Beyond the Hype: How Web3 Will Transform Banking

Jim Marous (00:13):

Welcome to Banking Transformed, the top podcast in retail banking. I'm your host, Jim Marous.

Jim Marous (00:18):

Joining us on the Banking Transformed Podcast is Alex Tapscott, co-founder of the Blockchain Research Institute and author of the highly anticipated book, Web3: Charting the Internet's Next Economic and Cultural Frontier.

Jim Marous (00:32):

In this interview, we explore the world of Web3 and discuss how Web3 differs from today's internet, what components are real versus hype, where the technology may be headed next, and its potential impacts on banking, financial services, and our lives.

Jim Marous (00:50):

Alex also discussed this high impact potential Web3 use case for banks like reinvented payments, lending, investments, and shares how banks can navigate the challenges and see the opportunities presented by Web3 revolution.

Jim Marous (01:06):

While parts of Web3 remain aspirational, there are already real-world examples of deployment of Web3 technologies.

Jim Marous (01:15):

It's time to dispel some of the hype, expand our understanding of what is possible, and propel for compelling vision of how Web 3.0 could transform banking and finance as well as every part of our daily lives.

Jim Marous (01:29):

So, Alex, before we dig into what's happening with internet's next frontier, can you share a bit about your background as well as what prompted you to write your latest book?

Alex Tapscott (01:38):

Certainly. So, I began my career working in traditional finance, what my Web3 friends would call TradFi. And I was actually an investment banker for about seven or eight years, really all through my early and mid to late 20s.

Alex Tapscott (01:52):

And it was while I was on the job there that I first learned about this thing called Bitcoin.

Alex Tapscott (01:57):

Now, this was before the word blockchain had entered the vernacular, and certainly before the term Web3, it had even been coined.

Alex Tapscott (02:04):

But I was curious about this new asset, and I think like a lot of people, a little skeptical. But the more I looked into it, the more convinced I became that not only was Bitcoin itself a really important innovation, the underlying blockchain technology could be foundational to a next era of maybe finance and certainly technology.

Alex Tapscott (02:25):

And I just started to dig in, spending time on weekends and evenings researching and investigating this further.

Alex Tapscott (02:32):

And all of that research and investigation led to a couple of big reports that I put together just in my spare time while I was still full-time on the job.

Alex Tapscott (02:41):

And those reports led to further research that I actually ended up doing with my dad, Don Tapscott. And together, that research became the basis for a book that we put out called Blockchain Revolution.

Alex Tapscott (02:50):

That book was released in 2016. And they say luck is the combination of preparation and good timing. While our timing was terrific on that book, this was right around the time that people in finance and in other parts of the economy were curious about this technology and didn't have a way to understand it.

Alex Tapscott (03:07):

And it went on to sell half a million copies and was translated into 19 languages.

Alex Tapscott (03:12):

So, over the last five years or so, I've been deeply involved in this industry in several ways. I've been an investor, an advisor, I've invested other people's capital as well. I ran a venture capital fund that raised 20 million and deployed it into the market, eventually returning about 50 million to investors.

Alex Tapscott (03:29):

And today, I actually work as a portfolio manager running ETF that trades on the Toronto Stock Exchange, investing into Web3 use cases through public equities, digital assets, and other investment opportunities.

Alex Tapscott (03:43):

And so, in the last couple of years in doing all of this, I sort of saw that more and more was happening in this industry.

Alex Tapscott (03:50):

And just as in 2015, 2016, I felt like there was a real need for a new book to be released into the market that could help to explain to people, what is Web3? Why is it important? Why should you care? And what does this mean for business society in the world?

Alex Tapscott (04:06):

And that was the impetus for the book. And am very pleased to say that it's out now, and just hit the Wall Street Journal bestseller list as a business book at number five. So, clearly the topic timing was right on this hopefully, and it's resonating with a broad audience.

Jim Marous (04:22):

Well, I did get the book as I told you I would and got into it a bit. It's interesting because we met each other in person about five years ago when blockchain was at the tipping point. We met each other at an event we were both speaking at in Dubai.

Jim Marous (04:38):

And a lot's happened, as you said, since then. It's an expansion of the theme of what's possible with technology and data and everything else in the world today.

Jim Marous (04:49):

Can you provide a simple definition from your perspective of what Web 3.0 is for our audience and explain how it differs from the internet as we know it today?

Alex Tapscott (05:01):

Certainly. So, I think just to understand Web3, it's important to understand what came before. So, Web1, what I think a lot of people remember as the .com era was basically a static medium for the presentation of information on websites.

Alex Tapscott (05:16):

So, you’d go online, and you would log on and you'd look at a website, you could read information and you could look at media and so forth.

Alex Tapscott (05:23):

But in general, it was very limited. It wasn't interactive. You couldn't upload your own content. The web was basically a broadcast medium, not a collaborative medium.

Alex Tapscott (05:33):

In the early to mid-2000s, some technology innovations occurred that made the web more of a tool for communication and collaboration. So, social apps and user generated content became sort of the dominant and defining applications and businesses of that period of time.

Alex Tapscott (05:54):

And Web2 as a collaborative medium had a lot of benefits. For one, it created tons of value for several big companies. If you're a shareholder of Google or Amazon, you did very well.

Alex Tapscott (06:05):

It also onboarded billions of people onto the internet that previously didn't have access. And it gave voice to people who maybe didn't have a way to speak their mind in the past, a platform for individuals to publish information.

Alex Tapscott (06:18):

And that was all very well and good, but it came with some pretty big drawbacks and some of those drawbacks we're still living with today.

Alex Tapscott (06:27):

The web, as basically all the value was captured by these big platforms. Those platforms relied on advertising, which kept people hooked on recommendation engines. We saw monopolies form in certain areas like say search or operating systems and other parts of the economy.

Alex Tapscott (06:43):

And as a result, that actually stifled development and innovation in the private sector.

Alex Tapscott (06:48):

So, there's all these things that in a way kind of prevented the web from reaching its full potential that we saw in Web2.

Alex Tapscott (06:54):

So, if Web1 was the web for consuming content and Web2 is a tool for collaboration. Then Web3 is what we call the ownership web. So, it is a way for individuals to own the asset class of the digital age.

Alex Tapscott (07:08):

That means owning their own identity, their own data, their own digital creations, their own assets and being able to possess those in the true sense of the world, to have digital property rights. And that's something that we've never really had before.

Alex Tapscott (07:23):

Before all of the value that was created through user generated content and collaboration online, was captured asymmetrically by a handful of big platforms and intermediaries.

Alex Tapscott (07:32):

And with Web3, the simple promises that internet users can become internet owners. And I think as with other areas of the web, it's going to be foundational to business.

Alex Tapscott (07:43):

And we can talk about finance in a second, but it's going to change financial services in a way that I think people haven't quite come to grips with yet.

Jim Marous (07:53):

So, what do you see as the core components of Web3? We talk about different items within that realm. Some people put it within Web3, some people put it with outside of Web3. And how do these different components actually work together to drive this new paradigm?

Alex Tapscott (08:11):

Yeah. So, we're in this really interesting period right now, where several technologies are all emerging at once.

Alex Tapscott (08:18):

Once in a while you see a new technology burst onto the scene that transforms the economic power grid and the old order of human affairs. That transistor, the internet itself, the television, the radio and so forth.

Alex Tapscott (08:32):

And now, we're seeing all these new technologies.

Alex Tapscott (08:34):

So, the foundational technology of Web3 is blockchain, and that's the thing that got me started seven years ago. And it continues to be the basis for all of this.

Alex Tapscott (08:43):

So, blockchains for people who don't understand, very simply put, are a way for individuals and businesses to move and store value online, peer-to-peer. And what they also do is automate complex business processes with software.

Alex Tapscott (09:00):

So, there's a thing called a smart contract that basically can take everything that a traditional business agreement might perform, involving lawyers and investment bankers and other agents to enforce the terms and automates it into software.

Alex Tapscott (09:16):

So, within financial services, every stock, every bond, every futures contract is a contract. And so, those contracts and all the terms that are in them, for example, can be automated using software, using blockchain. So, that's one example. So, blockchains are the foundational technology.

Alex Tapscott (09:29):

The second technology that's emerging right now, is artificial intelligence. AI is, I think, allowing us to reimagine what we thought computers could do, certainly, but also, what people could do when aligned with these tools and using these tools.

Alex Tapscott (09:44):

And that's going to create all sorts of new opportunities and productivity gains, I believe. But also, lots of problems as well.

Alex Tapscott (09:50):

There's another technology, which is extended reality. So, for most of the web's existence, it's been pretty much two dimensional.

Alex Tapscott (09:57):

So, the desktop fully two dimensional, the smartphone, maybe 2.5D because you're interacting with your physical environment a little bit. When you hail an Uber, it's sort of like not fully 2D, it's sort of 2.5 dimensional.

Alex Tapscott (10:10):

But what extended reality, so that's virtual reality and augmented reality promises to make the web three dimensional or spatial, and that's the technology that's also happening at the same time.

Alex Tapscott (10:20):

And then the final technology is connected devices. So, there are going to be trillions of devices with internet connections that are going to do everything from keeping us safe, to modern air glucose, to driving us around, you name it. So, connected devices, and those connected devices are going to become increasingly sophisticated.

Alex Tapscott (10:36):

So, all of these technologies are not separate, but related. In my view, in the same way that the term internet went from describing a narrow set of inter-networking technologies to describing a whole new range of business models and social behaviors and other technologies. The same is true for Web3.

Alex Tapscott (10:56):

We think of these technologies as discrete areas of innovation, but the reality is it's going to be the convergence of these technologies that's going to matter the most for the future of business and for the future of financial services.

Jim Marous (11:09):

It's interesting, over time, we all jump on bandwagons quite quickly, and certainly before COVID, it was even quicker. There was a lot of money in the marketplace, a lot of money looking for places to store it. So, the hype cycle was really different for all these different technologies.

Jim Marous (11:27):

And to be honest, we'll talk about it a little later, is that blockchain is an accepted platform and something that the financial services industry is currently using.

Jim Marous (11:36):

AI is certainly at its beginning point, but certainly got a boost November 30th of last year with ChatGPT, and it just opened our eyes into just new realms of what can happen.

Jim Marous (11:50):

But there's also things like NFTs, crypto that have a hype cycle that has gone up, down and everything else. But there's a core of what Web 3.0 really is.

Jim Marous (12:04):

What do you see today, is pretty much as a standardized platform, or we also, see that the three dimensional aspect where we keep on looking at different goggle platforms and everything else, and it's a really limited marketplace.

Jim Marous (12:18):

What today do you consider foundational, and what are you really excited about in the near term as being truly something we're going to see as opposed to staying in the hype area for a little while?

Alex Tapscott (12:31):

Definitely. Well, I think that to most people looking from the outside in, technology innovation seems like an overnight success story often, but the reality is that it's decades in the making, sometimes centuries in the making in the case of computing itself.

Alex Tapscott (12:46):

Even AI in the 1960s, there were researchers in the UK saying, “In 20 years, AI will replace all human functionality in the economy.” And in the 1980s, I'm pretty sure that hadn't happened.

Alex Tapscott (12:59):

And so, AI has had its ups and downs. Extended reality, virtual reality, similarly, we've seen plenty of kicks at the can, and the technology just simply wasn't ready for prime time.

Alex Tapscott (13:10):

And that's how it is with a lot of this stuff. It's the classic S-curve where there's a lot of time passing, but not that much innovation. And then all of a sudden, there's an inflection point. And you correctly pointed out that I think AI had that moment, the ChatGPT moment, November of last year.

Alex Tapscott (13:26):

But just because technology goes through cycles doesn't mean that in the down cycle we should be dismissing it. If anything, those are the best times to be really investigating it and taking a close look.

Alex Tapscott (13:35):

So, anyway, to answer your question directly. The thing that interests me most right now, is that a lot of enterprise innovation and a lot of innovation at big banks has now, moved from the proof of concept stage where it's happening on internal systems to where they're building on public networks.

Alex Tapscott (13:55):

And to me, that's very reminiscent of what happened in the 1990s, where a lot of big companies wanted to build on the web, on the internet, but didn't want to be on this open platform where all the criminals and drug dealers and everybody was. And so, they built closed proprietary networks called intranets.

Alex Tapscott (14:12):

And with blockchain, similarly, Jim, like when we released blockchain revolution, 2016, 2017 was the era of enterprise blockchain.

Alex Tapscott (14:20):

But the problem is, when you build something on a closed system, it's inherently limiting because you're not open to the innovation of the open market. You're not able to connect with other people and businesses, and you end up kind of trapped in a silo.

Alex Tapscott (14:32):

And so, my point is that recently, and I'd say in the last kind of two years or so, what we've seen is big enterprises announcing or building on public networks.

Alex Tapscott (14:43):

And part of the reason for that is that the networks themselves have become much more robust and more enterprise grade.

Alex Tapscott (14:49):

You could hardly blame a bank in 2016 wanting to build on a proprietary network. You look at the open market, the biggest public blockchain network, Ethereum, was worth a couple of billion dollars and wasn't really ready for prime time as I've said before. It just simply was not there yet.

Alex Tapscott (15:06):

And now, the technology is. So, today, for example, we heard that UBS is building out a tokenized money market fund on Ethereum.

Alex Tapscott (15:16):

And in the last five weeks or so, we've seen that announcement, Citibank saying it wants to tokenize all of its deposits. JP Morgan looking at launching an Ethereum based coin and also, looking to tokenize its deposits as a form of sort of like a tokenized stable money.

Alex Tapscott (15:36):

We saw Visa announcing that it's enabling merchant settlement on a public blockchain called Solana, and then PayPal, of course, launching its stable coined PYUSD on the Ethereum network.

Alex Tapscott (15:46):

So, that's a lot of information I'm giving your listeners, but the point is that pretty much all those initiatives are happening on public networks.

Alex Tapscott (15:55):

And to me, that's the most exciting thing because the public networks are where all the innovation is occurring. And it's also where, by the way, all these different technologies are going to come together.

Alex Tapscott (16:04):

So, to me, like notwithstanding the fact that the market for crypto or whatever is down a little bit right now, you can't let the tail wag the dog. Look at where businesses are investing for the long run and what they're most excited about. And it's all happening in this area.

Jim Marous (16:21):

It is interesting because you look at Web 3.0 and even looking at the transformation of technology going forward, I was just at Sibos, as I mentioned to you before our interview, and it was unique to see a couple things really coming in under the radar, but still very much top of mind.

Jim Marous (16:42):

Number one, the movement from currency to value. So, the expansion of the mode of transfer going beyond just money to include trust, to include security, to include speed and scale, to include all these elements that really are well beyond a traditional currency form of transfer.

Jim Marous (17:07):

Secondly, that almost everything being done right now, is really being done in a user-centric space, which in my mind means instead of doing it to reduce costs, it's being done to improve experiences and improving our daily lives from a saving of time to saving the money and things of that nature.

Jim Marous (17:27):

And thirdly, that the compartmentalization of everything that's going on, and the composability of solutions and the partnering within specialties is broader than I've ever seen.

Jim Marous (17:43):

I spent a lot of time at the IBM booth during the Sibos event. And it was very interesting how IBM who used to be very much it’s pretty much IBM and nothing else, now is really reaching out to partners to say, “How do we bring this to scale and speed in a way that's never been done before, reinventing how we come to market.”

Jim Marous (18:07):

How does Web3 really allow this all to happen and really move it at speed and scale?

Alex Tapscott (18:15):

So, that's a great question, and you pointed something out, which is, I think when a new technology comes along, people want to look at how it's going to cut costs and improve efficiency. And we're even seeing this with AI. Oh, it's like an AI bot can reduce your headcount at your call center, or something like that.

Alex Tapscott (18:29):

The reality is, with new technologies, the market opportunity is not only unknown at the time that it launches, but it's actually unknowable because the future is not something that we can easily predict. The future is bright, but it's not always clear.

Alex Tapscott (18:45):

And that quote, by the way that I just said is a paraphrase from Clay Christensen who wrote a book called The Innovator’s Dilemma.

Alex Tapscott (18:50):

And this is something that we see from time to time, which is like the future of AI, and Web3, and blockchain is going to be a lot stranger than what we can imagine based on what we know, because it's going to be the future, it's going to be different.

Alex Tapscott (19:03):

But in terms of how these technologies come together, I think that in financial services, the industry is going to be virtually unrecognizable in a decade or so. And a lot of that has to do with the impact of technologies like blockchain and AI.

Alex Tapscott (19:18):

I mean, there's no reason why an AI bot that you start with as a young person gets to know you, becomes your friend, understands everything about you from your health records to your personality traits, to your risk tolerance, to your income levels, to everything else, couldn't be a better financial advisor than most financial advisors.

Alex Tapscott (19:37):

That's a technology that will know you on a much more deep and intimate level with more information than any person could possibly hope to imagine with you filling out a form and getting to know you over a phone call.

Alex Tapscott (19:48):

So, I wonder, and there's an issue there, which is that AI bots I don't think can get registered as investment advisors in the United States yet. But that's a regulatory question not a technology question.

Alex Tapscott (19:59):

So, I think about how AI could impact the human side of financial services. A lot of trading and settlement of securities is already automated. A lot of fund management is already automated through index funds or algorithmic trading and so forth.

Alex Tapscott (20:13):

But the advisory part of it is still where most assets exist in places like the United States and Canada. Where I live, 60% of all the wealth is controlled through the advisor channel.

Alex Tapscott (20:24):

But what happens to the advisor channel when AI can do it just much better and have a more — not just like cheaper cost or less costly and so forth, but actually more human experience with technology than with a person. So, that's something I think about.

Alex Tapscott (20:38):

And then with blockchains, the question is basically all these assets in the world, trillions and trillions of dollars still basically exist on analog rails, pretty much.

Alex Tapscott (20:46):

And we could be using tokens as a way to completely automate the movement and storage of value in the economy. And you pointed out it's not about currency, it's about value.

Alex Tapscott (20:59):

The way that I think about tokens is basically as containers for value. And I think this is helpful to understand because people get wrapped up in the whole crypto part of it, and they think, “Well, there's all these cryptocurrencies. Why do we need thousands of currencies? Doesn't that seem to add friction not take it away?”

Alex Tapscott (21:14):

And the issue is that people think of them as currencies when they're not.

Alex Tapscott (21:18):

So, tokens, and there are lots of different types of tokens, but the easiest way to think about it is as a container for value.

Alex Tapscott (21:25):

And just as a shipping container, think of a literal shipping container, can contain my book, or contains furniture, or canned goods, or computer chips or whatever, a digital container can contain anything of value.

Alex Tapscott (21:42):

So, stocks, bonds, titles, deeds, votes, art, collectibles, money, certificates of deposit like receipts for gold and commodities held somewhere. So, all those different things that you can think of can be contained in a token.

Alex Tapscott (22:00):

And I think a good useful analogy for people who are more tech inclined is that a website is basically like a container for information. It's a tabula rasa, it can be anything. It can be a podcast studio, which is what this is. It can be a social media site, it can be the news, it can be whatever.

Alex Tapscott (22:15):

And I think like once you realize that there's an infinite configuration of websites, there's an infinite configuration of tokens.

Alex Tapscott (22:22):

And so, every single asset in the economy, in my opinion, will be tokenized at some point and will trade on blockchains.

Alex Tapscott (22:31):

And why is that a good thing? Well, it will reduce the cost of settlement and the time of settlement to near zero. It will connect to the world in ways that we haven't ever experienced.

Alex Tapscott (22:42):

If they say technology flattens the world, then I think that Web3 and tokens will be a steamroller in the sense that they will connect people not just with information, but with value and with assets. And that's something that I think a lot of people haven't really fully understood.

Alex Tapscott (23:02):

And the other thing is they'll bring people into the economy that don't currently have access to financial services, whether it’s people who are underbanked or unbanked or young people who are more used to using new technology.

Alex Tapscott (23:13):

So, all of these things are all happening all at once. And I think that we haven't really prepared for what that transformation looks like.

Jim Marous (23:18):

So, it's interesting, when you look at Web3, you're really looking at the confluence of data insights, the ability to process that data insights and technology to be able to hold it all because it's really exploded well beyond a, as you mentioned earlier, traditional cloud technology.

Jim Marous (23:36):

But at the end of the day, someone's going to own all that insight, and no one's going to let it go if they don't trust and believe in the technology that's underneath it.

Jim Marous (23:47):

So, we get to the whole concept of identity and trust, because all this only works if the consumer and the business say, “I want to play.”

Jim Marous (24:01):

And right now, the foundation of security and the foundation of compliance and Fed regulations really haven't caught up to what's going to be possible. And at some point, they're going to catch up and say, “Consumers are going to have complete control.”

Jim Marous (24:18):

And so, just like it is today, the power of Web 3.0 from my perspective, is all going to be dependent on people trusting the technology and being willing to share their identity at their discretion out in the marketplace.

Jim Marous (24:34):

And it's going to again, be a transfer of value. In other words, I keep on referring to Amazon, I only do it with Amazon because they do really well with my data, and I get a lot of value in return. In fact, we pay for the right to shop, which is insane.

Jim Marous (24:50):

How are we going to do the whole securitization of identity of information? How are we going to make John Q. Public comfortable in this environment?

Alex Tapscott (25:05):

It's a great question. So, number one, I think that the question of identity hits at the heart of this.

Alex Tapscott (25:09):

So, in a Web2 model, you create all this data, but you don't actually own it. It's owned by the platforms you're interacting with, whether it's Amazon or Facebook or what have you. And you get access to services, in exchange, they monetize your information.

Alex Tapscott (25:22):

Now, that was a bargain that we entered into without really, I think really appreciating what it meant in the early days.

Alex Tapscott (25:30):

And now, I think it increasingly feels like a bad deal for a lot of folks. And I think that they would like to, all things being equal, have more control over their identity. And if their data and their digital creations and content is being used to make money, maybe they'd like to participate in that.

Alex Tapscott (25:45):

So, the Web3 model for identity is a user-centric model. The idea is that you as an internet user have a wallet, and your wallet allows you to contain things of value.

Alex Tapscott (25:55):

Now, people think mostly of like money and crypto and stuff like that, but just as your current wallet can contain your identity, your driver's license, other things that have access to value, credit cards, bank cards and so forth, your wallet online can do the same thing. And that can be how you control how you interact with the internet.

Alex Tapscott (26:15):

And if someone wants to use your data, to your point, we can decide how it's used and whether it gets monetized and as a result, if we get paid for it. And I think that that's an important innovation.

Alex Tapscott (26:27):

But none of this will work unless the underlying technology is provable. And right now, we know that big blockchain networks and AI technologies, large language models are exciting. And they're also robust much more than they used to be, but they have lots of problems.

Alex Tapscott (26:44):

Large language model, people are treating as if it's a research assistant, when the reality is it doesn't really know anything. It doesn't always know what's right from what's wrong. And I don't mean that like in a moral sense, I mean what is correct and what is just fabricated. And so, it’s not-

Jim Marous (27:00):

Sometimes the model actually fabricates itself. Yeah, exactly.

Alex Tapscott (27:03):

Well, it's kind of like a person, when boxed into a corner and trying to come up with an answer, you might like kind of try and talk your way out of it. And I think that these models try to talk their way out of it, even though they don't know.

Alex Tapscott (27:17):

It'd be better if they just said, “I don't know.” But they don't know that they don't know because they're just predictive algorithms.

Alex Tapscott (27:22):

And the same is true with blockchains in a sense, which is like I mentioned the idea of like the financial advisor, you certainly want your financial advisor making prudent decisions on your behalf. Not that human advisors always do that, but in the case of large language models, they need to be better than the people in order for us to be able to accept them.

Alex Tapscott (27:42):

And then when it comes to blockchains, the question is, well, are these networks secure? Can they be scaled? Will the costs always remain reasonable? Will my identity and data, if I do control it, is that safe with me? And how do I ensure that it remains protected? And all of these questions exist around new technologies.

Alex Tapscott (28:00):

It's even like self-driving cars. Self-driving cars can't be as good as people. They need to be a hundred times better than people in order for us to accept them because the second a self-driving car runs somebody over-

Jim Marous (28:13):

We've already seen it.

Alex Tapscott (28:14):

Exactly, now that becomes like the big kind of issue.

Alex Tapscott (28:18):

So, my point is only are these all valid issues, reasons that these new technologies are not worth the time or are they implementation challenges to be overcome? And I think in each instance, they're an implementation challenge to be overcome.

Alex Tapscott (28:34):

In the case of AI, we can create experiences for users and solutions in the economy, new forms of entertainment, and companionship and value that wasn't possible before.

Alex Tapscott (28:48):

And with blockchains, we can flatten the world and give everybody access, not just ways to consume information and content, but ways to move value, store value, access financial services, secure their identities and build wealth on a globally level playing field. That's not possible.

Alex Tapscott (29:05):

With robotics and self-driving cars and these other technologies, we have a way to potentially scale it to a point where we're reducing traffic accidents, where we're reducing the carbon footprint materially because people don't need to own cars, where we're giving a ride to individuals who can't be discriminated upon based on race and gender and so on and so forth.

Alex Tapscott (29:25):

So, all these are reasons that these new technologies are worth the time. They're worth trying to overcome the tough questions because the opportunity is to make an economy in a world that is more fair, more efficient, more innovative, more robust, and I think we should all be working towards that.

Jim Marous (29:45):

Your analogy to the self-driving cars is important because we won't accept Web3 and the components of Web3 if it simply duplicates where we are today, but maybe faster. It's going to have to be much, much better, and we've seen that.

Jim Marous (30:01):

And so, we're going to get into some of the specifics in the banking industry, but let's take a short break here and recognize the sponsor of this podcast.

[Music Playing]

Jim Marous (30:09):

Welcome back to Banking Transformed. So, I'm joined today by Alex Tapscott, co-founder of Blockchain Research Institute.

Jim Marous (30:17):

We've been examining the current state of Web 3.0, separating the reality from the hype, and starting to identify what lies in the horizon.

Jim Marous (30:26):

So, we touched upon a lot of foundational issues before the breakouts, but how will Web3 impact traditional banking activities such as payments, lending, wealth management?

Jim Marous (30:39):

You always touched upon some of that, and I think a lot of it has been in the wealth management space and as it relates to blockchain, but what else do you see on the horizon?

Alex Tapscott (30:49):

Well, it's a great question. I think when a lot of people talk about innovation and financial services, this term FinTech comes up from time to time, and I'm sure it has on your show as well.

Alex Tapscott (30:59):

And FinTech obviously, is an important thing. And fintech's been around for a while. I think the first credit card was really sort of an example of early FinTech innovation. It's sort of disassociated the cash from the purchase and created like a virtual form of money.

Alex Tapscott (31:19):

And I think ever since then, we've seen tons of innovations. Prepaid debit cards buy now, pay later, ETFs, discount brokerages, zero fee mutual funds, like all these kinds of things. In a way, these are all versions of financial innovation and financial technology.

Alex Tapscott (31:36):

And more recently we've seen payments processors and other forms of FinTech innovation.

Alex Tapscott (31:43):

But fundamentally, all of this FinTech innovation in my view, is really just digital wallpaper. It is a fresh coat of paint. It is a new interface to access the existing world of financial services.

Alex Tapscott (31:57):

So, when you interact with PayPal or you tap your card on the card reader, or you buy security in a discount brokerage and Robinhood or something, and it feels all very digital and intuitive.

Alex Tapscott (32:09):

It may feel like that because the interface has been digitized. The way in which you interact with it is quite innovative. But on the back end, all of the companies and institutions and technologies that you're interacting with are legacy technologies.

Alex Tapscott (32:27):

The technologies for clearing and settling transactions and securities, in some cases run on technology that's decades old.

Alex Tapscott (32:34):

So, if you think about the analogy of a house, this fresh coat of wallpaper, this fresh coat of paint is concealing infrastructure (plumbing, electrical, and so forth) that is a little bit tired and can use some work.

Alex Tapscott (32:47):

So, what Web3 promises is not a new coat of paint, but a new foundation for the industry. Web3 tries to get to the heart of what the industry actually does and create sort of models for people to do it peer to peer.

Alex Tapscott (33:04):

So, what is it that the industry actually does. Well, the financial industry is more than any one industry, it's the lifeblood of commerce. It's leaders are known as the masters of the universe, or at least they were in the '80s.

Alex Tapscott (33:15):

But fundamentally, it does a few things. It gives us a way to move value, to store value, to access credit, to ensure against risk, to create ways for people to invest money, to create venues for individuals and businesses to transact and trade in financial assets (the exchange function), to organize financial information and to establish identity.

Alex Tapscott (33:40):

And those eight or nine functions are basically the foundation of our entire economic order. Even something like identity, KYC and AML, that is the starting point for financial services. How we move and store value, that is the foundation of most banks.

Alex Tapscott (33:59):

The CEO of one of Canada's biggest banks once told me, “We move money. And because we move money, we get to store money. And because we store money, we get to lend money, and lending is basically most of our business.”

Alex Tapscott (34:14):

“So, if you move the moving part, if that part gets disrupted, then all of a sudden the foundation of our business is kind of on shaky ground.” And the same is true in all other parts of the economy.

Alex Tapscott (34:26):

And so, where is the innovation happening right now? Well, for example, in moving money, one of the fastest growing and most important innovations in this space today is a thing called a stablecoin.

Alex Tapscott (34:36):

Now, your listeners may or may not have heard of this, but they're worth around $120 billion in value. And basically, they are tokenized dollars.

Alex Tapscott (34:44):

They're a way to move US dollars around the world, peer-to-peer, instantaneously between individuals and businesses and increments both small and humongous, up to hundreds of millions of dollars. And to do that in a way that doesn't require an intermediary.

Alex Tapscott (34:59):

Now, every person in the world wants a US dollar bank account. I'm not sure where all your listeners are, Jim. In the US people might say, “Well, I can already do that with Venmo.”

Alex Tapscott (35:10):

It's like, “Well, you can do that in small increments between individuals in the United States using the same application, and that's all true.”

Alex Tapscott (35:18):

But if you want to have a standard that individuals can use all around the world in any amount that they want, then there's only really one way to do that. And that's with Web3. So, that's with blockchain based tokens.

Alex Tapscott (35:30):

So, stablecoins are one of the fastest growing areas, but they're also just the very first example of a so-called real-world asset being put into the token container.

Alex Tapscott (35:40):

But there's all these other examples. Money market funds, mutual funds, deposits. All forms of assets can be put into this container so that they can become global and become digital.

Alex Tapscott (35:52):

In the 1970s and '80s, people used to read newspapers, and if you lived in LA and you wanted the Boston Globe, like tough luck, there was no Boston Globe for sale in Los Angeles. But then the internet democratize access to information.

Alex Tapscott (36:05):

So, Web3 democratizes access to financial services. It creates a digital global platform for anyone anywhere to access everything that people can access in local markets. And I think that's very important.

Alex Tapscott (36:16):

So, that's just moving value. And then there's eight other examples of how it's being used in practice.

Jim Marous (36:22):

So, everything we talk about makes all this sense, but it's not being accepted by everybody. And we mentioned early blockchain and even cloud technology was something that people said it was — you see around security, the issues of security.

Jim Marous (36:40):

But what do you see right now, as the main challenges around mainstream adoption of Web3 technology and adaptation of all the elements of Web3 in banking and financial services? Is it risk? Is it legacy thinking? Is it a combination? What is it?

Alex Tapscott (37:00):

I think it's all of the above. I mean, ultimately, if you build it, they will come. I mean, if something is so compelling and new and interesting and new, then it's going to find a product market fit.

Alex Tapscott (37:10):

And that's true of Web3. It depends on how you measure penetration on this. So, if the measure of Web3 is how many people are using tokens and large language models, and the rest, it's maybe a couple hundred, maybe a few hundred million people.

Alex Tapscott (37:28):

If the measure is how many people are like deep in the weeds and like holding their own digital assets and using these wallets that I was describing, the number's a little smaller than that. It's more like 30 million people.

Alex Tapscott (37:39):

So, either way you look at it, we're still in the sort of early adopter phase for a lot of this technology. And I do think that we're going to be hitting a inflection point at some point very soon.

Alex Tapscott (37:49):

And so, I think if you build these solutions and things that people find really helpful and fun and innovative and useful, then they will start to use them.

Alex Tapscott (37:58):

I think that one of the things that I find really interesting is that in the very early days of a new technology, the new technology isn't better. I think a lot of people assume the new new thing comes along and it's just so much better.

Alex Tapscott (38:13):

In the early 1990s, the experience of reading a newspaper was actually a lot better than trying to find the news on the internet. It was actually much worse.

Alex Tapscott (38:20):

In the 1980s when a lot of like companies went to PCs from many computers, those computers were actually not as powerful and not as useful for raw data processing as many computers and mainframes were previously.

Alex Tapscott (38:34):

Even like watching content on the internet, there's this great clip of Bill Gates on David Letterman where he is talking about things you can do with the internet. And Bill Gates says, “Well, you can listen to the radio on the internet.” It's like you can listen to the radio, on the radio, like what are you talking about?

Alex Tapscott (38:48):

But what happens with new technologies is that they often find product market fit with a small segment of the market that for whom the things that maybe might be perceived as weaknesses are actually strengths.

Alex Tapscott (39:04):

So, this is something that academics have talked about before in the past.

Alex Tapscott (39:09):

The first Japanese motorcycles arrived in the United States, and people used to driving Harleys thought they were just ridiculous little toys, but actually they found product market fit with people who like to go off-roading. And all of a sudden that helped to unlock a huge market.

Alex Tapscott (39:23):

And with Web3, one of the big benefits is that you can custody your own assets. You can be your own bank, you can control your own identity online.

Alex Tapscott (39:33):

And for some people that actually sounds like a big inconvenience. They would rather leave their money and their assets with a bank than to have it themselves.

Alex Tapscott (39:39):

But for lots of other individuals, young people who are used to buying virtual goods and video games or people who are unbanked or those living in countries where the local systems are corrupt, being able to custody your own digital goods is actually like a superpower.

Alex Tapscott (39:53):

And so, the question is, will the small segment of the market that enjoys those benefits continue to sustain it so that it becomes the market. So, that it ends up becoming more robust, more useful for everybody else, and then that becomes easier behavior that everybody adopts.

Alex Tapscott (40:10):

They used to say that there would never be more than a million vehicles on the road because there were only that many trained chauffeurs in the entire world, or something like that.

Alex Tapscott (40:18):

It's like, well, we couldn't process the idea that people would drive their own cars. Managers would never learn how to use computers because they didn't know how to type, because typing was something that secretaries did.

Alex Tapscott (40:29):

So, we couldn't imagine that computers could be tools for communication that individuals and business management professionals would use. The same, I feel, is true for a lot of these technology tools too.

Alex Tapscott (40:39):

So, we have to be kind of humble in the face of innovation because as Christensen said, “Not only is the market unknown, it's unknowable.” These things are going to happen, and we'll just have to do our best to prepare for them.

Jim Marous (40:54):

Yeah, change sucks. I mean, I say this almost in every podcast now, that nobody really likes change.

Alex Tapscott (41:01):

Change sucks.

Jim Marous (41:01):

But it's going to happen with or without me. And again, it's going to be interesting to see if it's going to be governmental units, if it's going to be financial institutions or who's going to own, or who's going to allow and deploy identity, make it so it's uniform.

Jim Marous (41:18):

We keep on going back and forth as far as how's that all going to happen, but it really gets down to authentication more than identity. How do you authenticate what you're doing on a daily basis.

Jim Marous (41:29):

So, what advice would you give bank and financial institutions around navigating this whole technology shift right now?

Alex Tapscott (41:39):

Well, you raised a great point. And there's a famous Canadian thought leader, his name's Marshall McLuhan. And Marshall McLuhan once said that he also hates change, which is funny because he was someone who was like very ahead of the game in trying to predict change.

Alex Tapscott (41:57):

And he said, “Well, I'm not just going to let the zeitgeist bowl me over. I'm going to try and prepare for it. Even if I hate it, I'm going to be there. I'm going to be prepared for it.”

Alex Tapscott (42:06):

And I think that maybe that's a useful framework for bankers and other financial professionals for whom the status quo might be comfortable and change might be scary.

Alex Tapscott (42:18):

Well, the good news is that there are things that you can do. So, the first thing you can do is become educated. I would recommend that everybody go out and buy my new book.

Jim Marous (42:27):

Well, I was going to say the same thing, that you're fearful of things you don't know, which doesn't say to stay in a hole and hope it doesn't happen.

Jim Marous (42:36):

But now, more than ever, because the deployment of insight is so easy right now, as I did, if you want to take this book and consolidate and say, “Okay, what does it talk about? Is it for me?” You can use the internet to do that today. And it's only been out for a week, a little bit more than a week. So, it's important to do that.

Jim Marous (42:56):

But you're right, it's education in both the traditional way and in non-traditional ways, sometimes dipping your foot in the water.

Alex Tapscott (43:04):

Well, that's right. And that's number two, which is personal use. If you haven't used ChatGPT or you haven't bought or sold a digital asset, like you should go do that right now.

Alex Tapscott (43:15):

You should, if you haven't dawned an extended reality headset just to get a feel for like what it is, and maybe it isn't ready for prime time.

Alex Tapscott (43:23):

But you can read a 300-page book about Web3, and I encourage you to do so. But you should also engage in personal use. Personal use is a precondition for understanding. And I think that's really important.

Alex Tapscott (43:36):

Number three is that I think that in 2016, '17, it was tough for enterprise leaders to navigate change because the promise of blockchain was so great, but the path to get there was unknown.

Alex Tapscott (43:50):

And now, I think there's a much more robust toolkit that you can tap into to try and learn about this stuff and use it and put it into practice. So, I would say start now, start small, be able to change quickly and just keep innovating. And it's a frontier.

Alex Tapscott (44:05):

I mean, the name of my book is Web3: Charting the Internet's Next Economic and Cultural Frontier. And with all new technologies, it's a bit of a frontier.

Alex Tapscott (44:14):

And look, frontiers have boundless opportunity and economic potential, but they also, have lots of risks, and they also have lots of pitfalls, and they attract the most shrewd business people and the most fervent believers and missionaries, but they also attract the wrong kinds of folks too.

Alex Tapscott (44:29):

So, every frontiers person needs a guide. Every explorer needs a guide. And with some humility, I hope that my mind proves useful.

Jim Marous (44:37):

Well, it's going to be there. The good news, as I said earlier in our podcast, is that most of the technology now, is becoming user-centric, whereby it's really focused on making life better.

Jim Marous (44:48):

In addition, as we saw with blockchain and with cloud technology, if you have concerns about things not being right, such as security, things like this, the marketplace will answer that question. We've done it on both the cloud, and we've done it on blockchain, whereby now financial institutions rely on both extensively.

Jim Marous (45:09):

But it wasn't put five years ago that people said, “I'm not going to put anything on the cloud. It's outside technology,” and then realize it was more secure than their internal mainframes.

Jim Marous (45:19):

I think there's a lot to happen. And I just urge everybody, as I do many times in the podcast and other things I write about and do webinars on, is don't put your head in the sand.

Jim Marous (45:30):

Become familiar with the change because it's going to be here before you expect it. I guarantee it. It always is. And it's becoming more and more the case.

Jim Marous (45:40):

And yes, if you say, “Oh, those Google goggles are not going to work for me.” It may not work for you, but how about contact lenses? Or how about something embedded in your skin or in your body? Those things may sound way out there, but some version of that is going to take effect.

Jim Marous (45:57):

So, we've got to get out of our comfort zone a little bit. At least become familiar, if for no other reason, to protect ourselves.

Jim Marous (46:04):

So, Alex, thank you so much for being on the podcast. I really appreciate it. It's good to see you again, and hopefully, we'll be speaking together again very soon.

Alex Tapscott (46:13):

Yeah. Well, thanks. That was terrific. Appreciate it.

Jim Marous (46:17):

Thanks for listening to Banking Transformed, the top podcast in retail banking, and the winner of three international awards for podcast excellence.

Jim Marous (46:24):

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Jim Marous (46:33):

Finally, be sure to catch my recent articles in The Financial Brand and the research we're doing for the Digital Banking Report.

Jim Marous (46:40):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios; and video producer, Will Pritts.

Jim Marous (46:49):

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Jim Marous (47:04):

Thank you again for joining us. And until next time, keep innovating and transforming.

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