The Future of Financial Technology

Itay Goldstein: This is the Future of Finance podcast, Future of Finance mini series here at Wharton Sirius XM. I am Itay Goldstein. I am a professor at the Finance Department and the Chair of the Finance Department at Wharton. Today, we will talk about the Future of Fintech.

Throughout the history of finance, technology has always played a central role. We saw many technological advancements, starting from ATMs and going to credit cards, and usually we had the incumbents in the finance industry adopting all these technological revolutions. But in the last 10 years or so, the pace of technological advancements has been much faster than before. But maybe even more peculiar and more exciting is the fact that a lot of the technologies are being introduced from the outside, trying to change the structure of the industry and challenge the incumbents. This is why this fintech wave has been so exciting and has generated so much attention.

Today, we have two excellent guests to talk about these changes and what is on the horizon for fintech. We have Alesia Haas, who is the CFO of Coinbase. And we have Michelle Lai, who is a Wharton alum and key player in many of the crypto startups and innovations. Among other roles, she is a board member of the Electric Coin Company.

Goldstein: It’s great to have you, Alesia and Michelle. We are all thinking about cryptocurrencies. Starting from Bitcoin, we had many other cryptocurrencies, and still have them, and they go up and down. If you’re an outsider who is seeing some of the developments, but not fully understanding what’s going on, what can you say about crypto? Has crypto now become mainstream? Is it about to become mainstream? Is it meeting the expectations given what we had in mind when it started? Alesia, let’s start with you.

Alesia Haas: Thank you for having me. It is no longer debated whether crypto is here to stay. That was a conversation we had 10 years ago. Today, it is solidified. It is a mainstream asset class. You can look to examples of this. The ETF (exchange-traded fund) approvals that we had starting in January of this year with the Bitcoin ETF, and then just this summer, with the Ethereum ETF, have now given crypto the official stamp of approval from both regulators and major institutional partners.

And we’ve seen incredible engagement there. Spot Bitcoin ETFs have become the fastest growing ETFs of all time. There were over $17 billion in net inflows, and we are seeing broad adoption. We’re seeing new capital flow into these ETFs. We can also point to the number of people that own crypto, both in the U.S. and globally. Over 52 million Americans have transactions in crypto, and 400 million people around the globe. When you look at the G20 countries, you can see that they are driving regulation in their markets. You can see this with MiCA in the EU (Markets in Crypto-Assets Regulation). In the U.S., we have bipartisan support for crypto regulation, even though we have not seen the approvals that we need here to have comprehensive regulation.

Then we get into new products, like stablecoins. Layer 2 is like Base, which is a protocol that we’ve built on top of Ethereum, which enables fast, cheap transactions. We are seeing huge developer activity now, building new apps on these protocols that enable fast, cheap, easy-to-use fintech products.

[They will] then become daily conversations, daily use cases. How do we use payments that are fast, cheap, global? We’ve seen developer activity. We saw eight times sequential developer activity in Base in the middle of the year. We saw growth in Q3. And so, this is where we really think that the future is going – to build these ubiquitous, fast, cheap, global payment infrastructures.

Goldstein: Great. Michelle, what do you think about it from where you sit in the industry?

Michelle Lai: I don’t blame some people for having doubt. We’ve gone through a lot of market cycles. Many existential crises, the most recent one being, I think in 2022, when a lot of the centralized crypto players went down.

Growing out of that, we have persisted. To Alesia’s data points, we have regulators coming in. We have governments wanting to implement CBDCs (central bank digital currencies), and a lot of other initiatives that I see as indicators that the world now has moved on from asking “Will it stick around?” You have all your large financial players, like PayPal, BlackRock, and Franklin Templeton – even UBS, a couple of days ago – making their mark in the industry. These are organizations that don’t change their minds very often on the big things.

Goldstein: You both mentioned that this is here to stay. It’s now effect on the ground, it’s big. There are a lot of people paying attention to it, trading it, investing in it. But the main question that comes to mind is, how exactly is it going to change the financial system? Is this going to make consumers’ lives easier in any way? Is this going to reform the way that we are doing payments, the way that we are consuming and paying for things? What should we expect going forward from fintech, and from cryptocurrency more specifically?

How Crypto Could Transform How We Transact

Haas: This is the first time that we’ve seen a new payment rail. So much of the innovation over the last couple of decades has been in better user experiences – front-end technology – but they’ve been going through similar back-end rails. Now we’re innovating from the rails up. That is what I think is going to transform the next generation.

We’ve moved from the internet standpoint; we were online, and now we’re moving on chain. This is really the next generation of the internet. We’re going to be rebuilding transactions, as well as a lot of just social applications, on these new rails.

I do think that we are going to see crypto blockchains transform the way we transact. It’s going to bring value and data closer together into transactions, and that will then underpin all of the financial transactions. My belief is that we are going to see this happen behind the scenes in many ways, and so I think we’ll get to a place where everyone is transacting on crypto rails, and they don’t even know that they’re doing it.

One of the things that is different about crypto today is, we talked about, “I bridged my asset, and I’m sending it on chain, and it’s alphanumeric characters.” That is for the early crypto adopters. This (new phase) is for advanced users. This is too complex for mass market adoption. But we’re seeing a lot of progress now with it. For example, Coinbase released Basenames. Now I can send you crypto on chain just with a simple name, like an email address. This is where we need to go with crypto to make it ubiquitous and easy-to-use for everybody.

But yes, I think payments will happen on chain. When you think about this rail, you think about credit cards. They’re expensive for the merchant – not for the individual consumer. You think about ACH. It is slow. Cheaper, but slower. It takes two to three days. Then you think about [systems] like Alipay, which are fast and cheap, but they’re not global. They’re very much a closed loop system. Crypto is fast, cheap, global. That is what is unique about crypto, which is what’s going to drive a lot of adoption.

Goldstein: Michelle, where do you see the main uses?

Lai: One thing I love about Coinbase is how it’s been such a proponent for consumers – how to use crypto in their everyday lives, how to make their lives a lot easier and faster. Just one point to add to the consumer side is, recently, Stripe acquired a stablecoin company for more than $1 billion. This is a reverse acquisition, because this company was trying to be the Stripe of crypto. From within these companies, we’re trying to rebuild rails that have existed pretty well, but now [it is] time for a revamp.

Coinbase has been supporting many of these large issuers on the Bitcoin, Ethereum, ETF side. The part that I really like that Coinbase is helping is with what you call real world assets. These are where you can invest your tokens such that the underlying issuer invests in money market funds. It’s a reverse crossover, which I like.

The banking and mergers and acquisitions industry could also apply crypto and crypto-adjacent technologies to improve the deal-making process. For example, in an M&A deal, there are a lot of trust assumptions between each party. So far, we’ve intermediated that by paying escrow agents or assuming that the repeat game set-up ensures that people will act fairly. But there are very cutting-edge, frontier math-based technologies that can obviate some of those trust assumptions. I’m super excited about that.

Also, Singapore just announced a framework for commercializing tokenization for funds and fixed income. They’ve involved 40 organizations and seven countries in some of these experiments since, I think, a couple years ago, or even more than that. So, I’m super excited for how the industry that most Wharton people graduate into will be influenced and upgraded through crypto and crypto-related technologies.

Could Stablecoins Tame Crypto Volatility?

Goldstein: You both mentioned stablecoins, and from what I hear around, this is indeed an area where people have a lot of hope for. The reason that some people are skeptical about cryptocurrencies is just the huge volatility. You look at the prices – it’s like a roller coaster. This is exactly what stablecoins are trying to fix – to make it stable. But the question, of course, is how credible it is. We saw episodes of runs on stablecoins. We all understand it really depends on the model that you’re using. So, Alesia, what do you think about stablecoins? Is this credible going forward? Are the benefits really that big, to justify the attention it’s getting?

Haas: I think they are [credible]. And people are definitely using stablecoins. It’s important to look at stablecoin transaction volume. It’s probably the most telling trend happening in crypto right now. In 2023, stablecoin transaction volume was about $10 trillion; 2024 is on pace to double that. Year-to-date, we’re at near $20 trillion.

To your second question on are they stable, the answer is, yes, when the reserves are backed one for one. For example, we think USDC, which is a stablecoin that we offer in partnership with Circle, is preferred for payments because it’s regulated. It’s transparent. It’s up more than 300% year-to-date in its total market cap. And we’re seeing adoption in a variety of use cases – for payments, as a stable payer for trading crypto. [It is also used] as savings assets in many countries where consumers don’t have access to U.S. dollar bank accounts, but they want to hold a U.S. dollar asset. This is providing them a unique way to get that exposure, to hedge their risk from other currency inflation in their own country.

When the reserves are transparent and held dollar for dollar, we do believe they are stable. And we’ve seen evidence of that. They provide a reliable store of value, and we are seeing them being adopted because of what I mentioned earlier – they’re faster, cheaper and more effective, 24/7. There are very few things that you can access 24/7, and instantly self-custody on your own. They’re very unique in that way.

Goldstein: Michelle, do you share the same opinion about stablecoins? Taking it a step further, how do you think stablecoins are going to interact, potentially, with CBDCs? Do you think that CBDCs could potentially replace them?

Lai: Wow. Spicy second question. But on the first part, I largely agree with Alesia’s take. However, most stablecoins are USD-based. So to the extent you believe the USD is stable, then stablecoins are largely stable. But I know a lot of people who believe that longer term, they are not. And a lot of people believe that to the extent the issuers are centralized, you don’t really have something that is true to the ethos of crypto when it was first founded.

There are continuing efforts to create a different kind of stablecoin. [Ethereum founder] Vitalik Buterin’s favorite one is RAI (Rai Reflex Index is a stablecoin that is not pegged to any traditional fiat currency). It’s been around since, I think, 2021. It’s ETH-only collateral. There’s no peg. They use interest rates to manage demand, and therefore price. it has so far been relatively stable. It’s been roughly around $2.8 to $3 in the last few years, which is pretty remarkable, because it’s been a volatile last few years.

In terms of CBDCs, it’s unclear right now what the prevailing CBDC take will be. In general, the countries that I’m aware of that are making serious efforts to do these projects are focused on quick settlement. I do think that that use case is highly valuable. For example, BRICS Pay was announced recently, where to avoid long settlement times between certain currencies that are not your mainstream currencies, they’ve had to create an alternative path. I think CBDCs is an effort to do a similar kind of thing.

There are concerns that I and many players in crypto worry about, such as surveillance, and whether that leads us a step closer to outcomes that we may not want – 1984–type scenarios [which George Orwell visualized]. But if we have sensible players in governments around the world, we will be able to avoid such a scenario, because there have already been parties that have expressed concerns.

Haas: I’d like to add to Michelle’s comments, because I agree with much of what she said. On the first, we should also say that the goal of stablecoins is to have the coin represent the underlying asset. [With] a U.S. dollar-backed stablecoin, the goal is the stablecoin represents the U.S. dollar, and a euro coin represents the underlying Euro.

I agree with Michelle that many in crypto believe that the reason Bitcoin came was it’s supposed to be the decentralized currency where you can then own an asset that isn’t controlled by a centralized government. That is up to the user to decide what their allocation of their investment portfolio or their day-to-day use case should be. But the stablecoin’s goal is to just represent the underlying asset, which could be a basket of goods, an individual currency, Ethereum, or other things.

Stablecoins, to me, is like a new technology – much like a credit card, much like an ATM. It’s a new way to hold and access a dollar. That was left to fintechs, as you opened up this conversation, Itay, to really drive innovation. And so, how we distribute dollars, how we can transact with dollars, how we use assets, has really been left to private industry. I think that that will continue in the U.S., because ultimately, when you think about at least a U.S. dollar-backed stablecoin, there’s no change to monetary authority. It’s still representing a dollar. Those dollars are still held in traditional financial institutions. The mechanism of transacting on a blockchain is just a technology innovation, much like we’ve seen in generations before.

Testing Time for U.S. Leadership in Fintech

Goldstein: Yes. Touching on that, the government obviously plays an important role in CBDC. But it also plays an important role if you think about the regulation of fintech and the crypto markets and so on. Alesia, you mentioned MiCA as one piece of legislation and regulation. We all know that in the U.S., things are a little slower than that. Do you have any concerns about that going forward? Do you think that there needs to be a change?

Haas: I do. I think the U.S. is at risk of losing its leadership position in technology, in finance, if it doesn’t establish clear crypto regulation soon. As you noted, we have seen the EU with MiCA, and others in Asia, setting the standard. They’re creating environments that are fostering innovation. They’re driving investments.

I do believe it’s a matter of our national security to defend the dollar as the world’s reserve on-chain currency, just like it has been for the past decades. Clear regulations attract entrepreneurs. They encourage developers to innovate. They build businesses. We’re ceding that pole position to other regions to build the next wave of financial innovation.

But there is hope. There is a lot of hope, because what we’ve now seen over the past year has been a recognition of this by many policymakers and regulators. And there’s clear bipartisan support in Congress that’s building momentum. We have optimistic hope that going into 2025, we’re going into the most pro-crypto Congress that we have seen. There’s real hope that we can get legislative clarity here in the U.S. to really keep driving this technology.

Lai: Just to add a data point, I was looking at a report on global crypto developers. North America and Europe were obviously leading for all of the history of crypto. But Asia has overtaken [them]. Asia now has the highest number of crypto developers, according to an Electric Capital report, which is really shocking. I don’t think it’s that we suddenly birthed a bunch of crypto developers. It’s the outward migration that I think happened.

Global Cooperation in Crypto Regulation

Goldstein: Right. But one thing, Michelle, that you mentioned before, is the coordination in regulation across different countries. Do you think that continues to be a concern?

Lai: Right now, a lot of countries are converging. They’re converging on their attitude towards compliance. It might take more time to shake out. But a couple years ago, it was really unclear who would go which way. Where things are a little bit clearer is where most governments agree on the underlying technology; for example, CBDCs as a technology, or the rails by which transactions can be settled. But in terms of tokens, stablecoins still has some gray area.

Goldstein: Yes. Alesia, how do you see the international arena? Do you think it’s getting better in terms of just communication, collaboration and coordination across different regions?

Haas: Many people have agreed on standards around know-your-customer, money laundering expectations, and sanctions. That is very consistent on a global basis, at least in countries where there are strong financial services and heavy investment levels. So, that feels very consistent.

What feels inconsistent right now is whether countries are adopting what I would refer to as open-loop or closed-loop systems, and how they want to control data and leave it very siloed within their country Or, whether they’re willing to let boundaries be more fluid and create global centers of technology excellence, and allow their customers, or their citizens, to transact with those global companies that are offering services in their countries.

For crypto, this looks like – do we allow self-custody? Can people take their wallets anywhere? Or do they have to be custodied in the country, and we have to know those assets are sitting within geographic boundaries? That is something from a policy effort that we are working very carefully on, because we really believe in the people’s ability to self-custody and take their assets with them wherever they may be.

Lai: That’s such a difficult problem. [For instance], how do you control where bits go?

How Cultural Moorings Are Crucial

Goldstein: Yes. This is definitely one of the challenges with fintech. Taking a step back and thinking about what this fintech revolution is all about, the role of culture has been very important. So is the role of trust. In some sense, what ignited this fintech wave was the search for better ways to achieve trust, and culture has been an important part of it. Where are we on on this? Is that continuing to be an important aspect, and where are we going from here?

Lai: I think the culture has been maturing. I am significantly older than most people at crypto conferences, so earlier, I felt that gap. But now, we’ve largely gone past the meme-ing and the meme-coin-only culture. There have been several cycles in the last year or so where you go to a conference and people say, “We have too much infrastructure now. We need applications. We need rail users. We don’t just need Twitter followers and Discord users. We need rail transaction volume.”

I like the way culture is moving, and I have to credit Vitalik for pushing a culture of being useful to a lot of people – especially to people who may be in environments where really need stablecoins, for example, versus just using it because it’s slightly easier or fun. I’m very hopeful that this culture will help us move towards more productive use cases.

A very interesting recent development is, two of the most famous Ethereum Foundation researchers gave up some very lucrative advisory positions for a crypto project. [They did that] because they decided that, “Hey, we really want to dedicate our lives and our research to building open, fair, decentralized protocols. We want no conflicts of interest.” So, I think culture – at least in the space I’m active in, which tends to be more ETH-focused, is quite positive at this moment. I’m happy with it.

Goldstein: Alesia, you come from a bigger firm. One of the biggest in the industry. So you probably see it a little differently than that.

Haas: I think of feedback loops in culture. Culture shapes how we develop technology. New technologies also shape culture. You can look to the internet. As you saw people move online, you saw a massive uptick in blending cultures across the globe. The world got smaller. The internet has its own unique culture. You see memes as a great example of this. And as people become accustomed to easily sharing information, sharing ideas and quickly accessing information, they get more accustomed to expecting that in all parts of their lives.

What they’ve also seen, though, as we’ve gone more online, is that more and more of their information is controlled in centralized systems. This is part of the feedback loop. Now we see they want money to move at the speed of the internet, because that’s how they’re used to sharing data. They don’t understand why money cannot move at the same rate as information. But they’ve also said, “Ooh, I don’t love that centralized system, that centralized power.”

So, that is the feedback loop that I think has then brought forth crypto. You can see this with younger generations, who are more comfortable digitally native. They drive demand for innovative financial products. It reflects their values, like self-custody, like decentralization, like independence. You can see that that is giving rise to the adoption of crypto. Many people who then are sitting in companies are now watching this cultural shift, and they’re using that cultural shift to drive their next roadmap. That is, I think, leading also to this wave of adoption of crypto within fintechs.

The Emerging Shape of Future Financial Systems

Goldstein: Great. Let me just ask each one of you a concluding question, maybe reflection, on what has happened and what we should expect going forward. If you were to predict whether we are going to live in a very different financial system a few years from now, what would you say? Is it going to look very different from what it is today? If so, what is the timeline we should keep in mind for that? Alesia?.

Haas: We’re on the precipice of moving transactions on chain. Many people won’t see it, because it will be hidden behind the technology stacks of companies in which you already transact. But we’re going to move to a world where we’ve adopted crypto technology, where we are moving towards Bitcoin being an important investment asset in people’s portfolios, and where we’re going to see the rise of stablecoins used in cross-border payments.

We’re also going to see the rise of the new social media apps on crypto rails that will enable creator communities to to get compensated from their creativity, and move away from these decentralized intermediaries. So yes, I’m very optimistic. And we are just getting there. We now have faster, cheaper technology. We are making it easier to use, and all of those key building blocks are getting to be in place.

Goldstein: What is the timeline?

Haas: Oh, my goodness, Itay. I’m not a crystal ball. But I definitely see over the next five to 10 years that this is going to be a transformation in how we transact on on chain.

Lai: One gift of crypto is that it is shaking up the incumbents. It’s forcing them to change, to update, to get [aligned] with consumer preferences. But one quote I always refer to from Jeff Bezos is, “Focus not on what changes, but what doesn’t change.” And I think what will never change is people want as much financial freedom as they can have. They want flexibility in their lives. They want to express themselves. So, to the extent crypto allows them to do that, I think in all the good ways, things will change.

Goldstein: And you also don’t want to pick the timeline …

Lai: We are in the time of change. There’s no turning back. Crypto is a religion, and there are a lot of people praying.