FT Alphaville spent a lot of last week hanging out at Lift12, a Geneva-based technology conference exploring the social implications of new technologies.
We were particularly drawn to the Beyond Finance session last Thursday, which tried to take a peek at how technology might change the world of banking and money in the years to come.
It was on the sidelines of the event that we caught up with Sean Park, the co-founder and managing director of Anthemis Group, an investment firm specialising in what he describes as ‘digitally native’ financial services start-ups.
Park has some interesting views on matters monetary. A former fixed income and credit trader at Dresdner and before that BNP Paribas, Park notably quit his old stomping ground for a career in angel investing in 2006, a good while before the financial storm hit his sector. Early pre-Anthemis investments included Betfair and Markit group —- moves which he says gave him the confidence to keep going in a field which was completely new to him.
“In hindsight I was probably about a year or two too early,” says Park. “It was only when we started building what has become Anthemis at the end of 2007 that the world started to fall apart at the seams.”
The crisis proved a turning point.
Park cites the old Keynesian adage that “markets can remain irrational longer than you can remain solvent” because his move into angel investing was, in a large part, underpinned by a feeling that something in the old model was wrong. But it was the timing of the crisis which he found hardest to predict. And indeed, over the course of 2007 and into 2008, he says he would often be mystified why it was that his old contacts in the city were still doing so well. Not that it changed his mind about his own path.
“It’s never appropriate to revel in someone else’s misery or stress,” he says, “but the crisis was what we thought was going to happen in some form or another.”
Yet Park says that 2008 has marked only the beginning of a much deeper and more structural paradigm shift in finance. A shift connected to many of the old system’s practices becoming outdated and technological advancements opening the door to a completely new way of banking and exchange. He uses the word ‘paradigm’ to explain this transition, a lot. (Note – his personal blog is called The Park Paradigm.)
Understandably, with Anthemis, Park is now steering investments into start-ups which complement this broader vision.
That includes the notion that in the future there will likely be more currencies not less. “Perhaps even billions of currencies,” he says, sketching out a world where every individual and every human network boasts its own unit of exchange. He believes that city-states will become more relevant than nations. And that communities and networks will take control over their own units of account. Virtual currencies such as BitCoin or Facebook credits or others not yet invented, meanwhile, could well start to rival established state-issued money both in private exchange and international trade. And community-led Peer2Peer networks will run alongside more established currency systems.
If you thought exchange rates might pose a problem here, Park says technology will provide us with something akin to a “universal translator” for establishing relative values. Real-time and cost efficient.
The concept of pricing, meanwhile, will likely to be turned on its head entirely. That’s because in the future Park believes prices will become a function of who you are just as much as broader supply and demand fundamentals. One reason why reputation tracking will once again become critical to business, investment and even daily exchange of goods. Just like when a gentleman’s word used to be his bond.
With respect to the idea that large numbers of currencies will prevail in a world following “nature’s path” towards dis-intermediation, fragmentation and complexity, we asked if all this money issuance wouldn’t pose a hyperinflationary danger a la Weimer Germany, where an endless supply of rival corporate notgeld monies was partly blamed for the frantic boom in money supply.
Park says no, because in his view technology and information abundance will enable more robust competition between currencies. As he explains:
Transactions will naturally gravitate to those currencies which are designed and or managed to best retain their value as a unit of trade or account. In such a world, competing currencies would likely form a Pareto distribution in terms of of activity and adoption with a small number accounting for most volume and a very long tail of currencies adapted for use by specific communities or needs.
However in such a world any currency that was mismanaged would swiftly find trade migrating to better, more robust currencies. Clearly the emergence of such a monetary system is hard to conceive of so long as national governments try to maintain their current monetary oligopoly; this will act as a significant brake on the move to a new monetary paradigm but the forces driving the global economy in this direction are strong and ultimately would seem almost inevitable, although the transition to such a system is more likely to be measured in decades rather than years.
But then again in Park’s world deflation and inflation don’t really exist in the conventional sense anyhow. How can anyone assess deflation or inflation in a world where prices a) adjust continuously and b) are a function of individual reputation and credit scores as much as broader fundamentals. Will a fixed price or a viable CPI index in any given currency even be relevant, when trade constantly seeks out the most efficient and appropriate currency for any given transation?
We discussed that retailers’ hold over fixed pricing was possibly already slipping. Price comparison websites, internet auction sites, adjustable price strategies and even smart couponing are, after all, already ensuring a departure from fixed retail price format. A transition from a retail framework to a universal market, where everyone gets to haggle or bargain for the best deal.
So what happens to banks in this world of self-controlled and dis-intermediated finance, where even nation states begin to lose monopoly control over the money supply?
Interestingly, Park doesn’t think that banks will be made completely redundant. While he believes some of their services may become obsolete and others will be better provided for by new types of organisations, he says banks will rediscover a role for themselves as utility-type providers. This would be a good outcome for the new financial system because instead of re-inventing the wheel, it will be able to harness and redeploy the existing infrastructure as a foundation upon which new, better ways of delivering financial services and products can be built, especially on the payment side. “It’s much easier for the two to co-exist than many might think. We definitely think there is a way for both incumbents and new entrants to prosper,” he says.
Indeed, Park says that the old institutional banks aren’t as out of the loop on this as many might think. “There are a lot of clever people at these banks,” he says. “But whereas two-three years ago the conversation [about the potential for disruptive innovations in finance] was ‘yeah, it’s interesting but it’s not going to happen’, there’s now a recognition that it’s time to do something, and a growing realisation they can’t do it by themselves.”
Intriguingly, he says he’s engaged in active talks with at least two major banks on this front already.
You can read more about what Park believes is in store for the future of finance on his blog, the Park Paradigm. We were definitely gripped.
Reinventing finance, one startup at the time – Lift12
Economics, a space opera – FT Alphaville
Bitcoin: a peer-to-peer electronic cash system – Satoshi Nakamoto
The FED’s real monetary problem – Thomas Luongo
The WIR bank model, or back to barter – FT Alphaville
Guest post: Post-Modern Fiscal Theory – FT Alphaville