How Cryptocurrency Is Set to Disrupt Traditional Banking
As new cryptocurrencies continue to flood the market, we are starting to see a financial power shift away from traditional banking, giving people more options to invest and take charge of their personal finances than ever before.
We spoke with Rob Frasca, managing partner at Cosimo Ventures and a holder of Ndau, the world’s first adaptive digital currency, about how blockchain (and the cryptocurrencies that exist as a result of the technology) will disrupt and enhance our banking and investing experiences going forward.
WM: How did blockchain grow into something that made you want to make it your life’s work?
Frasca: During its first phase, the internet was designed to be a resilient communication network. Content moved from being centralized to decentralized. When I grew up, we had ABC, NBC, CBS, PBS and newspapers — that was it.
What the internet did was make everybody a publisher of content and media.
WM: And the second phase?
Frasca: It was really all about communication. All of a sudden, instead of using the central switches of Ma Bell and AT&T, you and I are having a video call for nothing, just the marginal cost of bandwidth.
All of a sudden, we are peer to peer on communication.
WM: And peer-to-peer on everything really.
Frasca: During the next phase, the internet was really about commerce. You can buy anything, and you can sell anything online.
Through this network, society has gone from a centralized hierarchy, the tower, to a network, which is really the town square.
Charting the Internet's Growth
WM: Some finance experts say the rise of blockchain is creating a power shift in personal finance, giving control back to the people. Can you explain how that is?
Frasca: So, when you think about the one thing in the world that is still centralized, it’s money. Money is trust — it’s value exchange. The Medici bank goes back to the 1400s — they invented banking, and we're using the same system today.
We’ve got a problem because when you take a central bank — a central authority of trust — and you connect it to what is otherwise a town square, a network, it becomes a honeypot.
It becomes less resilient because somebody can climb into the network and attack that central point. Bitcoin showed that this new technology, blockchain, can get rid of the middleman.
WM: How so, exactly?
Frasca: If I want to buy something from you, and you don't know me, and I don't know you, we use a bank to declare the trade because we both trust the bank. The bank gets paid a transaction fee to clear the trade.
Bitcoin proved that we can trade, but instead of asking the bank to clear the trade, let's ask everybody on the network to clear it — let's do it via a consensus mechanism.
These emerging technologies are ways of clearing trade — doing things on a network in a resilient, global way. This is massive, and I think it's the single largest value creation event in our lifetime.
WM: What other ways is blockchain already disrupting traditional banking, and how do you think it will continue to disrupt it over the next decade?
Frasca: The business model for a bank is pretty simple. It takes a transaction fee — for example, when you go to the ATM and take money out, the bank takes $3. Most industries use this business model. When you sell a house or buy stock, the broker provides the trust.
When the entity providing trust is a network, you need a payment system and currency. These cryptocurrencies are just the payment rails for the network.
WM: For those who don't understand cryptocurrencies, what would be a good place for them to learn about them and invest?
Frasca: Bitcoin has turned out to be a long-term store of value, but it wasn’t designed this way. Nevertheless, people are buying Bitcoin because they think it's going to go up in value, or they think it's a hedge against the devaluation of the dollar because governments around the world are printing money.
Bitcoin has an appeal because there's no government behind it. It's a fixed supply. People look at and say, “This thing is not going to get devalued.”
That’s where everybody goes first. If you're going to jump into crypto, you jump into Bitcoin because it's the big one. It’s liquid — I can buy it, I can sell it, I could hold it. It’s there.
I don't give out financial advice. But I would say, if you're going to dip your toe in the water, it's probably a decent place to start.
WM: What about other blockchain technologies?
Frasca: The other half of the market is essentially technologies that provide decentralized content consensus, decentralized transaction capabilities and peer-to-peer transaction capabilities across the spectrum.
They're all very early, but some are more liquid than others, meaning easier to buy and sell. These are very interesting to look at as an investor because what they're doing is solving particular early-stage problems.
WM: Is there another moment in tech or finance history that you can compare this type of early-stage problem solving to?
Frasca: When people started using the internet for content, then communication and commerce, the early visionaries, generally around 5 percent of the market, thought, “I’m going to save the world,” but it was fraught with problems. They got enamored with the tech, not the value; they got enamored with the possibility and the vision. They came into the market, and they worked.
Then, the early adopters, about 10 to 15 percent of the market, jumped in. They looked at what the visionaries did and thought, “I could really save the world.”
Sometimes, it catches on, sometimes it doesn’t. We've seen technologies get to the early adopter phase and fizzle out because they're just too difficult. When something jumps that chasm and goes mainstream, things start to take off. For the internet, this was around 1996 to 1997.
WM: How does something that's adopted early like this become mainstream exactly?
Frasca: The mainstream majority then comes in; they learn from the early people and fix the problems that the early people didn’t foresee. This is a group of people who see the technology’s potential and say, “I want to fix this.”
Entrepreneurs don't see problems, they see opportunity, but the majority of people don't see opportunity, they see problems. Entrepreneurs capture all the value because they solve problems.
My fund, Cosmo X, invests in those entrepreneurs. Ultimately, as an investor, the return is in solving those problems. You want to be inspired by the problems that you think need to be solved and who you think has the best solution for that problem.
The Growth of Blockchain Technologies
WM: Are there ways in which blockchain and banking can work together?
Frasca: I'm not saying banks will ever go away. Banks serve a huge purpose. They're trusted, and there are regulations and compliance in place. Regulations and compliance are important.
In the early days of the internet, people were worried about security. So, we created guardrails, which reduce uncertainty. They make it so that when I'm driving my car, I don't have to worry about going over a cliff.
WM: But what about the uncertainty in cryptocurrency?
Frasca: It's the same thing here. Every time you lower uncertainty, what happens to the majority?
If it's safe, they enter; if it's not, they don't. So, regulation and compliance and regulatory transparency are important because what it does is signal to the market, “This is OK.”
We're Talking Crazy Growth in Crypto
WM: Experts claim cryptocurrencies can give more financial freedom back to the people. Would you agree?
Frasca: Less than 50 percent of the world's population has a bank account. Yet, I've seen numbers as low as 65 percent and as high as 83 percent that the world population has some kind of mobile phone — the majority of people have a prepaid account that goes by minutes.
With cryptocurrency, the unbanked population can participate in the financial world. Blockchain is a massive opportunity for growth for people in poverty in third-world countries.
Think about El Salvador. Now, people are holding Bitcoin versus relying on the country's central banks to figure out if they will devalue the currency or serve a corrupt dictator’s requirement to print more money.
The NFT Craze Goes Mainstream
WM: What are your thoughts on NFTs?
Frasca: The media defines NFTs as postage-size JPEGs being sold for millions of dollars. They’re concentrating on the artwork, what they really should be concentrating on is what an NFT really is — decentralized content digital rights management.
What it means is that someone can get paid for creating content, and when they get paid, they're not just getting paid once, they get paid royalties every time that media is shared, moved, collected or transmitted.
It changes how the entire royalty structure of media works. This will affect all walks of life from how people get paid to how people pay, and it’s going to create whole new incentive structures.
WM: Which is how more people can participate.
Frasca: If I have a network, and I want people to participate in that network, I have to create incentives, or if there's a behavior in the network that I don't want people to do, I have to create disincentives.
That's what this technology allows you to do — every one of these networks is basically a computer contract that provides incentives and disincentives for participation.
WM: What do you see as the biggest disadvantages of investing in cryptocurrency?
Frasca: When you invest in cryptocurrency, it's risky because you're investing or buying into a network that may or may not grow.
If the network doesn't grow, the value is not going to grow. And if the value doesn't grow, you lose.
WM: So, what are the advantages?
Frasca: There are early [cryptocurrency] opportunities that are priced very low — or you could argue, priced appropriately — because they're not worth much. They're not liquid.
But if the overall network builds to a level where there is a lot of value, then you make a lot of money.
WM: So, what's the best way for investors to approach the potential risk?
Frasca: What [investors] really should do is look at the things that are very liquid, or they should invest with in a fund or in a team that manages this stuff for a living.
This is the reason why people buy mutual funds and want to rely on a portfolio manager to pick the stock.
The Future of Cryptocurrencies
WM: There’s a lot of talk about cryptocurrency's impact on the environment. What are your thoughts on that?
Frasca: Bitcoin uses a thing called Proof of Work, which uses a lot of energy. But there are network protocols that have a different currency, which is the payment system on that network — they use a thing called Proof of Stake. It doesn't have much of an energy footprint. It's no more than what it takes to run your mobile phone.
It's like the early days of the internet — I was at a venture capital firm that wanted to invest in a company that was YouTube before YouTube, but we decided not to do it because the cost of the bandwidth was too high. We couldn't make any money. Boy, were we wrong!
WM: You just don’t know how things are going to play out — technology advances so quickly.
Frasca: When you look at the amount of value that's being generated, transmitted and moved from Bitcoin, it's not an environmental sustainability problem.
Sure, it might be at this moment in time. But, as the network grows, the amount of value that's being moved around the world grows, and as new technologies enter into the market, I don't think it'll be I won't be a problem going forward.