Since the dawn of humanity, we have needed to transact information and value. In early civilizations, this was easy, since tribes and villages were small. A small number of products and/or services produced by a small number of people. For the most part, transactions were between people who know each other.
As populations grew, so did the complexities of the economy. The number of products and services grew, and people unknown to each other began transacting more often.
To address this, we needed to facilitate new types of exchange: currencies, loans, stocks, etc. These exchanges needed to occur between people, companies, and governments who did not necessarily know or trust each other.
The seeds were planted for the tree that would eventually become our current financial system.
Layers Upon Layers Upon Layers
The system we built is layered. The base layer is where the most fundamental problems need to be solved. How do we design a system which has few limits to exchange but also limits the possibility of fraud? This is the basic principle underpinning our entire financial system. The way this problem is solved influences every layer above it.
The one we have now was created decades ago and rarely ever changes.
Our solution was to create trusted 3rd parties. For example, Governments guarantee the value of our currencies, Banks custody our money, and facilitate exchange. We are trusting these 3rd parties to always act on behalf of us.
Trust.
Governments regulate the financial industry to ensure they can trust it. Customers need to trust that banks follow the law and keep their money safe, and banks need to trust each other to develop common protocols and relationships.
Trust creates restrictions. It introduces extra steps into simple transactions. Consider cross-border payments.
Sending money overseas takes a long time, as you may have experienced. But the reason is the inefficiencies that are introduced by needing trust. The banks need to use a trusted intermediary to get the job done.
So long as the system is built on trust, this is the way it has to be. And it means that the system is slow, lacking freedom and innovation.
The Innovation Problem
Possibly the most tragic consequence of this system is the fact that we can only innovate at the top layer.
For example, Monzo bank has won numerous awards since coming into existence because of its mobile-first approach. They’ve innovated on the top layer so that everything can be done from their mobile app, they don’t even have physical bank branches. Their user base has soared in recent years, but they haven’t innovated at a deep level, they’ve simply maximized the potential of the current system (I’m not bashing Monzo here, I’m a customer myself and find Monzo far easier to work with than traditional big hitters). They invested in technology at the top level before the traditional banks did. They hid the plumbing.
