The Original Premiere – The Dot.com Boom

Remember the dot.com boom?

You need to be over 40 to have direct experience of it from the start, so here’s a recap.

It began in the mid-90s with the realisation that the internet was here to stay and a game changer in the way we live and work; leading to a frenzy of start-up companies with new business models to commercialise this opportunity, but which in many cases ignored economic necessities such as revenue and profit; culminating in a bursting bubble in 2001 with mass layoffs in the tech world, bankruptcies and wiped-out investors.

It was a wild time. The memories that endure for me were movements of senior execs in established businesses jumping ship to dot.coms; almost indiscriminate investment in any internet idea; and a race to flip companies in an IPO before their burn rate exhausted their capital.

In one example, in 1999 the global managing partner of Andersen Consulting, now Accenture, who had grown its business 8-fold during his decade-long tenure, suddenly, and unexpectedly left to be the CEO of Webvan, an internet grocery business with an unproven business model, no significant revenue or customer numbers and a $1bn bill to build distribution centres in the USA. Whereas Accenture has grown since into a world-leading consulting, technology, digital and outsourcing service provider, with revenue up a further 5x and a market cap today of ~$137bn, Webvan went bankrupt in 2001 after an IPO in 1999 (peak value $8.5bn, popping “only” 65% on its debut)  – its unfortunate CEO went from an Oscar-winning performance in one genre to a Darwin award in another, in just two, short years.

There are plenty of other similar examples of dot.coms which failed in a dramatic way.

The Banking Actors in the Dot.com Boom

While the main dot.com actors were companies such as Webvan, the boom was about more than just start-ups. Many corporates were swept up with dot.com euphoria as well, in particular telcos who overpaid for 3G licences and over-invested in communications infrastructure, and also banks and financial institutions.

Investment banks were in the thick of it, with key roles promoting dot.com IPOs, and some set up venture units to invest in dot.coms. I remember once watching in awe at the chutzpah of one called Ant Factory, an ambitious, confident and well-funded venture unit, when they presented a co-investment proposal to a board. Needless to say, Ant Factory was wound up shortly after the dot.com bubble burst along with many others.

Retail and corporate banks were late to the game but played their part. I was a management consultant at the time, and witnessed a frenzy of activity as banks played catch-up in 1999 and 2000. It seemed that every bank had to have an ecommerce or web strategy and a 100-day plan to kick start it, and had to rush out press releases to tell the world.

I worked with a couple of banks setting up separate ecommerce units - the mantra of the day was “think big, start small, scale fast”. Much of the thinking behind them was sound, and many of the capabilities we planned have been made to work successfully by other companies such as Worldpay, eBay and others; but after the bubble burst, FOMO in the banking world gave way to caution, and most initiatives, including those I worked on were quietly shelved. There were some exceptions, such as Orbian set up by Citi and SAP which is still around today as a supply chain finance provider (it was also a pioneer of digital currencies with Orbian Credits, together with others such Beenz and Digicash, long since disappeared).

Overall, banking participation in the dot.com boom was short lived, but fun while it lasted, and demonstrated that even traditional banks have reserves of entrepreneurial spirit.

The Sequel – The Digital Asset Boom?

However, I wonder if we may see a repeat frenzy with digital assets in the banking sector, this time with the banks centre stage, with more sustained and fruitful outcomes, grounded in stronger foundations?

There are some interesting parallels with the crypto-world today and the dot.com world twenty years ago that suggest such a sequel may be in the making.

The dot.com boom was catalysed by the arrival of the Mosaic and Netscape browsers making the internet accessible to all. Adoption of email and PCs grew at a rapid pace in the 90s creating conditions ripe for commercialising the internet, even if broadband access was still several years away, and mobile access that worked (remember WAP?) even further down the line.

Similarly, today, digital asset wallets such as Blockchain, Coinbase, Trezor, Mycelium, Toast to name a few, are proliferating and adopted widely especially by the youth segment, giving access and exposure to a range of popular digital assets such as Bitcoin, XRP, Ether, EOS, Tron, Litecoin and many more.

Stablecoins such as Tether are becoming widely used for trading in and out of digital assets and for holding client funds on digital asset exchanges without using bank accounts.  Solutions to digital asset custody are now available, such as from Fidelity, reducing the risk of losing digital assets through fraud or by simply forgetting passwords, making digital asset handling safer and viable for mass use.

Demand for digital assets is strong and the conditions are there for it to accelerate - the capabilities needed to meet demand at scale are maturing, similar motifs to those which sparked the dot.com boom.

The Emerging Script - CBDCs

Consequently, bank interest in digital assets is growing, and you sense many may be searching for the right script to commercialise them; and that they are itching to do so.

The key element that has held them back in the past is regulatory clarity, but that is changing. In the dot.com boom I recall regulation had little part to play (it took the Global Financial Crisis before regulators became a factor in technology innovation), and this is one big difference to today that is preventing banks from acting.

However, the script banks are looking for may come from Central Bank Digital Currencies (CBDCs). China looks set to launch a CBDC on a blockchain shortly, Sweden is actively doing the same, while the ECB is openly considering one, with separate interest in a digital Euro from authorities in both France and Germany.

It is probably fair to assume most central banks are actively, if discreetly assessing their CBDC options.

CBDCs will be a game changer for three reasons. Firstly, since they are issued by central banks, they will boost regulatory clarity on digital assets and give commercial banks the encouragement they need to proceed. Secondly, a very likely model for CBDCs is for central banks to issue and for commercial banks to distribute CBDC through their own digital wallets - analogous to the distribution of physical bank notes (a more traditional form of central bank money), in which case commercial banks will have to participate (see my blog “Powering Up a Crypto-Cash Society with Central Bank Money” 12 Mar 2018). Lastly, central banks are unlikely to risk accusation of restricting innovation, so once one or two central banks move, the rest could follow quickly.

It may be only a matter of time before banks feel they have a green light to build digital asset products, services and businesses.

Guessing The Plot

When that happens, we could see a frenzy of activity among banks that could match and possibly exceed their activity in the dot.com boom - digital assets are about moving value and about liquidity, both sweet spots of the banking sector. The more digital assets are used for storing and moving value, the greater the value of digital asset networks, with network effects in turn driving up usage and new business models. Banks have a clear, commercial incentive to play in these networks.

How this plays out is anyone’s guess – mine is that banks will build trading desks in digital assets that are huge compared to the digital asset exchanges we see today, supporting CBDCs, stablecoins and permissionless digital assets such as XRP and Ether. Initially, they will build products and services for their customers that look similar to other banking products and services such as digital wallets to distribute and manage CBDCs, derivatives, company share and bonds issuance on blockchains, digital asset loans and so on. Later will come more innovative products and services (particularly with permissionless digital assets which are open and flexible) such as micropayments, machine payments, P2P share trading, P2P FX and P2P digital asset lending, exploiting the programmable features of digital assets. This will lead to a world of democratised, decentralised finance (“DeFi”), one that is already at an early stage of development by some start-ups today (see my blog on 4 Nov 2019 about programmable value).

The Scene is Set

So, the scene looks it may be set for a digital asset boom for the banking sector. The difference this time compared to the dot.com boom is that it plays to the strengths of the banking sector and it is on their own turf – banks specialise in different classes of financial assets, digital assets are simply a new asset class for them to commercialise. Regulators also have a strong focus on the sector, and in many instances appear intent on enablement and supervision rather than on prevention, which helps.

Whereas the dot.com boom was a short-lived affair for banks, the digital asset boom will be more sustained and commercially viable. The sector is also much wiser and seasoned in innovation than it was during the dot.com era and will embrace it with confidence.

The digital-first Fintech banks, so-called challengers or neo-banks could lead the way, as could the many blockchain start-ups building capabilities on public permissionless blockchains (although these had a mini-boom several years ago and have endured a blockchain winter since, dwindling their number); however, balance sheet size and liquidity in assets and liabilities will be essential ingredients to any boom, so the larger, established banks will need to step up for it to happen.

It will be fun if they do – watch out for the digital asset bank strategies, 100-day plans and floods of press-releases as evidence. In which case, 2020 or 2021 could be blockbuster years for adoption of digital assets of all types.

The reality could of course be very different, there are many other possibilities. While CBDCs look certain to appear in the next two years, banks’ reaction could be slow and the industry appetite for digital assets could remain muted.

However, the picture I have painted here will be the more interesting and impactful outcome, a “movie” to be in, and one to watch:

lights, camera, action!