Council Post: A Better Global Financial System Formed In Collaboration
Allan Pedersen is founder and CEO of Monetalis and spends most of his time trying to gainfully connect traditional finance and crypto.
In the Wizard of Oz, Dorothy reveals, with a draw of a curtain, the Wizard of Oz as an ordinary man relying on mechanical “mind-tricks” to appear all-powerful and impact the world around him.
This story fits well, I think, with how the past 15 years have largely been one long Wizard of Oz-type curtain draw for institutions such as central banks and regulators. It has been revealed that key authorities are substantially less powerful in the face of the global financial system than was general public perception.
The financial system is today vast, complex, adaptive and entirely intertwined on a global scale. Large parts of the global financial system are, in fact, about as unexplored and ill-understood as the bottom of the ocean (i.e., fx swaps and forwards for instance). The Great Financial Crisis (GFC) led to an intensification of research efforts on understanding the global financial system—however—a key finding from these efforts might be that we seem quite far away from truly understanding its dynamics than we thought we were.
In fact, no single authority today has the financial tools, or understanding, to directly manipulate the global financial system and conclusively move it from one state to another. Rather, for instance, central banks must, largely, rely on mechanical mind tricks as the Wizard of Oz—and hope it produces the desired effect on the state of the global financial system.
One might also conclude that regulators are losing the whack-a-mole game that they invariably must play with the global financial system actors: When risk is removed from the banking system it reappears in the non-banking system. When the relevant non-banking system gets addressed by the regulators and risk is removed, it reappears in another place, etc., and so forth. Local regulators are sadly playing with losing odds, as the game has gone entirely global—there is always somewhere to move risks to it seems.
Crypto, obviously, also has a lot of humble pie to eat. Clearly, no global, useful, public utility type, trustless, transparent, decentralized, cost-effective, safe, financial system has emerged. Very far from it.
Over a short period of time, the otherwise laudable, basic original principles and desires from 2008, for what crypto set out to achieve, were largely crowded out by speculators and frontier lawlessness. As probably with all frontier cities, the inhabitants of “Crypto City” had many different views of how the City should evolve—some wanted to integrate with traditional finance and be a licensed, respected financial institution—some retreated back to the original core principles of crypto Defi—and some just wanted another sucker to con.
Only with the reasonably recent arrival of a very frosty Mr. Market, as some sort of invisible Wyatt Earp, has some order come to Crypto City. Mr. Market continues to do his work, but generally, we should be close to a place where the remaining main Crypto City inhabitants broadly could be considered upstanding and perhaps candidates for a larger generally accepted role in the global financial system.
In short, nobody has truly succeeded with their 2008 purpose and good intentions: The global financial system isn’t much better nor are there any “new global systems” in place to take over the existing system. But we have learned a few things it might be good to consider:
- It might be time to consider the global financial system as a complex, adaptive, system and set realistic expectations for how it can/cannot be impacted and how difficult it is to determine outcomes of impacts to the system.
- Might also be time to close the door on the assumption that the global financial system can realistically be replaced by a new one.
- Perhaps time to go back to the original intent of creating a better global financial system—in some form of collaboration?
What if the authorities acknowledged and promoted that the crypto industry in fact could play a major role in getting them back in sync with the global financial system (rather than relegate crypto to irrelevance)?
What if the crypto industry acknowledged and promoted that its focus is on integration and evolution of the current global financial system (rather than a rejection and replacement of the financial system)?
I have to think a collaboration based on this outlook could have productive results for the world.
The James Grant quote, “Progress is cumulative in science and engineering, but cyclical in finance,” comes to mind.
I think, given the above outlook, the crypto-industry/traditional finance collaborations can be the principal source of innovation gains made in the global financial system in the, hopefully soon coming, next upcycle. Why?
It’s all about the blockchain ledger and the basic original DeFi principles.
It seems today reasonably clear that this technology and thinking can lead to cheaper, better and faster transactions in the global financial system when the solution is put together right. That in itself is a great benefit, but that actually is not the full story at all—far from it.
I believe the real global public benefit materializes when you aggregate a new blockchain-based transaction infrastructure across the globe.
Because with this infrastructure, the world will, finally, start having real granular global transaction data for the financial actors and consequently will be able to gain a much better understanding of the dynamics of the complex adaptive system that is today’s global financial system. Without this type of infrastructure, the world will probably never come to understand, nor will the financial authorities be able to act productively on the global financial system. In short, blockchain can bring light to the vast shadowy parts of the global financial system.
Let’s start with identifying major areas of terra incognita in the global financial system—because these might be exactly the areas where the regulatory and legislative doors should be made wide and tall for crypto innovation and business building under requirements of transparency.
We will dig into what these areas could be in the last article in this series.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
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