Given that the world is full of problems and solutions are typically hard to come by, it’s reasonable for critics to gently (or not so gently) enquire what’s taking so long.
The Clean Slate Conundrum
It’s possible that things may have gotten off on the wrong foot.
Early crypto advocates tended towards a ‘clean slate’ or ‘maximalist’ approach to the field, insisting that the status quo was irretrievably corrupt.
This meant that the web3 revolution would involve not simply exploring the potential of blockchain technology as a value settlement layer for a new internet, but insisting that all of society and the economy be reimagined from first principles.
Doing this has some evolutionary precedent - the dinosaurs probably would not have made it to the moon or split the atom, so perhaps a clean slate worked out well in that case.
In general, though, evolution occurs by building on what came before it. To flip the famous quote by Edmund Burke: 'We must conserve in order to reform'.
The increasing importance of fiat-backed stablecoins (including in the case of decentralized tokens such as DAI, previously collateralized purely by crypto) is a testament to the current of change pulling crypto back to the harbor of tradition.
It seems increasingly likely that the future of web3 may be humbler than the grandiose expectations of its earlier proponents, if a lot grander than the less charitable predictions of its present-day detractors.
The report draws a distinction between the subset of web3-related companies they represent (including digital asset custodians, token issuance platforms, and other service providers) and the broader cryptocurrency world.
Progress in this ‘broader cryptocurrency world’ is gauged - as we know - by changes in the value of specific cryptocurrencies. With activity mainly if not entirely based on speculation, this domain is currently going through a ‘winter’ period, in large part due to rising interest rates and quantitative tightening.
‘Tokenizer’ firms, on the other hand, are concerned with using blockchain technology to create unique digital identifiers, which can be used to represent a wide range of both tangible and intangible assets on-chain. Examples include real estate, art, intellectual property, and of course good old-fashioned debt and equity.
Unlike mainstream crypto, these firms never had a bull market, so are not badly affected by the present-day crypto winter. On the contrary, they are just getting started, and have many reasons to be optimistic about the future.
As the Tokenizer report points out, a significant advantage of being grounded in the real world is that the thorny questions of regulation, viability, and demand that pure cryptocurrency firms must wrestle with are largely absent, leaving the path to growth and innovation clearer.
We could be at a fork in the road where the purists cling on to a potentially unachievable cryptopia, destined to play a perpetual game of catch-up with their more pragmatic counterparts.
This schism or ‘Great Divide’ in the web3 world could turn out to be a defining one, and it is important to pick the right side.
The 'WealthTech3' Hypothesis
While the concept of a Great Divide is a larger topic, in this article, I’d like to propose an example of how one divide can be bridged - a Burkean 'middle way' in which web3 can enrich a traditional industry by conserving rather than replacing its essence.
I’ve chosen Wealth Management as an example, firstly because it’s a field I know something about, and secondly, because I believe it serves a need that will always exist and is hence worth improving. Without a doubt, similar thinking could be applied to other fields (such as healthcare, banking, or even politics).
To make things even more interesting, I’m going to bring in FinTech as well, as it has the potential to form a natural bridge across the chasm between the new-age blockchain revolutionaries and the more classically-minded wealth management firms.
Let’s start by defining some fundamentals. What are these industries each trying to achieve?
Wealth Management: Help clients preserve and grow their wealth.
Fintech: Use technology to make financial services more efficient and user-friendly.
Web3: Create a world in which ordinary people have more control over their data, assets, and transactions.
The participants in these fields are starting from very different beginnings.
Fintech solutions are centralized, abundance-oriented, and thrive on scale. Wealth management is fragmented thanks to Dunbar’s number, and web3 is decentralized, scale-constrained by the blockchain trilemma, and ultimately focused on scarcity rather than abundance.
Wealth management is highly conservative and slow-moving (at least so far) whereas Fintech and Web3 are disruptive in nature and follow a ‘move fast and break stuff’ philosophy.
As already noted above, Web3 has traditionally styled itself as a standalone solution that wants to replace everything, and so there are cultural barriers standing in the way of a collaboration with other entities perceived to have links to the past and/or the present-day corrupt establishment.
While the starting points may be different, it’s not obvious that the end goals of the three fields are fundamentally opposed to one another.
Before examining how they could collaborate, let’s look at the challenges each one faces.
Wealth management as it stands today is an old-school industry in an accelerating world. It is focused on serving older clients with large piles of cash. Typically the wealth adviser is also approaching retirement. Its revenues owe more to a multi-decade bull market than to innovation.
When the stock market stops growing at its historic rate, Wealth Management firms are going to need to increase revenues organically (i.e. take on more clients) and reduce costs (i.e. increase efficiency). It’s not clear how they will do this yet.
Fintech is a success story by many metrics. The number of WealthTech firms (that is, fintech firms serving the wealth management niche) alone has proliferated to a dizzying degree in the past 5 years alone.
That said, very few standalone WealthTech solutions have emerged. For example, Robo-advisors have not replaced human advisers. The majority of successful WealthTechs have simply speeded up actions that advisers already perform such as billing, rebalancing, and note-taking.
Fintech needs something to 'fintech', and may be reaching its limits. Until its customers embrace fundamental innovation of some kind, it is stuck.
Unlike the other two fields, Web3 is neither old school nor constrained by the status quo. But it does have any number of other mountains to climb.
Chiefly, it lacks legitimacy in the eyes of institutions and consumers and has little in the way of regulatory acceptance. The lack of proven use cases is making it hard to solve either problem.
There is progress being made in this area, largely by use cases that tie into existing industries (e.g. such as ticketing, mobile internet infrastructure). In addition to use cases, adoption is the next great challenge.
What’s the solution?
So, to sum up: Wealth Management has an existential problem it can’t seem to solve, Fintech is confined to solving small problems instead of big ones, and Web3 - as we know - hasn’t found the right problem to solve yet.
Could they help each other out? I think the answer is yes.
Wealth management firms could embrace the power of Web3 to enrich their offering to clients and run their businesses more efficiently, thus creating a compelling basis for profitable growth. How exactly?
Well, the honest answer is no one knows exactly. The only way to an exact solution is through trial and error.
With that disclaimer, here are some examples of potential applications that could transform Wealth into Wealth3. The applications fall broadly into two camps - one to do with investments themselves and the other to do with how wealth management firms work.
Area 1: Helping Clients Navigate the DeFi Matrix
Let’s put the topic of trading cryptocurrencies to one side (or at least for the duration of the crypto winter, however long that lasts).
Going back to our Tokenizer friends, the potential of web3 to represent real-world assets on-chain creates a fundamentally new dimension for investors and their advisors to manage.
Suppose you could securitize your car, or do an IPO for your side hustle? It sounds crazy now, but so too would the idea of Mr. Beast, PewDiePie, or Justin Bieber pre-internet. Real-estate tokenization is the most popular example of how tokenization could be used by an everyday investor to raise or free up capital, but there is no technical limit to what can be tokenized.
Tokenizing personal property is an extreme example, but even before this becomes commonplace, many other firms are likely to take advantage of the idea of fractional ownership via the blockchain. Specifically in the area of investments, this will broaden access to previously restricted deals, while opening up the flow of capital in the other direction.
When assets are as liquid as capital (the ‘DeFi Matrix’ being the term coined to describe this phenomenon), the opportunities - and complexities - of wealth management will multiply, creating a stronger need for expert advice. Not only this but with wealth more liquid, more people will be de facto ‘wealthy’, meaning a larger market for advice overall.
The programmable scarcity of cryptographic tokens mirrors the constrained nature of a wealth advisor’s chief value-add: their time and expertise. While usability is scalable, personal advice does not scale and is, in other words, scarce.
Tokenized time - whereby each employee has a limited number of tokens to be sold or burned per year - could be one of many internal 'securities' that are used to streamline the workings of the future wealth advisory firm.
Drawing on the learnings of Decentralized Autonomous Organizations, who have used tokens as rewards and voting mechanisms for participants in organizations, could lead to the creation of other tokens.
Clients could earn Reward tokens for contributing to the community or by giving referrals, and redeem these for advice hours (which could be gifted to others), discounts, internal prestige, or voting rights. On this last point, the ability for clients to vote on at least some of the issues that affect them as clients could be a way of strengthening client relationships.
Moving operations on-chain unlocks all the other potential benefits of web3 for the advisory firm. The borderless nature of blockchain, for instance, means that becoming a client of a wealth manager could theoretically be even less constrained by geography in the future.
Advisors themselves could also receive non-monetary tokens by way of feedback, which if soul-bound could become part of a digital resume or on-chain reputation for future employment or entrepreneurial endeavors.
While Dunbar’s number and the number of hours in a working week may always constrain the extent of a given advisor’s reach, the transparency of an on-chain organization (e.g. via properly regulated smart contracts) may make its processes more replicable, hence scalable.
Needless to say, transparency would also make the on-chain firm more auditable (for regulators) and hence trustworthy (for consumers).
So what’s stopping them?
Web3 itself needs to completely transform itself before risk-averse firms and regulators will embrace it to the extent outlined above.
This is a very long way away from where things currently stand.
But Fintech firms can - I believe - provide the necessary bridge.
Specifically, they can help web3 firms by making them a) usable b) compliant and c) profitable (through effective monetization, not doolally yield-farming schemes).
Usability is probably the problem that Fintech providers should start with. Web3, it has been pointed out, is mainly a back-end revolution, and hence hard for non-engineers to intuitively grasp.
Clearing away the complexity and jargon is a momentous task that remains largely unsolved by, and unsolvable for, the engineers who are currently trying to build the blockchain-based future.
In addition, Fintechs will also be able to give realistic advice over what it is and is not advisable to attempt to automate or make immutable (i.e. where the human element is key, or the chaos element renders fixed approaches inadvisable), and on how to add back in customer care while handling privacy issues - both things that it was originally hoped would ‘solve themselves’.
Fintech can also help in the area of integrating web3 solutions with traditional finance. Many will have undergone the same psychological journey (from 'replace' to 'collaborate') that crypto natives will have to endure in the process.
Needless to say, Fintech will also bring the ability to add other forms of technology such as AI and machine learning for the centralized parts of the WealthTech3 ecosystem.
The WealthTech Web: A Coincidence of Needs
The end result of this process?
Web3 technology not only finds a use case, but also achieves broad adoption as its proven utility proliferates across the global wealth management industry, with all its millions of clients. Many of whom, it should be added, are currently unserved or underserved owing to inefficiencies in wealth management’s business model.
A trilateral alliance of the kind outlined above would do much to help solve the current regulatory logjam, due in large part to the fact that no one - including the regulator - really understands what the next phase looks like.
The role of Fintechs will likely become indistinguishable from that of the ‘Tokenizers’ referenced above. They will build out the elements of the WealthTech3 ecosystem that are human-facing, and benefit from centralization and scale (e.g. exchanges or token issuance platforms).
The web3 companies will be the true engineers working at the level of the blockchain and in the background - as web3 is fundamentally a back-end revolution, unlike web2 - keeping the nodes running and coding the smart contracts that make it all hum.
This may sound very vague - maybe even speculative - and at this point, it is.
But it is important to note that innovation in web3 is proceeding at breakneck speed owing to its decentralized nature: lots of small teams operating independently is the formula for radical innovation.
By definition, the firms that are focused on long-term utility as opposed to speculative gain are the survivors of the current blight and will persist irrespective of whether the bull or bear market reigns in the frenzied melee that is the crypto universe.
The future may not present a tabula rasa, but rather an intricate palimpsest, rich in both tradition and innovation, that requires deciphering over many years.
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