Why the future of money is hybrid

I’ve lost count of the times I’ve read breathless blogs about the imminent collapse of fiat currencies and the mass adoption of all things to do with Web3 and cryptocurrencies. I can only assume that there is a large group of people who believe - or want you to believe - that a lever is about to be pulled, ejecting the whole world of traditional finance (TradFi) out of some kind of cosmic trapdoor.

That’s not how it works, of course, and it's a mistake to imagine there is a binary choice between fiat and crypto. The two are going to coexist in a hybrid environment for many decades to come. 

The user base for digital assets is expanding, without any doubt. The European Central Bank (ECB) believes up to 10% of households in six large EU countries own digital assets. In emerging markets, the proportion of users is said to be still higher. A 2022 Accenture report (“Unclaimed Territory”) concluded that digital assets are a top-five holding for affluent investors in Asia, behind only equities, fixed income, cash, and real estate. 

But turn the lens around and that leaves 90% of European users without any digital assets at all and most Asian people - the Accenture finding focuses on the wealthy - are unlikely to be losing sleep over the allocation of digital assets in their portfolios. 

Web 3 and crypto are clearly still in their infancy. TradFi users, by contrast, are numbered in billions and, generally, they are reasonably content with what they have.

TradFi’s difficult beginnings 

As an infant, crypto is experiencing the sort of teething pains you might expect - FTX being a highly visible example right now. 

And why would anyone predict otherwise? It’s not as if conventional banking emerged fully formed, ready-regulated, and set to take its place in global finance. There were plenty of hiccups and embarrassments along the way. The 2008 banking collapse, which was just the latest in a centuries-long line of banking crises, also revealed the infamous Madoff Ponzi scheme that prosecutors estimated to have fleeced investors for $64 billion - despite all the rules and regulations in place. And going further back, the Medici bank, founded in Florence and often held up as the world’s first international bank, failed successively across the 15th century in Lyon, London, and Bruges, for example. These were the FTX moments of their day. 

An opportunity for market differentiation 

Given that neither of the two binary poles of the 21st-century financial system - TradFi and crypto - is about to disappear and leave the other wholly in charge, how can business users plan to take advantage in a hybrid future?  

There are just over 15,000 businesses accepting bitcoin or offering bitcoin ATMs worldwide right now, according to Zippa. That’s not many, but at the same time, Deloitte claims that 75% of retailers are planning to accept cryptocurrency payments within the next two years. So we’ve got this massive opportunity between where we are right now and where businesses say they want to be in the near future.

The hybrid world that this creates is an opportunity for market differentiation. The hybrid winners - those that will scale to become global mainstream businesses - will be those that build business models and platforms that enable users to switch between the two systems without even noticing a gap. In the short term, I’m thinking about digital assets businesses, crypto exchanges, payments providers, law offices, and forex brokers. But that list is going to expand and expand as the hybrid world matures. 

Right now, it’s pretty much the opposite experience. For most people, using money across things like cryptocurrencies, fiat cards, IBAN accounts and cash is still ridiculously difficult. It can often require visits to multiple platforms, each of them asking the same onboarding and compliance questions. It’s slow, complicated, and frustrating. 

Creating integrated platforms for a hybrid world

There’s no particular reason - other than inertia - why this should still be true. Using APIs available from digital banking providers, it’s possible to create integrated platforms that can seamlessly transition between fiat and digital currencies, as well as offer a number of payment and account products. New platforms are starting to emerge that deliver this vision, but they are still few and relatively small in scale. 

Why? Because crypto has distinct advantages for business. Crypto is instantaneous and, where payment is taken in crypto, can significantly lower or potentially eliminate conversion fees, even if customers are on the other side of the world. In many ways, crypto is the fastest and cheapest way to transfer funds anywhere in the world. This is big news for a business environment that is increasingly global, with staff, customers, and suppliers spread around the map. 

But there’s no point in saving on currency exchange fees if you give up any saving in an adverse movement in the value of the cryptocurrency you are using. To guard against this sort of volatility, some users are turning to stablecoins. These are linked to the value of a fiat currency, such as the US dollar, and provide a known basis for trading. There has been some bad publicity here in recent months too, but that was restricted to “algorithmic” coins not backed by any of the underlying fiat currency. Big, asset-backed stablecoins are therefore better  - although still not risk-free - for businesses seeking known fiat conversion values. 

One other point to consider: Some jurisdictions prohibit enterprises from holding crypto on their balance sheet. So they need to either exchange it straight away or use a third-party service that collects crypto and sends the equivalent in fiat. Another approach we are seeing from our clients is that digital businesses across a range of industries pool customers' funds and, once they reach a more significant sum, convert them to fiat via an OTC desk service. It means you get a better rate and save transaction costs compared with converting each trade individually.

And, at some point, someone will bring all this together in a seamless business platform with a painless customer experience.

No place for purists

The future is neither pure TradFi nor unadulterated crypto. As is the usual way of things, when two pathways are available the future is hybrid. While that is always more complex, it creates opportunities for businesses that focus on smoothing the customer experience to build the mega-businesses of the future.