Institutions decay. They become corrupted, sclerotic, and detrimental to progress. This causes people to despair, lose trust and become pessimistic about the future.
Let’s, instead, choose optimism, and look for the disruptive model. Here’s one: No institutions at all.
Here’s our starting point:
Institutions are organizations, customs and norms of behavior that mediate between individuals and society. They are mechanisms of social order, asserting rules that are designed to govern how we act. Who designs them? Other humans, who have a vested interest in being the ones who govern. Institutions exist to limit what sociologists call “agency” – the principle that autonomous beings (that would be us) are capable of acting and making decisions by themselves. Once established, institutions tend to become frozen and locked, because their designers prefer to maintain the status quo of governing others, rather than keep up with the innovation and change that goes on beyond their boundaries.
The function of institutions is to “mediate”. A representative legislature is supposed to mediate between individuals and the leviathan of government (an impossible task). Financial services institutions like banks mediate between individuals who wish to use money in economic exchanges and the monopolistic issuer and regulator of that money, the government. Money itself is an institution, mediating between the individuals on two sides of an exchange and solving the problem of mutual coincidence of needs. Stock exchanges mediate between individual buyers and sellers of equities via a regulated platform. Common law is an institution to mediate between individual disputants on opposite sides of contracts. (Unlike legislation, which is a manufactured coercion favoring one special interest group over another.)
The central planners and establishmentarians tell us that our civilization can’t operate without institutions. Until now, we have been able to disagree in theory, but unable to point to any alternative practice.
However, the practice is now emerging in the concept of technological disintermediation. Here’s a way to think about it in the specific field of finance: what if financial services institutions were all replaced by software. In fact, financial services will become software. There will be no institutions needed, and none will survive.
We conducted a thought experiment to ideate what the consumer experience would be like, and distilled it into a FROM-TO table. In the FROM column, we included findings published by EY and Deloitte, and commentary from The Motely Fool, LLC. In the TO column, we reflected the predictions and expectations of financial services experts interviewed in The Interconnected Individual.
Our Feelings About Institutional Financial Services Today
How We’ll Feel About Financial Services As Software
|We have to deal with a bureaucratic institution with all its frustrations.||It’s an app on a mobile device, with the same digital experience as any other.|
|All our transactions are intermediated—a 3rd party decides what’s permitted and proper.||Peer-to-peer, self-initiated, self-controlled, every decision is our own.|
|We expect high cost fees and commissions, often set at deterrent levels.||We will experience low costs, limited to typical digital norms.|
|We expect slow speed (often days, sometimes weeks) with a lot of friction.||Transactions will feel instantaneous or close to it, smooth and frictionless.|
|We feel like the institutional intermediary is a weight to carry, a drag on commerce.||We experience a lightweight, burdenless enablement of our dealings.|
|We have to endure offline elements—like phone calls, branch visits.||100% online, on our device, at the place and time of our choosing.|
|We know there’s a high privacy risk in dealing with the 3rd party and their legacy systems.||We expect high privacy.|
|With low privacy comes low security—we live in fear of identity theft and account hacks.||We expect greater security—with control over our private keys.|
|The many barriers institutions raise—e.g., to “accredited investors”—result in a closed, noninclusive services ecosystem.||Software financial services on the blockchain do not discriminate.|
|In the end, we feel that dealing with institutional financial services is not cost effective—high costs with lots of inefficiencies.||We feel that dealing with software financial services is highly cost effective—lowest costs with lots of effectiveness benefits.|
Caitlin Long is one of the most advanced thinkers in the space of financial services as software. She sees decentralization and disintermediation as the central themes of blockchain revolution in financial services.
It’s all about bringing power back to the individual and giving them control, escaping from reliance on big institutions. The central theme of blockchain is decentralization, devolving power back to the individual and enabling individuals to interact with each other directly with total trust even though they don’t know each other in advance.
Decentralization is true to the ethos of disintermediating institutions. All nodes on the blockchain are equal, which means that no party has more control, or different rights, than any other party. The laws of math, not of man, govern the network.
Institutions: Who Needs Them?
We can anticipate that big banks will no longer run big, highly leveraged balance sheets that lay taxpayer-subsidized risk onto the financial system. Companies will make direct offerings of securities, without the need for a stock exchange and the broker-dealers who trade the stock for their own profits. Blockchain will automate regulatory compliance, and give small businesses direct access to credit by pledging collateral without the need for an intermediary bank to vouch for them. Crypto-currency on distributed ledgers will replace central banks and other centralized institutions that pervade the financial system today.
Regular folks will question what central banks really do. If distributed ledger technology creates trust with software, then why do we need central banks? Why do we need the DTC, CLS Bank, the Clearing House and other powerful centralized institutions at the heart of capital markets if they don’t add value and instead create cost, delays, and counterparty risk where these would not otherwise exist?
These institutions did not exist at one point in the past, and we won’t need them in the future.
And then, having done away with financial institutions, we’ll start to question the need for the institution of government.