This year’s ‘Creating a Shared Future in a Fractured World’ theme for World Economic Forum’s Annual Meeting in Davos struck a cord with me. Where ever I have travelled, and I have travelled a lot, I heard people’s frustrations at being locked out of high return investments. People feel that the game is rigged to the benefit of the wealthy. As the rich get richer, the gap widens and the social contract that binds us all fractures ever more. Regulation and geopolitical risk are often blamed for excluding all but the wealthy from participating. This has wide-ranging political, economic and social consequences.
Investment regulation has undeniably had the positive effect in as much as it has protected investors, but it has also inadvertently restricted access to just the wealthy. Likewise, anti-money laundering and counter-terrorist finance regulation is vital to preventing crime and terrorism, but has excluded investors from poorer countries whose identity infrastructure is not trusted by others. Surely this was not the intended outcome. After all, shared future must share opportunities to be sustainable.
Geopolitical risks, see Improving Global Investing, have prevented the emergence of truly global markets. No nation is willing to trust another with hosting it’s critical financial infrastructure, in case a dispute results in loss of vital access. Resulting inter-markets reconciliation drives up costs. In addition, current market infrastructure providers don’t seem to accommodate constantly changing regulatory and business regional differences quickly enough to scale up to global needs.
Blockchain, for the first time in history, seems to be creating internationally trusted information systems to support global finance and identity requirements. Smart contracts and distributed ledgers may soon be scalable enough to meet diverse and changing national needs with a globally trusted platform that eliminates reconciliation frictions. As every nation runs a local copy, no nation can embargo the other one unilaterally.
Technology innovation cuts the infrastructure Gordian knot, but that’s not enough – regulation must also innovate. We must evolve towards globally inclusive regulation that strikes the right balance between protection and inclusion. Crypto markets rapid growth reminds us of the demand for access to high return investments by the general public, who are likely to under-appreciate the protection from potential risks, but resent anyone who they think is responsible for cutting them off from wealth creation opportunities.
That’s not to say that crypto markets are far from perfect. Many of the hard learned lessons from capital markets have been ignored with predictable and disastrous outcomes. Simple things like credit risk are ignored by depositors, who lose their exchange held assets overnight. An easily avoidable loss if only exchange and custodian segregation was regulated, as it is in capital markets. What we should do is combine crypto markets innovations with capital markets lessons. By blending improved technology and regulation, we can achieve inclusive global markets. Being blockchain based, they are more transparent and more automated. Automation in turn can reduce governance costs, such as tax collection and regulatory reporting, to the benefit of both the state and business community.
I look forward to discussing these ideas with folks in Davos, and hope to find like minded partners to work with on creating a shared future.