Coinbase’s IPO earlier this year was a moment of great symbolism. The listing of the world’s largest cryptocurrency exchange is another manifestation of crypto going mainstream. But it also underlines the disruptions that are sweeping financial services. A direct listing, it cuts out the usual middlemen like decentralized finance also threatens to do, while its $ 50 billion market capitalization has made the company, less than 10 years old, one of the 20 largest companies. of financial services in the world – bigger than the biggest banks in France or Brazil.
Now is the time to invest
Financial institutions now know they have to gamble in the digital asset market, both for offensive and defensive reasons. Over the years that I have discussed digital assets with financial institutions, the skepticism and misgivings have continued to dissipate. At first it was the realm of criminals. Then it was a fad. But with heavyweights from Fidelity to JP Morgan all making big bets on the space, and the threat of disruption from Coinbase and others looming, most financial firms are realizing that now is the time to invest. . Investing is the only way to protect their existing roles – as custodians, exchanges, issuers – as well as to claim their right in a market that will explode as tokenization opens up a much larger pool of assets.
But knowing that your business needs to invest in digital asset infrastructure is not the same as knowing exactly what its proposition or business model should be. Like any emerging market, the digital asset market evolves and changes rapidly. Investment cases change. It was difficult to argue for an investment in crypto asset custody a year ago, but since then the market has grown more than four times.
Value propositions will inevitably evolve as well. Not many people know that Coinbase started out as a Bitcoin payment processor until they realized there was a lot more money to be made as a Bitcoin broker. And so, in the same way, financial institutions are likely to change their strategy over time – about, for example, tokenizing assets directly or creating a secondary market for tokenized assets.
So the key for any institution will be to keep its options open., which will to a large extent be synonymous with not creating legacy technology.
Create options and avoid inheritance
Financial institutions spend more money on technology than any other industry. Part of the explanation is that financial services is an information-intensive industry: its product is both digital in its manufacture and increasingly in its distribution. But the other reason is that financial companies spend a lot of money to maintain and update existing systems; a result of historic poor decisions to invest in proprietary and overlapping solutions.
Digital assets give businesses the opportunity to start from scratch; to rebuild the future of their businesses without the legacy. However, that means not repeating the same mistakes – jumping into technology decisions that will cultivate the same expensive legacy IT heritage.
Temptations and risks abound. If a financial institution enters the digital asset market, it will immediately be faced with choices:
- Should it self-guard (take care of storing the private keys that secure digital assets) or should it outsource this function to a bank or custodian?
- If he opts for auto-custody, how should he secure the keys? With a hardware security module or with a multi-party calculation (a software alternative)?
- Should the solution be hot (connected to a network) or cold (only physically accessible)?
- Should it take advantage of public distributed ledger (DLT) technology or authorized ledgers?
- Should it run its solutions on-premises or in the cloud?
Each of these binary decisions risks closing options and creating a legacy infrastructure. For example, if an institution chooses in one location to have an on-site self-service cold storage solution and then decides in another location to use a sub-custodian, this will have created a data fragmentation issue reducing efficiency and adding friction to the customer experience. .
Orchestration is the answer
The solution lies in the choice of financial institutions of orchestration systems.
An orchestration system is similar to a computer operating system in that it manages many-to-many interactions. Just as an operating system sits between hardware and software applications, an orchestration system sits at the heart of an ecosystem made up of customer channels, trading platforms, custodians, networks. regulation and other components.
He buys a massive option from a financial institution at a low premium cost.
Any decision a company makes now about the technology or business model does not tie it permanently (or costly) to this path. If, for example, a financial institution chooses to become a custodian and then changes direction, an orchestration platform can easily effect that change as it aggregates the logic of the underlying applications and provides the necessary connections to third-party vendors; a case of connection and disconnection. Likewise, if an institution decides on direct distribution, but then moves on to distribution through intermediaries, this is again easily resolved because an orchestration platform also separates the logic between interaction and manufacturing, which means changing or adding new customer channels is easy.
New business models
If the optionality was not convincing enough on its own, financial institutions should also think about business models that would be difficult or impossible to execute without orchestration. In retrospect, all of the major tech business models – from Google to AWS – all seem obvious. They are logical platforms and aggregation games in a network age.
Well, DLT makes money on a network the same way the Internet has networked communication and information. New business models will emerge and the only thing we are sure of is that they will be based on facilitating the interaction of value between an ecosystem which – for the foreseeable future – will have to bridge the old world of centralized finance (CeFi) and the rapid emergence of DeFi.
Boil the frog or sautÃ© pan
If, looking around at the pace of change, you think your institution may be like the proverbial frog so far oblivious to rising temperatures, it is not too late. Many of your competitors who acted earlier, led by industrial-age team and procurement processes, made the classic mistake of selecting monolithic applications. By choosing orchestration instead, you can introduce the flexibility that will allow your business to navigate this rapidly changing space more successfully – allowing you to overtake them in time.