NEWS

At the genesis was the materialisation of a somewhat libertarian decentralised financial system idea, open to all and censorship resistant, that removed the double spending problem inherent to digital transactions. Bitcoin.

Despite the many controversies, one-way attacks from detractors, passionate debates and approximations about its intrinsic value, carbon footprint or role in money laundering, bitcoin has been running like a Swiss clock for more than 13 years now without any downtime, bug or attack. At the end of the day, its core value proposition has always— and only— been about 24/7 peer-to-peer electronic cash transfers at close to no cost. From that perspective, it’s a hit. Full stop.

More than a decade later, a multi-trillion crypto industry has come into shape, revolving around thousands of crypto-assets, a pool of more than 300Mn crypto-users as at the end of 2021 (expected to reach 1Bn by the end of 2022), Decentralised Finance (DeFi) protocols and Decentralised Autonomous Organisations (DAOs).

This reality is reinforced by the high-speed developments taking place in the metaverse, a 3D experience layer of the internet, powered by blockchain-based infrastructures, a crypto-asset based economy and the convergence of technologies such as AR/VR, spatial computing or 5G. This convergence, combined with a growing demand for decentralisation (web3, DeFI, SSI,..) and structural cultural changes (new cultural traits, behavioural patterns), are the key drivers of the metaverse’s developments. While we are still very early, the metaverse is meant to become a multi-trillion market much sooner than any rational study would forecast.

Conscious of that, time has certainly come for the broad banking industry to realise, not only that all of this will not evaporate overnight – it’s here to stay – but that it has already started to threaten its core business.

Now picture this: Saturday 10pm, right after having placed a pizza order at his/her favourite restaurant in Decentraland, settled the transaction in USDC (a fiat-backed stablecoin) and redeemed his/her discount NFT coupon, a daily metaverse user invested into crypto-assets stops by the virtual branch of his/her financial service provider opened 24/7. Yes that's right, millennials/Gen Z are not into the 9-5 schedule and want immediacy. So now he/she contracts a Bored Ape Yacht Club NFT-collateralised loan in a few minutes to fund the acquisition of a piece of virtual land in The Sandbox where he/she intends to showcase his/her digital content creations or lease part of it in exchange of recurring passive revenues. All late at night. The transactions are signed using his/her private key and he/she also takes the opportunity to start staking some of the new crypto-assets he/she just acquired and earn a passive 5% yield, unstakable on demand. All of this at negligible transaction costs and near real time. Think this is sci-fi ? Well think again during the time it takes for he/she to open the door to the pizza delivery guy. #virtualtophysical

The reality is, not only is this already effective, but we are on the cusp of crypto-assets’ mainstream adoption. Furthermore, millennials and Gen Z represent a growing portion of the banking sector customer pool and will be subject to the largest intergenerational wealth transfer of all time within the next few years. To spice it up just a little bit more, most of them are invested in crypto-assets and already have a commercial relationship with crypto-exchanges or are comfortable interacting with DEX or other DeFI protocols.

The direct consequences of the above are that the right to retail funds is no longer a given for the banking sector and that high yield competition is fiercer than ever. It might seem like a significant shift, but crypto-asset products and metaverse access are becoming the new table stakes.

Of course, many stay away from the conversation, pretending that crypto-assets and the metaverse are complex, risky or not compatible with internal policies…well guess what, the crypto-assets and metaverse ecosystems do not really pay attention to that, they keep moving fast. And millennials/Gen Z do not really care, they keep adopting fast. The disruptive effect on financial services will be significant, structural and irreversible.

So what are you gonna do about it? Sit and wait? Avoid? Well as JP Morgan recently said in the metaverse context: “The asymmetrical risk of being left behind is worth the incremental investment needed to get started and explore this new digital landscape for yourself”.

More concretely, is the future of banking open and digital? Are millennials and Gen Z a strategic and fast growing segment for the industry? Is the banking sector challenged by DeFI even more structurally than by neobanks?

All lot of open questions and uncertainties, but one thing is clear, there's a real, tangible, and urgent need to act now to maintain relevance in the near future

How?

Upskill. Go beyond misconceptions. Free your mind of any constraints. Experiment and engage. Crypto and DeFi were born as evergreen projects. You will not get there with a traditional mindset/approach.

Best case scenario is you identify great strategic/growth opportunities. But don’t think you have plenty of time, this started a while back and will turn into a reality check sooner than later. As Bill G. put it “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”

This applies the same way to the metaverse. You think digital banking has reached its zenith? Think again. The metaverse will bring digital banking to another level, one where customer experience, tailored on-demand crypto-assets based products and services, immersion, 24/7 availability and affordability will distinguish winners from those who might well disappear by the end of the decade. A “Too Big to Fail”mindset would be very presumptuous and dangerous in this new world.

The bottom line is, commercial opportunities are as massive as the business threats and engaging seriously on these topics is all about avoiding a structural—yet irreversible—break-up with the to-be most-important segment of your customer base. From that perspective, crypto-assets and the metaverse are certainly a natural next step for the banking industry. But remember, nature is selective.

 

Thomas Campione
Blockchain & Crypto-assets Leader
PwC Luxembourg

 

Roxane Haas
Banking leader
PwC Luxembourg