Gu Yanxi: Blockchain and stable currency may change the form of banking business
In the Internet age, Bill Gates has a very famous saying. The general idea is that we will continue to need banking business, but not necessarily through banks to do banking business. The development of applications in the financial industry in the Internet era has indeed proved his point of view to some extent. Due to the great convenience of information exchange brought by the Internet, people are less and less using traditional methods to carry out banking business. This is manifested in the reduction of people's need for physical branches of banks. More and more banking transactions are conducted through websites and apps. But such an impact has only affected the way banking business is conducted, which is still conducted through banks. However, the development of third-party payment has led to more and more banking services being completed through institutions other than banks. This has formed a direct competitive relationship with the bank. The deposit, loan and remittance business that could only be carried out through banks before can now be carried out through non-bank institutions.
The Internet only brings the convenience of information exchange, and the emergence of blockchain and encrypted digital currency is bringing the convenience of value exchange. The impact of the Internet on banks lies in the improvement of efficiency and the convenience of services, while blockchain and encrypted digital currency provide a brand new way of conducting banking business. The bank's deposit, loan and remittance business can be carried out in a more flexible, efficient and diversified manner on top of another financial market infrastructure. This will fundamentally change the foundation of the existing banking industry, and mainstream banking institutions will therefore face even greater challenges. Such a process of change is currently being promoted through the application and promotion of blockchain and digital stable currency.
The current encrypted digital finance originated from Bitcoin. The original intention of Bitcoin design is to provide an electronic cash for direct payment between peers. At the same time as Bitcoin, there is also the underlying blockchain technology that supports its operation. With the development of blockchain technology and encrypted digital currency today, more types of blockchain underlying and distributed accounting technologies have emerged. On the basis of these underlying technical support, various brands of legal currency-based digital stablecoins began to appear, such as USDC and PAX. In the past few years, the continuous growth of the issuance of such digital stablecoins has indicated a strong market demand for such stablecoins.
In 2020, the Office of the Comptroller of the Currency of the U.S. banking industry made it clear that the Federal Bank can provide reserve custody services to issuers of digital stablecoins. This clarifies the position of financial supervision in terms of compliance, so Bank of America can provide digital stable currency issuers with various financial services, including custody, without any worries. Such market development and a clear attitude towards regulation will therefore further encourage the development of digital stablecoins. In this field, some leaps and bounds are happening in the market right now. First, Diem (formerly Libra) expects to launch a USD-based digital stablecoin as early as January 2021. It is now just awaiting approval from FINMA in Switzerland. This stablecoin runs on top of the Libra blockchain. Technically, it can reach all users worldwide. Second, PayPal, which has 300 million users worldwide, began to provide its users with payment services for buying and selling encrypted digital currencies. The company that cooperates with it in this regard is Pax. Pax is a major issuer of the current digital dollar stablecoin. Therefore, PayPal's development trend in this regard is likely to provide payment services based on the digital dollar stable currency. Third, Visa recently announced that it will offer USDC-enabled credit cards to 60 million merchants worldwide. Holders of this credit card can make payments based on their USDC balance. The USDC digital dollar stablecoin operates on the basis of blockchain support. Therefore, the US dollar is beginning to circulate in the market in digital form on the underlying infrastructure outside the banking system. And this will fundamentally change the current banking business.
U.S. dollars will flow out of the banking system in an encrypted digital way, running on various blockchains under different brands. The decrease in deposits in the bank directly affects its lending business. In the Internet era, third-party payment institutions have used similar methods to transfer deposits from the banking system to the accounts of third-party payment institutions. However, in the Internet era, third-party payment institutions still use the clearing and settlement systems provided by banks. In the blockchain era, the circulation of digital dollar stablecoins is not at all above the bank's clearing and settlement system. The services provided by banks in this regard are no longer necessary. The lending business based on the digital dollar stable currency is naturally carried out on the blockchain. Therefore, the development of the digital dollar stable currency actually provides a completely new way to carry out deposit, loan and foreign exchange business. The more digital dollar stable coins are issued, the more deposit, loan and remittance business will be on top of it, and the market will naturally reduce the services for banks in this regard. But in this regard, it needs to be pointed out that such a change in the business of deposit, loan and foreign exchange is not entirely a loss of the corresponding banking business. Due to the characteristics of blockchain technology and digital stable currency, it can serve areas that the existing banking system cannot provide. Therefore, it is also increasing the total market volume of deposit, loan and foreign exchange business.
A key difference between the development of encrypted digital finance and the development of the Internet era is regulatory factors. Since blockchain technology brings about the exchange of value, the influence of regulatory factors in this area is stronger. The regulatory stance directly affects progress on this front. In the current US market, the regulatory stance is undergoing a fundamental change. And such changes are directly promoting the development of encrypted digital finance.
Brian Brooks, who is serving as the acting director of the U.S. Office of the Comptroller of the Currency (OCC), was previously the chief legal officer of cryptocurrency trading platform Coinbase. He holds a very cutting-edge view on the development of encrypted digital finance. In this respect, one of the metaphors he likes to use is that of a bank to a post office. Before the advent of the Internet, communication between people could only be done through the post office. However, after the emergence of the Internet, communication methods are more efficient and low-cost, and communication content and forms are more diverse. Therefore, the function of the communication service provided by the post office is weakening. Likewise, the emergence of blockchain technology and encrypted digital currencies is providing a new type of value exchange. The deposit, loan and remittance business in the banking business does not necessarily need to be carried out through the bank. Brian Brooks not only holds this view himself, but is also actively promoting the development of encrypted digital finance in this regard. In 2020, under his leadership, the OCC issued an open letter, clearly stating that banks can provide legal services to encrypted digital financial companies, and can also provide reserve custody services for issuers of digital stablecoins. The OCC is also currently advancing a nationwide franchise license that would allow non-banks to offer payment services. This provides an opportunity for digital dollar stablecoin issuers to provide payment services. The circulation and use of digital dollar stablecoins will have a more solid and compliant business foundation.
To sum up, the development of the digital dollar stablecoin in the market so far has shown that the market has a strong demand for it. The attitude of U.S. banking regulation is promoting the application of encrypted digital finance, including digital stablecoins. The expected approval of the Diem stablecoin by the Swiss FINMA will provide a basis for compliance for the global circulation and use of digital stablecoins. The global circulation and use of digital stablecoins will be an unchangeable trend. And this trend will have a huge impact on the existing banking system. Such a shock would be bigger than the Internet's shock to banking. Bill Gates' famous quote about banking will be further confirmed.
So is the bank completely in a passive situation? of course not. First of all, banks can issue their own digital stablecoins based on US dollar fiat currency. In this way, on the basis of the support of blockchain technology, it can grasp the various advantages brought by this new technology and serve business areas that were previously untouchable. In addition, the most important thing is that due to the change of infrastructure, the transaction business that banks could not carry out on a large scale before can now be carried out at least from a technical point of view, because the financial business is completely based on digital currency and digital assets, and is in Based on the same infrastructure, the current banking and securities industries no longer have clear boundaries. Banks can fully participate in transaction business on a large scale by taking advantage of their advantages in systems, infrastructure and users. Moreover, future trading methods will be more diverse, not limited to the current centralized matching transactions and peer-to-peer off-exchange transactions between institutions. If banks can grasp this trend and make corresponding strategic changes, banks will still have an advantage in the future encrypted digital financial world.
