Recently I was listening to Chamath Palihapitya on the ‘All-In’ podcast where he discusses the future and landscape of the card scheme giants VISA and MasterCard. His comments included; VISA and MasterCard will be the biggest losers of 2022 and that DeFi Web 3.0 protocols will very quickly replace existing financial infrastructures over the next 10 years.
Whilst we pause to digest such thought processes and comments, we need to first introduce him. Chamath is most famous (and admired) for his work at Facebook from 2007-2011, where he was credited primarily for helping grow Facebook to over 1 billion users. Since leaving Facebook, he founded Social Capital, a venture capital firm. In which time he has gained notoriety as an early investor in cryptocurrency, long on Tesla (although recently selling his position) and credited for leading the wave of SPAC’s (special purpose acquisition company) that have been IPO’ing to a varying degree of success and scepticism.
Whilst Chamath makes a reasoned argument towards the degradation of existing financial systems and the emergence of decentralised systems, the bigger picture is that the world already has changed and many of the frameworks/solutions already exist for those wishing to enable blockchain protocols. They have done for over 10 years and such ‘solutions’ have been serving a highly unregulated network such as the Silk Road (online black market place), non-legal means of financial access (think terrorist financing, theft of personal data and human trafficking) and a retail market of ‘investors’ predominantly buying into price increase of such digital ‘assets’. Those wishing to pay by crypto in the grocery store and via online eCommerce storefront remain mostly absent for the majority of global citizens who pay tax and earn an honest living wishing to spend their money in the freest and most ubiquitous way possible.
The defi whitepapers that Chamath mentions, for the most part, have been created by companies wishing to validate themselves in a space that lacks validity, providing an oversimplified vision of the existing systems that they claim to replace. In short, whitepapers are great at explaining a concept or idea, but often forget the real-world application to the end-user. In the world of science and technology, an example of this would be that of machine learning, first coined in 1959 by Arthur Samuel and the roots of such work can be found far earlier. My point being is those good ideas, take an awfully long time to resonate and the right technological and political environments need to also exist for such widespread adoption. Something that currently does not exist, despite the widespread printing of Fiat money globally and huge government deficits that have primed many crypto advocates into such adoption and investment.
A real-world problem that defi claims to solve is that blockchain is far superior for P2P (peer to peer) transactions. When in reality Fiat transactions happen in seconds in many countries such as the UK, Europe, China etc. My bank issued VISA card transacts and debits/settles almost instantly via the merchant acquirer, issuer and merchant, while my FIAT money is backed by the tax I pay to support such deficits that are run by the central banking system. In comparison, it takes minutes (sometimes hours) to transfer cryptocurrencies, particularly that of BTC and usually at a far higher cost.
Whilst crypto and defi do provide some benefit, particularly around the reduction of potential operational costs a far more transparent and regulated system needs to exist if end users are to trust such alternatives. And whilst people are becoming increasingly tech-savvy, asking someone like my mother to make payment via a crypto wallet is frankly laughable (sorry Mum). His background in social media/search; think Facebook/Google has done him a serious disservice as such companies have been successful because they operate with very little regulation or compliance to abide too. Decentralised finance and cryptocurrency are not like this, neither is this the direction they are following. My point; Finance is really based on trust and not just technology. And such trust comes from regulation and law. The unspoken word of trust and finance will forever walk hand in hand and has done for 1000s of years. After all, it is one thing to trust Facebook with your photos and private information, but another to trust a new technology with your hard-earned cash. This is a rather different question and topic altogether.
To put fault to his other comments, that such solutions will cost far less is also a strange argument as little fact would support this. For starters, the most successful defi/ blockchain-based projects are started and run by ex-investment banker types (think Coinbase etc) commanding high salaries with the view of personal gain rather than that of the improvement in costs and saving to the end-user. The more money that is invested into such businesses, the greater the focus on profit and returns that become imminent. Many of which platforms and cypto companies follow a similar growth model all other tech businesses follow, often running profitless in a bid to create exponential growth, whilst costs are then slowly levied back onto the user base in order to support profitability. Such business models only made possible by the existing financial systems and money markets that cryptocurrency seemingly wishes to displace? A strange hypocrisy do you not think?
Further to this, the cost to you as a consumer and respective companies will remain high and possibly only marginally better than the existing systems they seek to replace. In context VISA on LinkedIn has almost 20,000 employees and generated $24.1 Billion USD in profit last year. In comparison Coinbase, one of the very few listed cryptocurrency businesses and arguably the largest cryptocurrency exchange employs 5000 people and made $322 million last year. Hardly an efficient use of human capital or the suggested success of such systems in comparison to the payment giant. The economies of scale gained via monopoly, duopoly or oligopoly do not add up particularly well in a world of decentralisation as far more companies are required to compete, if they are to replace such financial systems. It would be far better to argue that VISA and MasterCards duopoly is far more technologically effective due to their lack of comparative headcount for such a vast network and incredibly effective end offering to consumers. For the most part, none of these decentralised projects support any real great change to the existing consumers behaviour as they only bid to replace such infrastructure with little benefit. In a broader sense, such companies will compete away any real meaningful change or savings to the end-user. For a real 10x scenario to happen they need to be devoid of such incremental improvements and ideas than simply reducing a cost base. In comparison we can compare the telecoms market over the last 20 years, as we jump from ever faster data networks and increased access. Where such change has had real reverberating change to our wider society.
Whilst I agree with Chamath that this is VISA’s time in the sun (they are the worlds largest financial services company by market capitalisation, so it would be harder to climb any higher and the only way is down from here on…), he fails to disclose the vast progress that has already been made in the existing financial system since Satoshis Nakomotos whitepaper and creation of Bitcoin in 2008, yet he seemingly still lives under this Utopian idea of his future. When many of the existing bitcoin and blockchain protocols today are slow and lack the capacity required for the modern world. Comparing such ‘rails’ to the existing payment infrastructure we have today (think SEPA Instant Credit, PIX, UK Faster Payments Scheme, VISA Direct etc etc etc) would be rather embarrassing as instant payment is already here.
VISA/MasterCard are not the enemy as they are simply the owners of an incredibly effective system that enables customers, merchants and banks to make, send and receive payment. Government policy introduction and innovation continues to improve this service (think VISA Direct, Account Updater (VAU), 3DS 2.0). In comparison to other industries Chammaths former employer Facebook and telecoms businesses that provide groundbreaking technology such as the introduction of 3G, 4G, 5G etc (such improvements at a meteoric rate of change). Such success and progress has happened because they are monopolies/duopoly’s and they take a centralised approach, not a decentralised one. It is merely our job as individuals and entrepreneurs to challenge such regimes and to create products where they fail to do so in a bid to create our own monopolies rather than to simply disrupt a system for the sake of disrupting it. The 2-3% fees that Chammath mentions exist in the US and many other parts of the world, but for UK and Europe, such interchange fees are capped due to government intervention and competition ruling. In summary, the internet would be useless if we couldn’t all connect in a uniformed manner, why make finance that way? And Chammaths time would be better spent challenging his own government that allows such high fees to be charged to end consumers if he really cares about creating a far more cost-effective product… In the words of Jordan Peterson, he better go and tidy his room…
*DISCLAIMER*
Please note that all views and opinions expressed here are my own. On a side note, I am a huge fan of Chammaths and regularly tune in to hear what he has to say. His work at Facebook has arguably changed the world, for better or worse and his personal life story is an excellent one, my favourite speaker panel is on his return to Waterloo University (where he studied) that can be watched below.
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