Banks need to be ready for hybrid money

Over the past years the financial industry has had a weird relationship with the cryptocurrency industry. The former was launched thousands of years ago; the latter just over a decade ago. Maybe that’s why. But, during my experience, we started with financial markets saying cryptocurrencies didn’t matter; then that the technology, namely blockchain, mattered but the currencies didn’t; to we understand this, but it needs to be regulated and managed by us; to being proven right.

The cryptocurrencies markets imploded in 2022 … or did they?

When you have lived in this space as long as I have, what actually happened is the cryptocurrency markets exploded in 2020. Valuations and investments ballooned, and probably all down to the pandemic lockdown. But they weren’t alone. The same happened with FinTech valuations and Big Tech firms. All technology markets exploded in market cap in 2020, and now they’ve all imploded.

Does this mean there’s nothing of value here?

Not at all, and this is what surprises me in most banks. Having rejected cryptocurrencies for years, most banks moved into custodial services and trading in such currencies in the last few years. This was due to pressure from clients and media, and it means that we are now living in a world where, whether you like it or not, cryptocurrencies are here to stay. The question is: here to stay, but in what form?

My personal belief is in a hybrid form. Hybrid finance or, as I call it, HyFi. It's not DeFi or CeFi. It's HyFi. This represents the whole argument of centralised currencies (CBDCs) vs decentralised currencies (DeFi). HyFi is decentralised banking but with a central authority to protect users against losses. It's not necessarily a government or central bank, but a trusted authority that ensures bad actors are squeezed out of the system and that users get their money back. The authority can just as easily be a network of citizens, like the way in which we use eBay or other services based upon user ratings, or it could be a regulatory service or government. It's your choice, but I trust the latter more than the former.

I have argued for a few years that a global network of mobile and internet demands a global currency. That is obvious. The less obvious answer is what currency.

Interestingly, the nub of the answer to that question was delivered by Bob Diamond. Remember him? Bob is the former CEO of Barclays Bank and currently founder and CEO of Atlas Capital. He is also an incredibly astute investor and banker. So, when I saw his recent interview in The Financial Times stating that digital currencies are the way forward hit my radar hard. Specifically Bob says: “I can’t think of anyone who doesn’t believe that in the future a digital version of the dollar for institutional and corporate use isn’t going to happen and be far more efficient.”

This is a key endorsement of where we are going but note, it is not an endorsement of a particular currency. It is an endorsement that we will a digital currency as our future course. My question back to Bob would be: why is it the dollar?

Will the dollar be the dominant currency of the network and the future, or will it be the euro or yuan? Or will it be something else like … uh-oh, bitcoin?

Now, I’m very aware how much bankers hate bitcoin - just ask Jamie Dimon - but there is an emerging view that cryptocurrencies need to merge with fiat currencies, and this is the core of my argument. If you could have a central bank digital currency (CBDC) merged with a cryptocurrency, what would that mean?

So, when travelling around Europe you have a digital euro; in America, you have a digital dollar; and in China, you use a digital yuan. Then you go onto the network, and you use a global coin. How is a global coin regulated and managed? Well, the answer is that it’s obviously a global coin regulated and managed by global business with a global basket of governmentally regulated currencies. In other words, the bitcoin of the future is centrally regulated but de-centrally operated. Sound confusing? Not really.

The core of the answer to where we are going, as endorsed and explained by Bob Diamond and more, is that we will have a digital currency for institutional and corporate use. Where I disagree with Bob Diamond and more is that it will not be a digital dollar. It will be a hybrid currency of dollars, yuan and euros managed in an integrated way as a global currency through integration in a basket of decentralised currencies, such as bitcoin and ether.

The question then for you is: how will you offer custodial and transaction services in a basket of currencies that are both centralised and decentralised?