming economies.

Erin:I love that. I love that fact. It really, uh, brings a nice visual to it. How about Patrick or John?

Patrick: If I think about where Bitcoin is going, I think one, it represents. uh, a much more prosperous and financially secure world. Kind of what we are seeing happening is really the quote unquote, internet of money. And that is going to mean that everything will fundamentally change over the next decade or two, the way that the internet already changed all our lives if we look back over the past couple of decades. And the rate of acceleration is only going to speed up. And, you know, maybe the piece of advice I could give that was given to me was that Bitcoin or cryptocurrency is like learning another language. You know, it is easy to be able to sit down in another country and you can say a few words to get by. But to really be able to have a fluent conversation that required lots of time invested into learning it. And that is important because it is going to change everything that I know.

Erin:Wonderful. John, do you want to it on home for us here?

John: I really think crypto and digital assets in this world, this ecosystem that has been built out here, and is in the process of continuing to expand really creates a path for global financial inclusion for participants who could not participate in these markets today or who must pay too much to access the financial services they need. And, you know, in addition to financial inclusion, where we are going here is democratization of the financial opportunity for providing financial services and technology. And that is really exciting. It's an exciting journey because it democratizes access, but it also democratizes the provision of services and technology. To echo Patrick's point, you know, this is a transformation on a both a technology level, and an economic level, and it's really awesome to have a chance to participate. Particularly because this will ultimately uh, you know, impact in the world in the coming years.
John Avery is senior strategy director at FIS, Patrick Sells is CIO at NYDIG, and Richard Walker is principal at Deloitte. That's it for today's show. Thanks for joining us for season seven of Financial Futures, a production of Lower Street Media in collaboration with FIS. This season has been produced and edited by Ryan Sutton. Alex Bennett is our audio editor and sound designer. And I'm your host, Erin Dangler. Stay tuned. season eight is coming soon.