Thoughtful Fintech professionals will often passionately debate the question of evolution v. revolution, wondering which will dominate and which is the pathway to their own success. While this is a fun debate over a refreshing beverage after work, unfortunately the vast majority of the time the answer is likely to be constrained to the more mundane option of evolution, particularly for digital custody. The reason is in the detail.
Fintech is founded on revolutionary approaches, most notably blockchain and its embedded distributed ledger methodology. But while the focus on Fintech tends towards the transformative technology that is enabling and driving the change, ultimately these new solutions only succeed insofar as they meet consumers’ needs.
Importantly, for the average consumer these demands spread beyond the immediate solution to involve how the new approach fits into their life, or more specifically, how it will interact with the existing architecture of the customer’s established financial institutions.
Very few (if any) consumers can completely cut the cord to their old financial service providers. Instead most people are using their fintech solutions as a complement to their existing service providers, or a replacement for a specific one, but they still need these solutions to blend seamlessly with their remaining brick and mortar providers. One sees evidence of this in PayPal’s recent decision to allow easy transfers to banks through its Instant Transfer facility. Certainly PayPal would prefer that people keep their funds in the PayPal wallet to continue making transactions through their service. PayPal recognizes though that their clients’ needs are best met by an evolutionary approach and they have decided to make it easier for their users to use PayPal as one of several service providers. Evolution has trumped revolution because the evolutionary approach better meets the customers’ needs.
This pressure is not just sourced from retail consumers. It also decides the argument for institutional investors. Institutional custody is a far from glamorous field, yet globally it holds more than US$150 trillion in assets, helping to keep these safe for the beneficial owners. However most of the technology managing this custody is decades, if not centuries, old. Blockchain solutions can now allow for far greater efficiency and flexibility in providing custody services for these traditional assets.
What is more, in what might first appear to be contrary to the spirit of digital currencies, crypto assets themselves benefit from digital custody. At first glance one might presume that holders of crypto currencies would want nothing to do with a Trust company. After all, the trust is supposed to be inherent within the process and the blockchain. Why would one pay someone else to provide for the safe custody of assets when you already have the blockchain. Unfortunately the answer to that question is too-well known to many people who have seen their holdings hacked, or are digging through trash dumps looking for old hard drives that hold their digital key.
Once one decides that a link to the traditional world of asset custody is necessary, the solution then becomes much more complex than simply trying to tie the two together. To gain the benefits of each system and make the sum better than the parts, they must be thoughtfully bridged with a full understanding of the intricacies on each side.
As one example, people who work in financial market trading are familiar with SWIFT codes. The Society for Worldwide Interbank Financial Telecommunication provides a global network that allows financial institutions to communicate about financial transactions in a secure and reliable way. To make this work requires standardized formats and a great deal of detail. One of those details is that SWIFT allows for values to be transmitted with up to 15 places after the decimal point — a high degree of precision that would, it has always been thought, allow for any sensible transfer of assets.
But one of the major cryptocurrency frameworks allows for 18 places after the decimal. Is that overkill? Perhaps, although depending on the exact manner of digitization there could be reason for this. The point is though that if you simply stick the old and the new together you might well establish a system that works perfectly fine most of the time, until that one day when suddenly there seems to be a slight error in the reconciliation. This type of error could be particularly pernicious as in most instances it would not materialize, hence being hard to track down.
Ultimately evolution will trump revolution, if for no other reasons than those expressed through today’s US congressional testimony on Libra — that governments will not lightly cede their authority and control. To allow this evolution to move quickly though will require accurate and considered bridging between crypto and established financial market structure.
Most fintech firms will not want to spend the time to worry about these details. The good news is that they likely do not need to, so long as they are working with a firm that provides this bridge and the technical expertise from both sides of the devil-detail chasm.
Hex Trust is the Asian leader in enterprise-grade custody for digital assets. Led by innovators from the institutional financial services space, Hex Trust has built a proprietary platform that delivers a modern custody solution for financial institutions, asset managers, and corporations to safely and efficiently operate in the blockchain ecosystem. ZeroKey, a proprietary technology, enables seamless transacting and fast access to assets stored on multiple blockchains, while maintaining the highest levels of security of cold storage solutions. As a registered Trust Company under the Hong Kong Trust Ordinance and holding a Trust or Company Service Provider (TCSP) license under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Hex Trust offers a truly end-to-end digital asset servicing solution. Visit www.hextrust.com to learn more.