Dorothy: Do you suppose we’ll meet any wild financial technology innovation?
Tin Man: We might.
Dorothy: Oh!
Scarecrow: Innovation that – that eats finance?
Tin Man: Uh, some. But mostly digital wallets, AI, and tokens.
Dorothy: Digital wallets?
Scarecrow: And AI?
Tin Man: [nodding] And tokens.
Dorothy: Oh! Digital wallets and AI and tokens. Oh my!
We will let the reader decide who amongst the characters of The Wonderful Wizard of Oz by L. Frank Baum should be played by banks, regulators, users, customers, payment companies, asset managers, fintech startups old and new, and central banks—although it would be fair to say we are all Dorothy, walking along the yellow brick road of financial services development.
We can also state without a doubt that we will never quite go back to the exact home we left, but we certainly use magical shoes from time to time to help us during our journey. In this instance, the magical shoes happen to be a trifecta: digital wallets, the new bank account where we will see all of our assets and conduct all of our transactions; tokens, which will represent any asset that we will then be able to interact with in our digital wallets; and AI, which will hopefully make our work simpler, faster, and more intelligent.
We are witnessing in real time a convergence of three waves of innovation, each with massive early adoption.
Digital wallets are primarily used by individuals to store their crypto assets. Over 400M wallets actively hold cryptocurrency worldwide, and the number continues to grow rapidly. The latest wave of AI has seen substantial investment from corporations and venture capital alike, with widespread adoption within tech developers’ communities—these AI capabilities are shaking the foundations of our economy. Tokens started timidly with a universe mostly endogenous to digital worlds (cryptocurrencies, crypto assets). However, the dam has broken on the token front with the acceleration of stablecoins and the tokenization of traditional financial assets.
We have written previously about each of these trends separately. This is the first time we highlight them as an interconnected trifecta. We strongly believe these three trends are leading us toward a drastically new financial services world—one that is Onchain as opposed to offline.
By offline, we mean that up to now, our money, contracts, and assets were represented in databases and were mostly disconnected. We activated them as needed, sometimes instantly, sometimes with a delay. They were offline most of the time, much like a car lives most of its life parked.
With assets tokenized on a chain, digital wallets living on a chain, and intelligent automation unlocked by AI, we are converging toward a world where all the components of financial services will be Onchain, 24/7.
An Onchain financial services world will pose challenges: how fraud will evolve and how we handle it, how compliance should be designed and delivered, what guardrails regulators will need to establish to protect customers, and how incumbents will react and adapt in a world where users and customers are truly empowered.
That said, an Onchain financial services world holds untold promises: better netting, clearing, and settlement of payments from both cost and risk perspectives; improved investment processes; democratization of investment access; rationalization of capital constraints; and a new type of global markets interconnectivity – impacting retail to institutional and domestic to cross-border activity. These advances will lower unit costs and usher in an era of business model and product delivery innovation—a net positive applied to the entire assets and payments universes globally.
If we were to pinpoint what is enabling this Onchain revolution, we would highlight four factors:
First, the advent of cloud computing changed the mindset of financial regulators and central banks. In less than ten years, they morphed from firm Luddites to careful adopters. This shift was necessary to enable further innovation in financial services.
Second, the maturation of the previous innovation trifecta—mobile technology, APIs, and cloud computing—allowed newer technology waves to progress faster through early adoption and breakthrough usage in financial services.
Third, Bitcoin’s survival and growth proved that digital assets could deliver “killer” use cases.
Fourth, stablecoins broke the dam by leveraging all the experimentation of the crypto world (wins and losses alike) to bring financial incumbent actors into a world of tokenized assets powering financial transactions.
As several astute pundits have noted, the institutionalization of crypto—via Bitcoin’s acceptance as a speculative asset by asset managers, stablecoins by the payments and banking industry, and tokens by asset issuers—is “killing” pure crypto while building Onchain finance.
This co-opting was to be expected, as this is exactly what happened with the dot-com bubble, with the most constructive use cases laying the groundwork for commerce and industry to morph into what we now know as the Web 2.0 economy.
If the “chain” is the home of financial services, we periodically move from one imperfect home to another less imperfect one. We are sure the fathers of double-entry accounting (an earlier chain) would be excited by this Onchain future.
For us at MGV, this means continued focus, as many value chains and stores of value within capital markets and asset management still need to be digitized, automated intelligently, tokenized, and serviced. Our portfolio companies—including Keyrock, Finoa, Nilos, Blockpit, Ctrl Alt — are perfect examples of this Onchain future today.
