What role will institutional investors play in supporting future financial innovation?
Often overlooked, government agencies and institutional investors have played a key role ensuring successful companies and new technologies receive the long-term financing that enabled their development Since the near economic meltdown of 2008, financial innovation as a term has for understandable reasons taken its…
Often overlooked, government agencies and institutional investors have played a key role ensuring successful companies and new technologies receive the long-term financing that enabled their development
Since the near economic meltdown of 2008, financial innovation as a term has for understandable reasons taken its fair share of criticism. When asked what the most important piece of financial innovation he had seen in the past few decades, former US Federal Reserve Chairman, Paul Volcker once famously quipped the automatic teller machine. It’s not hard to see why people have their reservations about over-financialization of the economy and overcomplicating an industry that should essentially act as a utility allocating capital where it’s needed. That said it would be wrong for the Financial Services industry to rest on its laurels and carry on as it is. 2.5 billion people are unbanked around the world while current levels of service and clearing times are far from perfect for people who are lucky enough to have access to Financial Services in the Developed World.
Future of Finance
Since the Ethereum blockchain successfully completed the Shanghai upgrade in April this year, it’s important to ask what is the point of Financial Services and what role does innovation play? As a team we see Ethereum as the future of decentralized finance, and for it to succeed as a serious competitor to fiat-based economies it will need secure and reliable partners that provide a range of services to support the ecosystem. Smart contracts based on Ethereum’s code have the potential to bank the unbanked and remove friction within the current financial plumbing that could save time and money. Areas such as: remittances, intellectual property for artists, logistics and trading could all be transformed through decentralized applications (DApps), however this industry is still in its infancy and platforms are still relatively small in scale with few real world use cases. Traditionally governments have led the way in helping to create and shape markets/systems for new technologies that have their origins in defense spending or corporate research laboratories. Due to the dispersed nature of blockchain technology platforms used by hundreds of millions of people around the world, it’s very hard for governments to shape and direct how it’s deployed in the way it has done with previous technological leaps such as Information Technology and Internet use.
Fostering future technological innovation
Instead of governments, institutional investors have a role to play in creating an environment that enables the circulation of knowledge about the blockchain and its application to the future global economy. Since the Merge last year, staking Ether has enabled the Ethereum network to function so that entrepreneurs and programmers can successfully build new systems using smart contract technology without the fear of excessive energy use.
Ethereum-based platforms are part of a broader network of actors with whom they cooperate and compete, collectively they can support the adoption and understanding of smart contracts that use the Ethereum blockchain. Introducing institutional investors to Ethereum is not purely an investment proposal, when these investors stake their Ether they are providing the foundation for future innovation and development of services and products using Ethereum infrastructure.
Institutional participation in Ethereum through staking Ether is pivotal in both supporting and the creation of blockchain startups that require not just seed investment for developing new platforms. Institutional investors also provide ongoing support for the market within which these platforms will compete inside the Ethereum blockchain with aims to achieve returns that aren’t illiquid or volatile (characteristics of many alternative cryptocurrencies).
When pitching the benefits of staking Ethereum, most people focus on greater diversification and improved returns, important though those points are, institutional investors should take into account the power of innovation and long-term vision for the Financial Services industry. By virtue of being a participant of the Ethereum ecosystem they are supporting future innovation by providing the finance to underpin a highly networked new economy. An economically stable Ethereum ecosystem provides continuous feedback loops established between individuals and platforms that enables the sharing of knowledge and traditional frontiers to be broken down. Individual investors and entrepreneurs have a role to play, however without a stable and economically diverse ecosystem their efforts will fall flat. Institutional investors in Ethereum provide countercyclical lending, funding of long-term capital development projects, finance for technology development of start-ups and finance for projects that help drive societal changes (such as greater financial inclusion) and can take a longer-term view in a way that individual investors are less likely to do. These are noble goals and aren’t celebrated or promoted by the industry that is all too often misunderstood as focusing on short-term profits and fads.
About the Author: Dr. Sreejith Das, is a financial specialist with decades of experience in the wholesale capital markets. Part of a small team that successfully obtained a new UK banking license, one of the first to be granted in over a hundred years, he is skilled at building and developing multi-billion dollar investment corporations. He holds a Ph.D in applied mathematics, and has a keen interest in technology and the changes it can bring to society.
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