Crypto and the Circle of Disintermediation

Banks have been getting louder and louder about their opposition to central bank digital currencies (CBDCs) like the digital dollar over the course of 2022, making clear that they see CBDCs as an existential threat that could disintermediate them from their customers, and the deposits that are used in lending that makes up a huge part of their business.

That’s a role that’s been played in recent years by cryptocurrencies and stablecoins, but what makes CBDCs a little ironic is that, unlike the privately issued digital assets like bitcoin and USD Coin, CBDCs were not actually intended to disintermediate banks like cryptocurrencies and their fiat-pegged stablecoin offshoots were.

Disintermediation, after all, is where blockchain began. The Bitcoin Whitepaper’s very first sentence talks about the goal of allowing “online payments to be sent directly from one party to another without going through a financial institution.”

But crypto disintermediating banks is not really a one-way street. For one thing, non-crypto FinTechs have that same basic goal: Getting between banks and their customers. Then there’s the point that blockchain-based financial services — both centralized finance (CeFi) and decentralized finance (DeFi) — are trying, in many cases, to disintermediate the FinTechs that are disintermediating traditional financial institutions.

None of which has stopped banks from furiously trying to adapt and appropriate the tools of both crypto and FinTechs, cutting them out of the picture. It is in many ways, a circle of disintermediation, with three players trying to move eyeballs, attention spans and wallets away from the others.

Disintermediating the Disintermediators

Last April, JPMorgan Chase CEO Jamie Dimon warned that FinTechs “are making great strides in building both digital and physical banking products and services,” Dimon said. “From loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products.”

This, in part, is why “banks are playing an increasingly smaller role in the financial system,” he said.

Yet for all their agility, FinTechs themselves are at risk of disintermediation by blockchain and crypto providers — they remain, after all, middlemen. The benefits of programmable money powered by smart contracts, instant settlement and the “trustless” nature of immutable blockchains that remove the need for trusted third parties (the second sentence of the Bitcoin Whitepaper) make them vulnerable as well.

As for cryptocurrencies, they are fighting on two fronts as well: Trust on the banking side and ease-of-use on the FinTech side.

The bear market in digital assets being called crypto winter has given both the same thing Comptroller of the Currency Michael Hsu recently said it had given regulators writing rules for digital assets that were roaring ahead at full speed: “A little bit more breathing space.”

Between that downturn and the disruption May’s $48 billion collapse of the TerraUSD stablecoin had on not just cryptocurrency investing but decentralized finance (DeFi), banks and other traditional financial institutions have some more breathing room when it comes to formulating a plan for how to respond to and defend against the disintermediation that blockchain’s digital ledgers, to say nothing of other non-crypto FinTechs have as their basic goal.

Right Back at You

And yet, as Hsu’s comments suggest, pure-play crypto companies are increasingly at risk of being disintermediated from their own technology as banks and other FinTechs race to take advantage of some of the tools of DeFi without giving in to its chaotic nature and users’ lack of recourse.

That latter point’s a failing the bankruptcy of many crypto lenders in the wake of TerraUSD’s de-pegging showed quite clearly.

Beyond that, Dimon’s point about FinTechs creating products that are intuitive and easy to use is something that frequently doesn’t apply to crypto, especially in the DeFi side of the market.

Another failing crypto shares with FinTechs that was pointed out in an October study on “The Forces Disrupting Payments” by BNY Mellon is that their “solutions tend to be very niche” so businesses can’t get all their needs met by a single provider — something traditional FIs are more capable of doing, albeit (as Dimon confessed) not always as well on each individual financial product.

As for customer trust, well, note that blockchain data firm Chainalysis dubbed last month “Hacktober” due to the more than $700 million looted from various crypto projects — bringing the year’s total north of $3 billion. That is something that the company’s head of research, Kim Grauer, told PYMNTS’ Karen Webster recently is “not healthy for sustainable long-term growth.”

And given that blockchain transactions are not reversible even if there is a middleman, like a crypto payments technology provider, in the transaction — no chargeback fraud is a selling point for merchants — the consumer protection and customer service offered by banks and FinTechs can be a big advantage that crypto is having trouble matching.

Whether one or two will win or they’ll just find a way to work together remains to be seen. But as the CBDC fight shows, the pie being divvied up is the banks’ and they’re not too eager to share.


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