What bankers need to know about Web 3.0

Enjoy complimentary access to top ideas and insights — selected by our editors.

Transcription:

Penny Crosman (00:03):

Welcome to the American Banker Podcast, I'm Penny Crosman. If Web 3.0 is real, where do banks fit in, if they do? We're here today with Alex Tapscott, managing director of the Digital Asset Group at Nine Point Partners and co-author of the book Blockchain Revolution. Welcome, Alex.

Alex Tapscott (00:22):

Happy to be here, Penny.

Penny Crosman (00:23):

Thank you for coming. I appreciate it. So I have seen and heard different definitions of Web 3.0. How do you define it?

Alex Tapscott (00:31):

Well, I think in order to understand web three, we need to first define what web one and web two are. I'm not sure that everybody really knows what those things are. Web 1.0 roughly speaking tracks to the period from around, call it 1992, to the early 2000s, basically the dawn of the web browser and the .com age, and it's typically referred to as the read web. The internet was primarily a medium for broadcasting information, and a lot of the early websites of Web 1.0 basically mimicked things that existed in the world before the internet. So we had things like classifieds and catalogs and magazines, even though the words themselves, things like webpage and email, really heartened back to sort of a text-based, paper-based world. And I think a lot of people assumed that the internet was going to evolve into something like radio or tv, a way to consume content or to consume information.

(01:36)

Web 2.0 was an evolution of the web that happened really in the early 2000s, and it's called the read-write web, where not only was the web a place where you went to consume information, but it was something that you could write to. And basically all that means is that you could program and manipulate web pages and use it as a way to communicate with other people. So some of the early examples of this were things like file sharing, for example, or blogging, where people could all of a sudden with no coding ability change the nature of a web page. That was something that wasn't possible in the nineties, the ability to go into a website and write something to it. So the internet went from being primarily a broadcast medium, a way to consume information, to a collaboration platform, a way for people to share information and content and to collaborate online.

(02:37)

And it at first was something that was filled with immense hope. And some of the big examples of Web 2.0 in action where things like Wikipedia. Wikipedia was this project that was imbued with kind of an open source ethos that said basically anybody can contribute to an encyclopedia. And what ended up happening is that Wikipedia became the most valuable or the most authoritative source for information, and certainly the biggest that had ever been assembled in human history. So proof that the read-write web could create things of value. But what ended up happening in Web 2.0 was that a lot of the values that got created ended up getting captured by large platforms because the web itself was in a state of anarchy and a lot of these platforms saw an opportunity to basically co-opt or control a lot of this collaboration and to move people onto these big platforms.

(03:35)

So the big winners of Web 2.0 were social media giants like Facebook, digital conglomerates like Apple and other big internet companies like Google who basically ended up controlling the big distribution pipes for the web and in the end became natural monopolies. In the broadcast world, we had ABC and NBC, CBS and Fox, and now we've got Google, Amazon, Apple, Facebook and Netflix. A handful of companies overnight basically took control of the big platforms for the web. Web 3.0 is the read, write, own web, referring to ownership. And basically it provides us with yet another set of tools. So if the first web brought us a way to consume information, democratized access to information and Web 2.0 democratized access to publishing, the ability for anyone to be a citizen journalist or scientist or amateur photographer, then Web 3.0 empowers us with the ability to own assets online and control our own identities, and as a result, potentially even have a say in how the services that we consume are run and how they're governed.

(04:54)

And that's a really big innovation. And at the core of this is blockchains, basically. So for people who are listening, blockchains are the thing that make digital assets like Bitcoin possible. And in essence, they are a ledger that is shared across the network that anyone can see, but no single person can alter. And as a result, they're a way to program scarcity into digital goods. So a way to create things of value that are scarce online and that's something that can be applied to basically anything of value in the economy. Most of the early Web 3.0 innovations so far are what's called geomorphic. They basically mimic some of the things that we saw in the pre-Web 3.0 world. So we see things like cryptocurrencies and crypto collectibles, NFTs, things that we're familiar with, these kinds of assets. But I think ultimately digital assets that Web 3.0 makes possible will come to represent things that we haven't even really thought of yet. In the same way that I think in the nineties we could not have really conceived of the way the internet was going to change things with innovations like mobile computing, cloud computing and so forth. So any technology that promises to change the nature of assets and ownership is going to have a really big impact on financial services and on banking specifically. And it's no surprise that it's in the world of finance where we're seeing a lot of the big innovation occurring right now.

Penny Crosman (06:27):

So thank you. That was very detailed history and account of these technologies. Now, so would you consider any sort of distributed ledger project would fit under the umbrella of Web 3.0?

Alex Tapscott (06:43):

I would consider any public blockchain project would be part of Web 3.0. And I make that distinction because in the early days of blockchain innovation, there was a lot of excitement inside of banks and other firms that they could take the best of this technology but then create their own version of it. So they loved the idea of, if everyone in a network or in a market has a shared ledger, then there's no reason for everyone to duplicate records and that might improve the speed or metabolism of commerce. And maybe that means we can all save money and cut costs. And that was a big pitch about what blockchains could do. But they looked at the world of things like Ethereum, which I'm sure most of your listeners have probably heard of by now, and thought, this is not ready for prime time.

(07:36)

This is early stage. They've got these things called crypto kitties that have crashed the network, so they're not gonna be able to support any of the real world banking applications that I need. We better build our own thing. And I think probably at the time they were justified in thinking that way because this is a technology that was in its infancy five or six years ago. But the problem was a lot of those projects that they built didn't scale because they weren't open and then because they weren't open, they weren't available to be iterated on or experimented on, and there weren't the same kind of open source innovations. And the other thing too is that blockchains are networks and networks become more valuable the more people that plug into them. So building a closed system is going to, by definition, just limit how useful it is. And so a lot of those enterprise blockchains just never took off.

(08:29)

And a good comparison for people who are old enough to remember is in the 1990s, a lot of big enterprises wanted some kind of networking capability. So they wanted a way to do shared workflow and calendars and other sort of enterprise software, but they didn't want to expose themselves to the worldwide web, the internet. And so intranets became very popular. I think of these enterprise blockchains as sort of the intranets of Web 3.0. They were necessary in the early days to help big companies understand the potential, but ultimately they became obsolete. And the reason they became obsolete is because the public blockchains, the thing that started as not ready for prime time and kind of a little out there scaled and matured and grew and became more useful. And so I think that things like Ethereum, for example, Solana, Avalanche, Cosmos, people may or may not know what these things are.

(09:27)

That's okay. They're sort of like the networks that make up the foundation of Web 3.0. And in the same way that the internet is really a network of networks that connect using a common communicating protocol called tcp/ip, I think of Web 3.0 is basically going to be a network of networks as well, where these different platforms kind of interconnect at the bottom. But for the average consumer user, company, banker or whatever, they're not going to be interacting as much or even really aware that there are all these different networks connecting with each other underneath. Because over time, that just gets disappeared away.

Penny Crosman (10:01):

Well, interesting. A lot of banks still do like that idea of a somewhat closed network, like a private permissioned distributed ledger. Recently, a number of banks worked with a company called Tassat to start moving large transactions amongst each other over what Tassat calls a blockchain. It's basically a layer that's built on a fork of Ethereum, and they kind of built their own thing on top of tech the banks are using. Would you call that a version of Web 3.0 or would you call that something else entirely?

Alex Tapscott (10:42):

Well, that's a really interesting question, Penny. I think that what you just described is probably where things are going with enterprises. Going back to my internet analogy there are lots of permissioned, closed environments online. There are plenty of things that are password gated and have super high levels of security. They just happen to also exist on this sort of shared infrastructure of the internet. So I think that there will obviously be, and there there's a need for lots of application-specific implementations that do those things, especially in financial services. For example, you may not want to rely on a shared ledger where everything is public. If you're trying to, say, accumulate a position in a company as an investor, you may want to make sure it's closed so that only counterparties that are KYC and are in good standing with the regulator are there to, that you can interact with that.

(11:49)

You can't interact with someone who's a criminal or something like that without knowing it. So there are lots of reasons to build those kinds of implementations. I do think, however, that they'll be built on top of those public platforms. And as you just described this project is a version or a fork of Ethereum, which I think is quite interesting. Is this Web 3.0? I think that more accurately, you could say that those firms are using Web 3.0 tools or the Web 3.0 toolkit. So what are the things that they're using for specifically? One would be the idea that you can have a shared ledger that everyone can in your closed network can sort of see and trust is accurate. And that reduces that duplication of everyone maintaining their own ledger. And that cost of trust is a major friction point in finance and in business.

(12:40)

And so removing that should improve the workflow of the system. Another thing too is the idea that you can make financial assets, digital assets. And again, I think that a lot of people jump to this conclusion that, okay, we've got this digital medium for value, but the first example was a thing called Bitcoin. It's a currency I guess, and works like money. Maybe it's digital gold. What other traditional assets that we can think of, can we put on the blockchain? And that's led to innovations like securities tokens. And I think that they're important, but I don't think that they're where most of the value creation is going to happen long term in this area. But still, I think you can apply Web 3.0 tools to traditional assets, just like you can read the New York Times online. The New York Times, it took them about 30 years to realize that they're not really a newspaper, they're a media company, and they're now in the content production business. And that content, things like their podcasts and other sort of ancillary businesses are now becoming increasingly valuable to them. Anyway, that's a digression. But my point is only that I think of these big firms as using Web 3.0 tools and that's okay. You don't have to go full Web 3.0, full decentralized finance in order to reap some of the benefits of an underlying technology.

Penny Crosman (13:58):

And going back to your description of use of open public blockchains in financial services, what do you think are the most immediate or most practical use cases for anybody in financial services, but also specifically for banks? What might they be able to do? What's the low hanging fruit?

Alex Tapscott (14:20):

Well, I think there are probably two different things right away. One would be payments, and the other one is accounting or at least data management. So on the payments side this is one of the big ironies of Web 3.0 because it began with Bitcoin and a lot of Bitcoin people thought that the Bitcoin was going to be a life raft if the US dollar tanks. And what ended up happening actually was, as we know, the dollar's stronger than ever, but crypto Web 3.0 technology may have actually helped that in a small part. And that's because one of the first killer apps of Web 3.0 has been digitizing the dollar. So there are these things called stablecoins, which basically are pegged to the U.S. dollar almost always. Sometimes they can be pegged as some other asset, but it's almost always the U.S. dollar. And they have become the dominant payment rail in Web 3.0, and they're becoming more and more commonplace in other parts of the economy.

(15:22)

And I think that's a process that I would expect to accelerate. The daily dollar volume of stablecoins far outpaces the most popular retail payment apps in the us. Venmo, I think did $12 billion a year in 2020. And the most popular stablecoins will do that kind of volume every single week. So this is an area that I think if you're in finance today and you're trying to understand how this impacts me in the short term, understanding stablecoins is a really good thing to do. I don't want to go down too far down the rabbit hole because people may have heard of the high profile failure of a certain digital asset called UST which was a kind of stablecoin that had never worked before and so far hasn't worked. But most of these things are backed at least one to one, if not more, with actual collateral.

(16:18)

And so have been really good at holding their peg. So they've been around for many years, they're sort of battle tested they're widely used, and that's an area where I would pay attention. The other thing to think about is how do we record workflows in financial services today? I mean, there's a lot of proprietary systems, but often it's email, it's Excel spreadsheets. And there's all this sort of duplicated workflow. And what's really interesting about transactions that happen on blockchains is that there is a record that is searchable, that is auditable and is immutable of all transactions. And so if you're part of a network that's using one of these systems, you can get access in real time to all the information you might need to do things like risk analysis or to do back office record keeping and so forth. And there's a lot of really interesting lenders, for example, in the defi space, in decentralized finance, things like Maple Finance, for example, which is worth checking out, that are basically kind of backing their clients into a form of on-chain accounting, where all of a sudden they don't need to keep records because all of this information exists in a way that they can trust is accurate.

(17:37)

And I think that's something that's really interesting. Again, not to go too far into history, but the invention of bookkeeping, specifically double entry bookkeeping, is considered one of the great innovations of modern history. And it was invented in mercantile Venice in the Middle Ages, and basically with double entry booking, for every transaction there's a debit and a credit, and in the end, they have to balance, which is why it's called a balance sheet. What blockchains enable is essentially single entry bookkeeping or triple entry, depending on your perspective, where there's a single source of truth that everyone can see and trust is accurate. So that's the single entry. Or alternatively, you know, can maintain your own books where you still have debits and credits and your own internal ledger, but you can always check it against the blockchain and trust that it's accurate.

Penny Crosman (18:28):

Sure, that makes sense. And we've seen a few smaller cases, again, like closed permissioned blockchain pilots that have done just that with things like private equity deals and with securitization of bank debt, very specific use cases like that. But Alex Tapscott, this has been great. Thank you so much for joining us today and for all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kevin Parise. Special thanks this week to Alex Tapscott at Nine Point Partners. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker I'm Penny Crosman, and thanks for listening.