Currencies: the Next Quantum Advancement in Digitization

Dangelo, Mark mark@mpdangelo.com

January 26, 2016



(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.)

In a financial world seemingly obsessed with everything digital--consumers, statements, mobility, payments, compliance--the one thing now generating growing enthusiasm (or hype) is currency.

Currency in this context refers to a multitude of labels, some more subtle than others. And when you listen to experts or read articles, it quickly becomes a discussion of complex mathematics and technology sophistication that can be somewhat mind-numbing.

Some refer to them as cryptocurrencies (e.g., bitcoin and nearly a thousand others), digital payments (anything paid electronically), virtual currencies (i.e., not intended for "common" payments), and the still-emerging central banker's vision of a digital sovereign currency (e.g., Bank of England). Further distinctions occur if they are peer-to-peer settled (i.e., part of the "sharing economy") or centrally cleared. Supplementary attributes can be attached regarding convertibility, closed versus open, regulated versus unregulated, protections and exchange rates.

With cyber protection, fraud detection, money laundering identification, consumer protection and technology sophistication increasing, merchants, consumers, regulatory authorities and banks are slowly entertaining wider adoption of, for lack of a better identifier, all of the above differentiations, electronic currencies.

So, if you seek a robust discussion on the technology directions of electronic currencies, this article is not for you. If you seek a first discussion on what impacts for electronic currencies could potentially touch as the world's consumers begins a multi-decade phase out of physical instruments, then read on. (If you are seeking detailed texts, I might suggest the Federal Reserve's Virtual Currency Debriefs, The Age of Crypto Currency by Vigna and Casey, or the open-source efforts of the Linux Foundation to Advance Blockchain Technology).

Technology: Not the Only Advancement Taking Place
Generally, there are some strong reasons to begin adoption of electronic currencies more into the mainstream financial supply chain. Let's examine just a few of these transformative movements.

First is a need to know your customer. Regulators and law enforcement have traditionally been skeptical of electronic currencies (especially completely anonymous transactions) for good reason: terrorism, criminal activity, tax evasion, challenges to national interests. Yet, if electronic currencies are trusted and verified, it makes any form of evasion very difficult.

Secondly, consumer mobility has created demand for new payment forms beyond bank transfers, credit cards, cash and debit transactions. In all cases, they rely on centralized, trusted organizations to guarantee payment. With P2P economic transactions on the rise, demand for traditional interactions is transforming from the spoke and hub model to a parallel processing model where currency movement does not require a legacy hierarchy devised decades ago. It's a case of technology changing industry and behaviors.

Third, we work differently. The Bureau of Labor Statistics estimates one-third of the workforce comprises independent workers, not loyal to any one employer. What a difference a generation makes when compared to the 1980s. Paychecks, company sponsored healthcare and perks are things of legend, resulting in need for more rapid payments as contractors are unwilling to wait 45 to 60 days for payments, let alone deal with accounts payable teams seeking longer floats.

Electronic currencies represent a sophisticated and emerging set of global solutions that capture interest of bankers, media personal and, most recently, conference organizers. However, while the complexity and sophistication of currencies in these digital formats demand equally high-tech discussions, repercussions of their incorporation into global financial supply chains are beyond those open-source collaborations or digital ledger advancements (e.g., blockchain) making recent headlines.

Whereas understanding current and future advancements in electronic currencies is imperative to successful implementation and ongoing adaptation (as robustness and features increase with time), treatment of their impacts to existing financial services processes and operations requires a comprehensive impact analysis across existing products, services, alliances, outsourcing arrangements and infrastructures. Electronic currencies can be a catalyst for a fundamental shift in how digitization is applied to financial services--a move from one-off projects to comprehensive transformations.

Framing the Discussion Beyond a Project
Therein lies the rub in treating the iterative adoption of electronic currencies into highly regulated financial services institutions. Historically new "technology" efforts are treated as container projects--define the scope, create the plan and assemble the team--move onto the next "big thing."

A recent report, Beyond Corporate Project Mentality: A Multi-Year Investigation into Financial Services' Digitization of Everything Uncovers Why Many Efforts Fail to Achieve Desired Results, provides a number of messages applicable to electronic currencies planning and preparations:

--Electronic currencies are the tip of a sea change taking place not just with consumers, but how they view financial institutions and what constitutes money. In a growing distributed and decentralized world of payments, attempted throttling of transaction methods by regulators, law enforcement and mainstream merchants will likely backfire, or worse, hobble economic growth and innovation. As illustrated here, digitization and electronic currencies directly impact all aspects of existing financial services institutions along with some historically coveted operational segments.

--Electronic currencies solutions may be compartmentalized and assembled, but layering reusable components will have the widest impact when applied to legacy infrastructure and operating methods. Adoption of any electronic currencies solution will cut across familiar horizontal groupings of core delivery and integration, along with planning and governance, growth and efficiency, organizational methods and techniques, as well as consumers and segmentations (see image here).

--Incorporation of a repeatable framework should be included for all electronic currencies solutions, ensuring that whatever is chosen, it can be readily adapted to rapidly changing economic and regulatory conditions naturally present when incorporating emerging ideals driven by transitory consumer behaviors.

--For lenders, as the push for automation technology accelerates due to need for greater margins, error reductions, due diligence and market share, incorporation of electronic currencies can also impact origins and uses of funds (where these "tiny" transactions come from), fungibility, cyber integrity, compliance and fraud, consumer perceptions, virtualization, software models, archiving). This DOE event might be the watershed that further pushes standardization, incorporates and solidifies open-source accessibility, reduces transaction fees for intermediaries and influences repayment capabilities well beyond today's bolt-on ideals.

While many other stimuli and criteria should be highlighted, this is the purpose of a repeatable and adaptable framework for DOE, and in particular electronic currencies, beyond mere technology or app delivery.

We in finance are surrounded by regulations, systems, processes, technology, customers, expectations and comrades in delivery. We are never alone to contemplate changes to our daily world and what it might be like when major pieces transform our functions and our internal value.

In an era of electronic currencies solutions it is definitely time. In this era of financial services DOE, now is a moment to step back and begin assessing the impacts on the horizon before we simply chase the grail of profit--it is reminiscent of a decade ago when we chased other complex ideas, which in turn bit us all in our collective rears. How we all prepare for electronic currencies in all its forms represents another watershed event, of which we will know the outcome in years to come.

(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)

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