The path of technology leaves clues.
This is something that can be garnered by watching what takes place. It is especially true in the digital era. Since the introduction of the Internet, we saw the same process play out.
What happens when the Internet shows up in a particular industry?
By analyzing different industries, we see there are two major changes:
- whatever is there gets disrupted
- abundance is created
The digital world is one of abundance. We know how quickly things can multiply. A lot of this stems from the fact that bits are much easier to deal with than atoms. That means we are dealing with exponential expansion as compared to the rate in the physical world.
Industries Completely Upended
With these two ideas in mind, let us think about the last 25 years and some industries that were radically affected.
Let us consider this:
- information (newspapers, magazines, encyclopedias)
- video (Blockbuster, Movie Gallery)
- music (record companies, stores, music players)
- communications (long distance phone service, snail mail)
- shopping (numbers department stores, retail outlets, shopping malls)
Digitization changes everything.
The total dollars disrupted in just these 5 areas is incredible. This is going to be compounded in the future as older generations die off. Newspapers, for example, still hang around in physical form due to the fact there are still people who prefer it delivered. These tend to not be the younger generation.
Cryptocurrency is a massive shift because it brought the Internet to money.
Banks And Financial Institutions
The Internet made everyone a blogger. Eventually, anyone could become a content creator and distributor.
Shortly, we will see where anyone can become a money creator.
This, coupled with digital wallets, are going to change everything. The transition will be evident when businesses are creating their own tokens. PayPal recently made news with their stablecoin announcement. This is nothing compared to what we will see down the road.
The time is coming when a small business will be able to issue tokens, either fungible or non-fungible, to their customers. Here is where the system gets completely upended. When business-to-customer paths are established, decentralized finance (DeFi) takes on a new meaning.
It becomes a major problem for banks and other financial institutions.
FinTech has done a number on the banking system. Cryptocurrency is the next step in this evolution. For their part, the banks are turning to governments for protection. This is a flawed strategy.
All financial institutions that seek shelter in this manner are doomed. This is the fate of most of these entities.
Technology Is Like Water
It is best to think of technology as water.
When industries try to protect themselves by turning to the legal or political system, things get dammed up. For a moment, the technological progress is stopped.
This is not permanent however.
During the stoppage, we see a pooling. Like water behind a dam, it keeps building.
Of course, when the dam breaks, the force is much greater than if were not constructed in the first place. Technology acts in the same manner. When the bursting happens, the implosion is epic.
The music industry is a prime example. Record companies fought file sharing. They even took to suing their own customers. This caused a brief reprieve yet did not stop the downloading of copyrighted music.
What happened in the aftermath was epic. Apple was able to roll in a cut a sweetheart deal because the record companies were losing a fortune. Many went out of business and consolidation took place. Over the next 18 years, the industry lost money every year on recorded music.
The same process is being repeated with finance.
Headlines are filled with talk of regulation, lawsuits against companies that broken securities laws, and banks trying to ensure they still have a seat at the table.
For now, they are on solid footing. The problem is the water is pooling. Technological progress can be slowed, it cannot be stopped.
Cryptocurrency has the potential to alter the entire financial system. This is something we saw previously in other industries.
Now that the Internet came to money, we know two things are going to happen: the incumbents will be disrupted and abundance will be created.
Another fact is that governments or the legal system will not be able to protect these entities. Trying to control technology is akin to closing your fist around water. It simply does not work.
Taking On Bigger Fish
Technology is growing more powerful each year. Not only is more progress made but there are more involved.
For this reason, the entities that are being affected are growing in size. Blockbuster was a large company yet it did not rival that of banks. When we see a company like Tesla turning automotive into technology, we see some very large corporations disrupted.
Eventually, governments are going to face the same situation. As the entire technological wave grows, the area of destruction gets much bigger.
Thirty years ago, the idea of technology being a major threat to the banks was unfathomable. Today, not so much. In fact, FinTech has done a number on that industry already.
We can expect more in the future. Cryptocurrency is a power mechanism since much of it is open source, digital, and global in nature. This was developed for the Internet, never residing in the physical world.
That is why Netflix was able to usurp Blockchain. Taking it one step further, YouTube is even more powerful than Netflix since it is open to all content (until they ban someone).
Banks are financial intermediaries that add friction, cost, and counterparty risk to the equation. For centuries, they were necessary. Technology is changing that.
Like this newspaper, this is not going to happen overnight. It will be a process, in part due to generational habits. However, over time, their power will dwindle as technology based entities start to take over.
This is going to happen. The only question is whether centralized entities such as PayPal are the winners or do we see decentralized options emerging as the standards.
Either way, we know there is disruption and abundance before us. The lessons of the Internet teach us this.
The banks are just the next in line.
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